Company Law Notes | B.A. LL.B. (Five Year Course) Semester 7 | Mumbai University | munotes

The definition itself: section 2(20)

The Act's definition is famously unhelpful and you should quote it anyway, because it is the definition:

"company" means a company incorporated under this Act or under any previous company law

Read it twice and notice that it defines a company by how it came into being, not by what it does. That is deliberate. A company is not a kind of business. It is a status that a business acquires by registering. Two shops on the same street selling the same bread may be a company and not a company, and the only difference is that one of them is on the register.

"Or under any previous company law" matters more than students expect. Companies registered under the Companies Act 1956, and under the Acts before it, are companies for the 2013 Act too. Most of the large Indian companies you can name were incorporated long before 2013 and are governed by the 2013 Act today.

Section 3: who may form a company

Section 3(1) says a company may be formed for any lawful purpose by:

• (a) seven or more persons, where the company to be formed is to be a public company;
• (b) two or more persons, where it is to be a private company; or
• (c) one person, where it is to be a One Person Company, that is to say, a private company,

by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

So the minimum membership is seven, two or one, according to the kind of company. Those three numbers are worth memorising because they come back in several places, including section 3A below.

The One Person Company carries four provisos, and they exist because a company with one member has an obvious problem: what happens when that member dies? The answer is that the memorandum of a One Person Company must name another person, with that person's prior written consent, who becomes the member on the subscriber's death or incapacity. The nominee may withdraw consent, the member may change the nominee at any time, the member must tell the company of a change and the company must tell the Registrar, and such a change is not an alteration of the memorandum.

Section 3(2) then says a company formed under sub-section (1) may be limited by shares, limited by guarantee, or unlimited. Those three are taught in the chapter on types of companies.

Section 9: the section that actually creates the person

This is the most important single sentence in the subject.

From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

Take it apart, because six separate legal consequences are packed into it.

1. From the date of incorporation mentioned in the certificate. Not from the date the papers were filed, and not from the date the Registrar signed. The certificate names a date and that date is when the person begins.
2. Shall be a body corporate. This is the operative phrase. Parliament does not say the company is like a person; it says it is one.
3. By the name contained in the memorandum. The company's name is its identity, which is why altering it is regulated and why a wrongly chosen name can be rectified.
4. Perpetual succession. The company outlives its members.
5. Power to acquire, hold and dispose of property. The company owns its assets, not the members.
6. To contract and to sue and be sued, by the said name. It makes its own contracts and it litigates in its own name.

One thing has been quietly removed from that list and most notes still print it. Section 9 used to end "...perpetual succession and a common seal with power to acquire...". The words "and a common seal" were omitted by the Companies (Amendment) Act 2015, with effect from 29 May 2015. A company may still have a seal, and several sections now read "common seal, if any", but it is no longer a compulsory characteristic of a company. Writing that every company has a common seal is a mistake of live law, and it is the commonest one in this subject.

A worked example

Ganesh, Radha, Iqbal and five friends want to run a courier service in Thane. They are eight, so they may form either a public or a private company; if they had been six they could only have formed a private one.

They sign a memorandum stating the name Speedpost Thane Logistics Limited, file it with the Registrar with the other documents section 7 requires, and on 14 June 2026 the Registrar issues a certificate of incorporation bearing that date.

From 14 June 2026, by section 9:

• The vans the company buys belong to Speedpost Thane Logistics Limited, not to Ganesh and the others, however much of the money each of them put in.
• A contract with a customer is made by the company. If it is broken, the customer sues the company.
• When Radha dies in 2031, the company does not close. Her shares pass to her heirs and the courier service runs as before. That is perpetual succession doing its work.
• If the eight of them later want to sell the business, they can sell their shares, and every van, every contract and every employee stays exactly where it is, because none of them ever belonged to the eight.

Notice that none of these four consequences needed a separate agreement. They followed automatically from the certificate.

The case this rests on, and how to cite it

Salomon v. A. Salomon and Co. Ltd., decided by the House of Lords in 1897, is the decision every company law course begins with. It is the case that settled that a company, once properly registered, is a different person in law from the members who own it, and that this is so even where one man holds almost all the shares and controls everything the company does.

How to answer on it. In an Indian paper the authority you must cite is the section, and the proposition Salomon established is now written into the Act: section 9 says the company shall be a body corporate with power to hold property, to contract and to sue and be sued in its own name. So the full-mark shape is: state the principle, cite section 9, and name Salomon as the decision in which the principle was established.

A note on how this book handles cases. No law report carrying Salomon could be opened from where this book was written, and the house rule is that a citation is attached only to a case whose report has actually been read. So this book names the case and states the proposition it settled, and does not print facts or a citation it has not verified. The full position, including every source that was tried, is in authorities/cases.json and in FINDINGS.md section 5.1. Nothing in the syllabus is left untaught by this: the rule itself is section 9, and section 9 is set out above in the Act's own words.

What this does NOT mean

It does not mean the members own the company's property. They own shares. A member who owns ninety-nine per cent of a company still owns none of its factory, and cannot insure the factory in his own name. This trips people up constantly and it is examined.

It does not mean the company is a citizen. Separate personality and citizenship are different questions, and the second gets its own chapter.

It does not mean incorporation is a formality. Until the certificate is issued there is no company, and a contract made "for the company" before that date binds nobody in the way the parties expect. That is the promoters' problem and it has its own chapter.

It does not mean the separation can never be looked through. It can, in defined situations, and that is the next chapter but one.

Limits and criticism

The separation is a rule of law, not a description of reality, and it produces results that look wrong to a non-lawyer. In a one-member company the member and the company are the same in every practical sense and different in law. That gap is exactly what the doctrine of lifting the veil exists to police.

A reform is pending, and it is not law. The Corporate Laws (Amendment) Bill 2026 would change several parts of this Act. It was introduced in Lok Sabha on 23 March 2026, referred the same day to a Joint Parliamentary Committee, which reported on 3 August 2026. It has not been passed by either House and has not received assent. Answer on the Act as it stands.

Quick revision

• Definition: section 2(20), a company incorporated under this Act or any previous company law. Defined by how it came into being.
• Formation: section 3(1), seven persons for a public company, two for a private, one for an OPC, by subscribing to a memorandum.
• Kinds on formation: section 3(2), limited by shares, limited by guarantee, or unlimited.
• The creating section: section 9. Body corporate, by the name in the memorandum, from the date on the certificate, with perpetual succession, power to hold property, to contract, and to sue and be sued.
• "And a common seal" was omitted from section 9 by the Companies (Amendment) Act 2015 with effect from 29 May 2015.
• The case: Salomon, for separate personality. In an Indian answer, cite section 9 and name Salomon.

Test yourself

1. Define a company under the Companies Act 2013. A company means a company incorporated under this Act or under any previous company law: section 2(20). The definition turns on registration, not on the nature of the business.

2. How many persons are needed to form a private company, and where does the number come from? Two or more, under section 3(1)(b). Seven or more for a public company under section 3(1)(a), and one for a One Person Company under section 3(1)(c).

3. From what date does a company exist? From the date of incorporation mentioned in the certificate of incorporation: section 9. Not from the date of filing.

4. A shareholder holding ninety per cent of a company's shares says the company's warehouse is "his". Is he right? No. Section 9 gives the company the power to acquire and hold property in its own name, so the warehouse belongs to the company. He owns shares, which measure his interest in the company, not in any particular asset.

5. Is a common seal a characteristic of every company? No, and this is a trap. The words "and a common seal" were omitted from section 9 by the Companies (Amendment) Act 2015 with effect from 29 May 2015. A company may have one; several sections now say "common seal, if any".

6. What happens to a One Person Company when its only member dies? The person named in the memorandum as nominee, who gave prior written consent, becomes the member: the first proviso to section 3(1). The memorandum must name that person at incorporation.

Both cases are named here without citations and without facts, and that is deliberate. No law report carrying either could be opened from where this book was written, and the house rule is that a citation is attached only to a report that has been read. See authorities/cases.json. In an Indian answer the authority is section 9, and the cases are named as the decisions that established the propositions.

2. Perpetual succession

Section 9 gives the company perpetual succession. Members die, sell out, go bankrupt or disappear; the company does not notice. It ends only when it is wound up or its name is struck off, both of which are formal legal processes with their own chapters.

Section 3A shows what happens when membership falls too low, and it is the closest the Act comes to an exception. If the number of members falls below seven in a public company or below two in a private company, and the company carries on business for more than six months in that state, then every member during that time who is aware of it becomes severally liable for the whole of the debts contracted during that period. Note carefully what that does and does not do: the company does not cease to exist, and its perpetual succession is untouched. What is lost is the members' limited liability.

3. Limited liability

This is not automatic, and saying that it is loses marks. A company may be limited by shares, limited by guarantee, or unlimited, under section 3(2), and only the first two have limited liability at all.

• In a company limited by shares, section 2(22), the liability is limited to the amount, if any, unpaid on the shares held by the member. A member whose shares are fully paid can be called on for nothing.
• In a company limited by guarantee, section 2(21), the liability is limited to the amount each member has undertaken by the memorandum to contribute to the assets in the event of winding up. Notice that this money is payable only on winding up, which is what makes guarantee companies suitable for clubs and charities that do not want capital from their members while they are running.
• In an unlimited company there is no limit at all.

4. Transferability of shares

Section 44 is short and does a great deal of work:

The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

Three consequences. First, a share is movable property, so it moves like goods rather than like land. Second, it is transferable, which is what lets an investor exit without the company being disturbed. Third, transfer is in the manner provided by the articles, which is how a private company restricts transfer while remaining a company, under section 2(68).

Section 45 adds that every share in a company having a share capital must be distinguished by its distinctive number, unless it is held in a depository, that is, in electronic form. In practice almost all listed shares are now held that way, so the proviso has swallowed a good deal of the rule.

5. Capacity to contract, to own and to sue

Section 9 gives the company power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name. It does all of this through human beings, because it has no hands, and section 22 is where the Act says how.

Under section 22(1), a bill of exchange, hundi or promissory note is deemed to have been made, accepted, drawn or endorsed on behalf of the company if it is done in the name of, or on behalf of, or on account of the company by any person acting under its authority, express or implied.

Under section 22(2), the company may by writing under its common seal, if any, authorise a person as its attorney to execute deeds on its behalf, in or outside India. The proviso is the modern part: where the company does not have a common seal, the authorisation is made by two directors, or by a director and the Company Secretary where one has been appointed.

The common seal: the characteristic that was removed

Read the words of section 22(2) again. "Under its common seal, if any." That phrase was substituted by the Companies (Amendment) Act 2015. The same Act omitted the words "and a common seal" from section 9, with effect from 29 May 2015, and made the same change in section 46(1) so that a share certificate is one "issued under the common seal, if any, of the company".

So a company may keep a seal and many do, but a company without one is a perfectly ordinary company, and everything a seal used to be required for can now be done by two directors, or a director and the Company Secretary.

Say this in an answer and you will stand out, because the old list of characteristics ran "separate legal entity, perpetual succession, limited liability, common seal, transferability of shares" and that fourth item has been wrong since 2015.

A worked example

Mrs Karve holds ninety-eight of the hundred shares of Kolhapur Looms Private Limited, is its managing director, and draws a salary from it. The company owns a weaving shed, its looms, and a lorry.

Who owns the shed? The company, not Mrs Karve. Under section 9 the members are a body corporate with power to acquire, hold and dispose of property, and what she owns is ninety-eight shares, which are an interest in the company and not a slice of the shed. If she insures the shed in her own name she insures property that is not hers.

She dies. The company does not. Perpetual succession under section 9 means her shares pass to her legal representative and the company carries on without a pause, keeping its name, its contracts and its licences. Had this been a partnership, her death would have affected the firm itself.

Only one member left. Suppose her executor is the only member for eight months. The company continues to exist, but section 3A provides that where the number of members falls below two in a private company and the business is carried on for more than six months while it is so reduced, every person who is a member during that time and knows of it is severally liable for the whole of the debts contracted after those six months. So the separate personality survives; the limited liability does not.

Her salary. She is both the controlling member and an employee, and the two relationships are separate because the company is a different person from her. Her employment contract is with the company.

Her liability for a debt. The company owes a yarn supplier four lakh rupees and cannot pay. Her shares are fully paid, so under section 2(22) nothing further can be required of her, and the supplier has no claim against her personally. Had the company been limited by guarantee under section 2(21), she would have been liable for the amount she undertook by the memorandum to contribute in the event of winding up, and no more; had it been an unlimited company under section 3(2), there would have been no limit at all.

Selling out. She agrees to transfer sixty shares to her nephew. Under section 44 the shares are movable property transferable in the manner provided by the articles, and this being a private company the articles will restrict the transfer, so the transfer takes effect only as the articles allow. The shares she keeps carry distinctive numbers under section 45, unless they are held in a depository.

Signing for the company. The lorry is bought on a promissory note signed "for and on behalf of Kolhapur Looms Private Limited" by Mrs Karve as managing director. Under section 22(1) the note is deemed to have been made on behalf of the company, so the company is liable on it and she is not.

And the seal. The company has never had a common seal. That does not matter. Section 22(2) says "under its common seal, if any", the words having been substituted by the Companies (Amendment) Act, 2015, and a deed may instead be executed by two directors, or by a director and the company secretary where one is appointed. A student who lists the common seal among the characteristics of a company is describing the law as it stood before 2015.

Distinctions that carry marks

What this does NOT mean

It does not mean a company can do anything a human can. It cannot marry, cannot be imprisoned, and cannot take an oath. Where the Act punishes an offence with imprisonment, the punishment falls on the officer in default, not on the company.

It does not mean limited liability protects a member who behaves badly. Sections 3A, 7(6) and 339 all make individuals personally liable in defined circumstances, and they are the subject of the next chapter.

It does not mean a share gives you a share of the assets. It gives you a bundle of rights against the company: to vote, to dividends when declared, and to a share in the surplus on winding up after everybody else is paid.

Quick revision

• Source of nearly all of them: section 9.
• Separate personality: the company owns its property; a member does not, so he cannot insure it (Macaura). A member may also be an employee (Lee's Air Farming).
• Perpetual succession: section 9. Section 3A is the exception that removes limited liability, not existence, after six months below seven or two members.
• Limited liability: section 3(2) with sections 2(21) and 2(22). Not automatic; an unlimited company has none.
• Transferability: section 44, shares are movable property transferable as the articles provide. Section 45, distinctive numbers, except in a depository.
• Contracting: section 22. No seal needed; two directors, or a director and the Company Secretary.
• The common seal is NOT a characteristic since 29 May 2015.

Test yourself

1. List the characteristics of a company and give the section for each. Separate legal personality, perpetual succession, and the power to hold property, contract and sue, all from section 9; limited liability from section 3(2) with sections 2(21) and 2(22); transferability from section 44.

2. Ravi owns all the shares in a company that owns a godown. He insures the godown in his own name. It burns down. Can he claim? No. The godown belongs to the company under section 9, and Ravi owns shares, not the godown, so he has no insurable interest in it. This is the point for which Macaura is cited.

3. A private company's membership falls to one, and it trades for eight months. What follows? Section 3A applies. Every person who was a member during the period after the first six months, and who was aware that the company was carrying on business with fewer than two members, becomes severally liable for the whole of the debts contracted during that time. The company continues to exist.

4. Does every company have a common seal? No. The words "and a common seal" were omitted from section 9 by the Companies (Amendment) Act 2015 with effect from 29 May 2015. Sections 22(2) and 46(1) now read "common seal, if any", and the proviso to section 22(2) lets two directors, or a director and the Company Secretary, authorise an attorney where there is no seal.

5. Distinguish a share from a debenture. A shareholder is a member and an owner, gets a dividend only out of profits, votes under section 47, and is paid last on winding up. A debenture holder is a creditor, gets interest whether or not there are profits, does not vote, and is paid before members. Both are movable property under section 44.

6. Are shares freely transferable in every company? No. Section 44 makes them transferable in the manner provided by the articles, and section 2(68) requires a private company's articles to restrict the right to transfer its shares.

Section 3A: membership below the minimum

If at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

Broken down, four conditions must all be satisfied:

1. Membership falls below seven (public) or below two (private).
2. The company carries on business in that state.
3. It does so for more than six months.
4. The member sought to be charged is cognisant of the fact, that is, knows about it.

Only then, and only for debts contracted after those six months, is the member severally liable, meaning a creditor can recover the whole debt from him alone.

Notice what is not affected. The company continues to exist and keeps its separate personality; section 3A takes away the members' limited liability, not the company's personality. That distinction is worth a sentence in an answer.

Section 7(5), (6) and (7): a company got by lying

Section 7 is the incorporation section. Its last three sub-sections deal with what happens when the company was obtained dishonestly, and they escalate.

Section 7(5). If any person furnishes false or incorrect particulars, or suppresses material information of which he is aware, in any document filed for registration, he shall be liable for action under section 447, which is the Act's fraud provision.

Section 7(6). Where, at any time after incorporation, it is proved that the company was got incorporated by false or incorrect information or representation, by suppressing a material fact, or by any fraudulent action, then the promoters, the persons named as the first directors, and the persons who made the declaration under section 7(1)(b) shall each be liable for action under section 447.

Section 7(7). This is the true veil-lifting provision, because it reaches the company itself. On an application, and on being satisfied that the situation warrants it, the Tribunal may:

• (a) pass such orders as it thinks fit for regulation of the management of the company, including changes in its memorandum and articles, in the public interest or in the interest of the company and its members and creditors;
• (b) direct that the liability of the members shall be unlimited;
• (c) direct removal of the name of the company from the register of companies;
• (d) pass an order for the winding up of the company; or
• (e) pass such other orders as it may deem fit.

Two safeguards in the proviso. Before making any such order the Tribunal must give the company a reasonable opportunity of being heard, and must take into consideration the transactions entered into by the company, including obligations contracted and any liability paid. The second one exists because innocent outsiders have usually dealt with the company by then.

Clause (b) is the striking one. The Tribunal can convert a limited company into an unlimited one by order, which is veil-lifting written into the statute.

Section 339: fraudulent conduct of business

This one operates in the course of winding up.

If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.

Take the elements in order:

1. The company is being wound up. Section 339 cannot be used against a going concern.
2. Business was carried on with intent to defraud creditors or others, or for any fraudulent purpose.
3. Who can apply: the Official Liquidator, the Company Liquidator, any creditor, or any contributory.
4. Who can be made liable: a director, manager or officer, past or present, or any person who was knowingly a party to carrying on the business that way. Note that the last limb catches people who were never officers at all.
5. The consequence: personally responsible, without any limitation of liability, for such debts as the Tribunal directs.

The words "without any limitation of liability" are the point. Limited liability is simply switched off for that person.

Section 464: too many members outside a company

Section 464(1) forbids an association or partnership of more than the prescribed number of persons, formed to carry on business for gain, unless it is registered as a company or formed under some other law. The proviso caps the prescribable number at one hundred.

Section 464(2) exempts two cases: a Hindu undivided family carrying on business, and an association or partnership formed by professionals governed by special Acts, which is why very large firms of chartered accountants and advocates are lawful.

Section 464(3) is the veil-lifting part: every member of an association carrying on business in contravention shall be punishable with fine which may extend to one lakh rupees and shall also be personally liable for all liabilities incurred in such business.

A worked example

Sunil owes a decree of forty lakh rupees to a bank. Before the bank can execute, he forms Sunview Trading Private Limited, transfers his shop and his stock to it for a nominal price, takes ninety-nine of its hundred shares, and tells the bank the shop is no longer his.

What the bank cannot do. It cannot simply say "the company is Sunil". Section 9 stands, and Salomon's principle stands with it. The company owns the shop.

What the bank can do. It can ask a court to look through the arrangement, because the corporate form has been used for the single purpose of defeating an existing obligation, and that is the paradigm case for judicial lifting. It can point to the timing, the nominal price and the ninety-nine per cent shareholding as evidence of purpose.

And if the company is wound up, section 339 becomes available: the business was carried on with intent to defraud a creditor, and Sunil, as a director and as a person knowingly a party to it, may be declared personally responsible without any limitation of liability for the company's debts, on the application of the liquidator or of the bank itself as a creditor.

Change one fact. Suppose Sunil had formed the company two years before the loan and had run a genuine business through it. The bank's argument collapses, because there is nothing to look through. Incorporating to limit future risk is the whole purpose of company law; incorporating to escape a debt you already owe is not.

Distinctions that carry marks

What this does NOT mean

It does not mean the company disappears. In almost every instance the company continues; what changes is that a person behind it is also liable. Section 7(7)(c) and (d), removal from the register and winding up, are the exceptions.

It does not mean a court will lift the veil because the result seems unfair. Salomon's principle is the rule and lifting is the exception, and an examiner will expect you to say so before you list the exceptions.

It does not mean a one-member company is a sham. Section 3(1)(c) expressly allows a One Person Company, so having a single member is lawful and is not by itself a ground for lifting anything.

Limits and criticism

The judicial categories are criticised as vague. "Fraud" and "single economic unit" are not tests so much as labels applied after the decision has been made, and the same facts can be described either way. That vagueness is the reason the statutory instances matter: they tell a person in advance exactly when their limited liability is at risk.

The counter-argument is that a closed statutory list would be gamed within a year, and that the courts need a residual power precisely because dishonest people are inventive. An answer that sets out both sides is a better answer than one that recites categories.

Quick revision

• The rule is separate personality, section 9. Lifting is the exception.
• Judicial grounds: fraud or improper conduct, evasion of law or of a contract, enemy character, tax evasion, single economic unit.
• Section 3A: below seven or two members, business carried on more than six months, member aware, severally liable for debts of that period.
• Section 7(5): false particulars, action under section 447.
• Section 7(6): company got incorporated by fraud, promoters, first directors and declarants liable under section 447.
• Section 7(7): Tribunal may regulate management, make members' liability unlimited, strike off, wind up, or make any other order. Hearing first, and past transactions considered.
• Section 339: in winding up, business carried on to defraud, director, manager, officer or knowing party personally responsible without limit.
• Section 464: association above the prescribed number, capped at one hundred, fine up to one lakh rupees and personal liability. HUF and professionals exempt.

Test yourself

1. What is meant by lifting the corporate veil? Disregarding the separation between a company and the persons behind it, created by section 9, so as to fix those persons with liability or to look at their characteristics. It is an exception to the rule in Salomon.

2. Name five statutory instances under the Companies Act 2013. Section 3A, membership below the minimum for over six months; section 7(6), incorporation obtained by fraud; section 7(7), the Tribunal's power to make members' liability unlimited; section 339, fraudulent conduct of business in a winding up; section 464(3), association exceeding the prescribed number.

3. Under section 339, who may apply and against whom? The Official Liquidator, the Company Liquidator, any creditor or any contributory may apply. The declaration may be made against any past or present director, manager or officer, and against any person who was knowingly a party to carrying on the business with intent to defraud.

4. A public company has had five members for four months and is trading. Are the members personally liable? Not yet. Section 3A requires the business to be carried on for more than six months while the number is reduced. At four months the condition is not satisfied. Liability, if it comes, attaches only to debts contracted after the six months and only to members who are aware of the position.

5. What is the maximum number of persons who may carry on business in an unregistered association? Such number as may be prescribed, and the proviso to section 464(1) says the prescribed number shall not exceed one hundred. A Hindu undivided family, and an association of professionals governed by special Acts, are outside the section altogether.

6. Can the Tribunal make the members of a limited company unlimitedly liable? Yes, in one situation: section 7(7)(b), where the company was got incorporated by false or incorrect information, by suppression of a material fact, or by any fraudulent action. The company must first be heard, and the Tribunal must consider the transactions it has already entered into.

Second, "not a citizen" is not "no rights". A company holds the rights given to persons, and it holds its ordinary legal rights of property and contract under section 9 in full. Nothing about the citizenship rule weakens the company's separate personality.

2. What is a company's nationality? The country it was incorporated in.

A company's nationality follows its place of incorporation, and the Companies Act works on exactly that footing. Section 2(20) defines a company as one incorporated under this Act or under any previous company law, so an Indian company is an Indian company because it is on the Indian register.

Everything else is a foreign company. Section 2(42) defines it as:

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

Note the two limbs. Being incorporated outside India is not by itself enough to make a body a "foreign company" for this Act; it must also have a place of business in India and conduct business activity here. A company in Singapore with no Indian presence is simply outside the Act.

3. Where does a company reside? Where it is really controlled.

Nationality is fixed once and for all at incorporation. Residence is a question of fact and can change, because it asks where the company's central control and management actually are. This is why an Indian-registered company may be resident abroad for a particular purpose, and why a foreign-registered company controlled from Mumbai may be treated as resident here.

The Act contains a striking illustration of the same instinct. Section 379(2) provides that where not less than fifty per cent of the paid-up share capital of a foreign company, whether equity or preference or partly both, is held by one or more citizens of India, or by one or more companies or bodies corporate incorporated in India, or by a combination of the two, whether singly or in the aggregate, that company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.

Read that carefully, because it is the most examinable sentence in this chapter. The company's nationality does not change. It remains incorporated outside India. What changes is the regulatory treatment: for its Indian business it is treated as if it were an Indian company. That is the law choosing substance over the register, and it is the same instinct that drives veil-lifting.

Section 379(1) sets the baseline: sections 380 to 386 and sections 392 and 393 apply to all foreign companies, whoever owns them.

A worked example

Harbour Analytics Pte Ltd is incorporated in Singapore. It opens an office in Andheri and sells software to Indian banks. Sixty per cent of its shares are held by two Indian citizens and by an Indian private company.

Is it a citizen of India? No, and neither would an Indian-registered company be. Citizenship is not available to any company.

What is its nationality? Singaporean. It was incorporated under Singapore law and that does not change because Indians bought its shares.

Is it a "foreign company" under this Act? Yes. It is incorporated outside India, it has a place of business in India, and it conducts business activity here, so section 2(42) is satisfied on both limbs.

What follows from the sixty per cent? Section 379(2) is triggered, because at least fifty per cent of the paid-up share capital is held by Indian citizens and an Indian company in the aggregate. So for the business it carries on in India it must comply with Chapter XXII and such other provisions as are prescribed as if it were an Indian company. Sections 380 to 386, 392 and 393 would have applied to it anyway under section 379(1).

Change one fact. If the Indian holding were forty per cent, section 379(2) would not bite, and only section 379(1) would apply. The company would still be a foreign company; it would simply carry a lighter load.

Distinctions that carry marks

What this does NOT mean

It does not mean a company has no constitutional protection. Rights given to "any person", such as Article 14, are available to it.

It does not mean shareholders lose their rights. They are citizens and their own fundamental rights survive the fact that they invested through a company.

It does not mean a foreign company escapes Indian law. Section 379(1) applies a defined set of provisions to every foreign company, and section 379(2) applies much more where the ownership is substantially Indian.

It does not mean nationality and residence are the same. Mixing them is the commonest error here. Nationality is fixed at incorporation; residence is a factual question about control.

Quick revision

• Citizen: no. A company is a juristic person, not a natural one, so it cannot claim Article 19 rights. It can claim rights given to "any person", such as Article 14.
• Shareholders: remain citizens and keep their own fundamental rights.
• Nationality: the country of incorporation. Section 2(20) for Indian companies.
• Foreign company: section 2(42), incorporated outside India, and has a place of business in India, and conducts business activity here.
• Section 379(1): sections 380 to 386, 392 and 393 apply to all foreign companies.
• Section 379(2): fifty per cent or more of the paid-up capital held by Indian citizens or Indian bodies corporate, singly or in the aggregate, means the company complies with Chapter XXII as if it were incorporated in India, for its Indian business.
• Residence: where central control and management are. A question of fact, and it can change.

Test yourself

1. Is a company a citizen of India? No. Citizenship is conferred on natural persons. A company is a juristic person, so it cannot claim the rights that Article 19 gives to citizens only, though it can claim rights given to any person, such as Article 14.

2. If a company cannot claim Article 19, is its business unprotected? No. The shareholders are citizens and may complain of state action that infringes their own fundamental rights, and the company retains its ordinary legal rights of property and contract under section 9.

3. Define a foreign company. Section 2(42): any company or body corporate incorporated outside India which has a place of business in India, whether by itself or through an agent, physically or through electronic mode, and conducts any business activity in India in any other manner.

4. A company incorporated in Dubai has seventy per cent of its shares held by Indian citizens and runs a branch in Pune. What is the consequence? Section 379(2) applies, because not less than fifty per cent of the paid-up share capital is held by Indian citizens. For the business it carries on in India it must comply with Chapter XXII and such other provisions as may be prescribed as if it were a company incorporated in India. Its nationality remains foreign.

5. Distinguish the nationality of a company from its residence. Nationality is fixed by the place of incorporation and does not change. Residence depends on where the central control and management of the company actually are, is a question of fact, and can change.

Limited by guarantee

Section 2(21): a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

The differences from the first kind are worth spelling out because they are examined together. The member does not buy shares; he promises an amount. The promise is enforceable only in the event of winding up, so while the company is a going concern the members owe nothing at all. And the amount is whatever each member undertook in the memorandum, so different members may have undertaken different amounts.

That is exactly what a club, a trade association, a school or a research body needs. It wants members, not investors, and it does not want to hand out shares. A guarantee company may also have a share capital, in which case its members carry both liabilities.

Unlimited

Section 3(2)(c). The members' liability is not limited at all, and on a winding up they must contribute whatever is needed to pay the debts. It is rare, and it is chosen where members want to signal that they stand fully behind the business, or where the regulatory relief for unlimited companies is worth more than the protection given up.

Axis two: membership

Private company, section 2(68)

A private company is one having a minimum paid-up share capital as may be prescribed, and which by its articles:

• (i) restricts the right to transfer its shares;
• (ii) except in the case of a One Person Company, limits the number of its members to two hundred, joint holders being counted as a single member; and
• (iii) prohibits any invitation to the public to subscribe for any securities of the company.

About the capital. The words "of one lakh rupees or such higher paid-up share capital" were omitted by the Companies (Amendment) Act 2015 with effect from 29 May 2015. What survives is "as may be prescribed", and no minimum is prescribed. So a private company can be incorporated with a paid-up capital of one hundred rupees. Writing that a private company needs one lakh rupees is an error of live law.

About the two hundred. Note two things. The count is of members, not of shareholders as individuals, so joint holders of a share are one member. And the limit is on members, not on employees or former employees who became members while employed, who are excluded by the second proviso.

About the restriction on transfer. This is the clause that makes a private company private in practice. Read it alongside section 44, which makes shares transferable in the manner provided by the articles. Section 44 is what gives the articles the power that section 2(68)(i) then requires them to use.

Public company, section 2(71)

A public company is one which:

• (a) is not a private company; and
• (b) has a minimum paid-up share capital as may be prescribed.

The definition is deliberately residual. A company is public because it is not private, not because of anything it does. The words "of five lakh rupees or such higher paid-up capital," were omitted by the same 2015 Act on the same day, so there is no capital floor here either.

The proviso is the sting, and it is heavily examined:

a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

So a private company that is a subsidiary of a public company is treated as public, no matter what its own articles say. It keeps its restrictive articles and it loses its private status. Students almost always miss this.

One Person Company, section 2(62)

"One Person Company" means a company which has only one person as a member. Section 3(1)(c) allows it to be formed, and says it is a private company, so everything said about private companies applies to it except the two hundred member ceiling, which section 2(68)(ii) expressly disapplies.

The four provisos to section 3(1), covering the nominee, are set out in [What a Company Is] and are the distinctive feature: the memorandum must name a person, with prior written consent, who becomes the member on the subscriber's death or incapacity.

Small company, section 2(85)

A small company is a company, other than a public company, of which:

• (i) the paid-up share capital does not exceed fifty lakh rupees, or such higher amount as may be prescribed, which shall not be more than ten crore rupees; and
• (ii) the turnover as per the profit and loss account for the immediately preceding financial year does not exceed two crore rupees, or such higher amount as may be prescribed, which shall not be more than one hundred crore rupees.

Both limbs must be satisfied, because the clause says "and".

The proviso excludes three kinds outright, whatever their size: (A) a holding company or a subsidiary company; (B) a company registered under section 8; and (C) a company or body corporate governed by any special Act.

Note the drafting technique in the two figures. The section states a figure and then a ceiling on what may be prescribed, so the Government can raise the threshold by rule up to ten crore and one hundred crore but no further. Small company status is not a separate kind of company; it is a size label that switches on relief in later chapters, such as fewer board meetings and a simpler annual return.

Pending reform, not law. The Corporate Laws (Amendment) Bill 2026 would raise these thresholds. It is before a Joint Parliamentary Committee, which reported on 3 August 2026, and it has not been passed or assented to. Answer on the figures above.

A worked example

Meera and Farhan want to open a design studio in Dadar.

They are two, so under section 3(1)(b) they may form a private company. They choose to be limited by shares under section 3(2)(a), so their liability will be limited to any amount unpaid on their shares, under section 2(22).

Their articles must, under section 2(68), restrict the transfer of shares, cap members at two hundred, and prohibit any invitation to the public. They put in a paid-up capital of ten thousand rupees, which is lawful, because the one lakh rupee floor was removed on 29 May 2015.

In its first year the studio's paid-up capital is ten thousand rupees and its turnover is eighty lakh rupees. Both are within section 2(85), it is not a public company, and it is not a holding or subsidiary company, a section 8 company or governed by a special Act. It is a small company and gets the reliefs that go with that.

Now change one fact. A listed public company buys sixty per cent of the studio. Two things happen at once. By the proviso to section 2(71) the studio is deemed to be a public company, even though its articles still restrict transfers. And by proviso (A) to section 2(85) it stops being a small company, because it is now a subsidiary. Its capital and turnover have not moved at all.

Distinctions that carry marks

What this does NOT mean

It does not mean "private" and "limited by shares" are alternatives. They answer different questions and every company has an answer to both.

It does not mean a private company is small. Some of the largest companies in India are private companies. Size is section 2(85); privateness is section 2(68).

It does not mean a small company is a separate kind of company. It is a label that attaches to a private company for as long as it stays under both thresholds, and it falls away the moment either is crossed or the company becomes a subsidiary.

It does not mean a One Person Company has one director. It has one member. Directors are a different question entirely.

Quick revision

• Section 3(2): limited by shares, limited by guarantee, or unlimited. A closed list.
• 2(22) unpaid on shares; 2(21) amount undertaken, payable only on winding up.
• 2(68) private: articles restrict transfer, cap members at two hundred except an OPC, prohibit public invitation. Joint holders count as one.
• 2(71) public: not a private company. Proviso: a subsidiary of a non-private company is deemed public.
• No minimum paid-up capital for either since 29 May 2015, Act 21 of 2015.
• 2(62) OPC: one member; a private company by section 3(1)(c).
• 2(85) small: not public, capital up to fifty lakh (prescribable to ten crore) and turnover up to two crore (prescribable to one hundred crore). Excludes holding and subsidiary companies, section 8 companies, and companies under a special Act.
• Section 464: unregistered associations above the prescribed number, capped at one hundred.

Test yourself

1. What are the three kinds of company by liability? Limited by shares, limited by guarantee, and unlimited: section 3(2).

2. What must a private company's articles contain? Under section 2(68): a restriction on the right to transfer its shares; a limit of two hundred members, except in a One Person Company; and a prohibition on any invitation to the public to subscribe for its securities.

3. What is the minimum paid-up capital of a public company? None. The words "of five lakh rupees or such higher paid-up capital," were omitted from section 2(71) by the Companies (Amendment) Act 2015 with effect from 29 May 2015, and nothing has been prescribed in their place.

4. A private company is a wholly owned subsidiary of a listed company. Its articles still restrict transfers. Is it private? No. By the proviso to section 2(71) it is deemed to be a public company for the purposes of the Act, even though it continues to be a private company in its articles.

5. A company has paid-up capital of forty lakh rupees and turnover of one crore fifty lakh rupees, and is a subsidiary of another company. Is it a small company? No. Both numerical limbs of section 2(85) are satisfied, but proviso (A) excludes a subsidiary company outright.

6. In a company limited by guarantee, when does a member have to pay? Only in the event of the company being wound up, and then only the amount he undertook by the memorandum to contribute: section 2(21).

Test (i), control of composition, means the power to appoint or remove all or a majority of the directors. Test (ii), more than one-half of the total voting power, is a bare arithmetic test, and the words "either at its own or together with one or more of its subsidiary companies" make it a group test: A holds thirty per cent of C directly and owns B, which holds twenty-five per cent of C. Together that is fifty-five per cent, so C is A's subsidiary.

The proviso limits layers. Such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. The mischief is a chain of companies so long that nobody can trace who really owns the business at the bottom.

Holding company, section 2(46)

A company of which such companies are subsidiary companies. It is purely the mirror of section 2(87), so all the work is done there. The Explanation adds that for this clause "company" includes any body corporate, which matters because it brings in bodies that are not companies registered under this Act.

Associate company, section 2(6)

A company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence, and includes a joint venture company.

The Explanation defines both key terms:

• "significant influence" means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement;
• "joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

So the ladder is: twenty per cent or more but not control equals associate; control equals subsidiary. And note that significant influence has a second route that has nothing to do with shares at all: control of or participation in business decisions under an agreement. A company with no shareholding whatever can be an associate if there is such an agreement.

Section 19: a subsidiary may not hold shares in its holding company

This section exists to stop a group owning itself, which would let the same money be counted as capital twice.

Section 19(1) provides that no company shall, either by itself or through its nominees, hold any shares in its holding company, and no holding company shall allot or transfer its shares to any of its subsidiary companies, and any such allotment or transfer shall be void.

Three exceptions in the first proviso, where the subsidiary holds the shares:

• (a) as the legal representative of a deceased member of the holding company;
• (b) as a trustee; or
• (c) where the subsidiary was a shareholder even before it became a subsidiary.

The second proviso restricts voting: a subsidiary within the exceptions may vote at a meeting of the holding company only in respect of the shares it holds as a legal representative or as a trustee, that is, under (a) or (b). So the (c) shareholding is tolerated but silent.

Section 19(2) deals with a holding company that has no share capital, being limited by guarantee or unlimited: the reference to shares is read as a reference to the interest of its members, whatever be the form of interest.

Government company, section 2(45)

Any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

Three points. The threshold is not less than fifty-one per cent, so exactly fifty-one qualifies. The holding may be aggregated across the Centre and one or more States. And a subsidiary of a Government company is itself a Government company, which extends the definition a long way down a group.

A Government company is an ordinary company in all other respects. It is registered under this Act, it has shareholders and directors, and it can be sued. Being a Government company is not the same as being the Government, and the separate personality in section 9 applies to it exactly as to any other company.

Dormant company, section 455

Section 455(1) lets a company apply to the Registrar for the status of a dormant company where it is formed and registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction, or where it is an inactive company.

The Explanation defines both terms and they are examinable:

• "inactive company" means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
• "significant accounting transaction" means any transaction other than: (a) payment of fees to the Registrar; (b) payments made to fulfil the requirements of this Act or any other law; (c) allotment of shares to fulfil the requirements of this Act; and (d) payments for maintenance of its office and records.

Read (a) to (d) again. They are the four things a company must do simply to stay alive. Excluding them means a company can keep itself lawfully in existence without losing dormant status.

The rest of the section is machinery. The Registrar allows the status and issues a certificate, section 455(2), and maintains a register of dormant companies, section 455(3). Where a company has not filed financial statements or annual returns for two consecutive financial years, the Registrar shall issue a notice and enter its name in that register, section 455(4), so dormancy can be imposed as well as applied for. A dormant company must keep a minimum number of directors, file documents and pay an annual fee to retain the status, and may become active again on application, section 455(5). If it fails to comply, the Registrar shall strike off its name from the register of dormant companies, section 455(6).

Nidhi and producer companies, in one line each

A Nidhi, section 406, is a company incorporated with the object of cultivating the habit of thrift and savings among its members, receiving deposits from and lending to its members only, for their mutual benefit. It is a recognised class with its own rules and it appears again in [Government Companies, Registration Offices, Statistics and Nidhis].

A producer company is a company of primary producers, formed under Chapter XXIA, sections 378A to 378ZU, which was put into this Act in 2020. It has its own chapter, [Producer Companies].

A worked example

Anvi Holdings Limited owns forty per cent of Kesar Foods Private Limited and, under a shareholders' agreement, has the right to appoint four of Kesar's seven directors.

Is Kesar a subsidiary? Yes. Anvi does not have more than half the voting power, so test (ii) of section 2(87) fails. But it controls the composition of the Board, because it can appoint a majority of the directors, so test (i) is satisfied. Either test is enough.

What does that make Anvi? A holding company, by section 2(46).

What is Kesar's status as a private company? By the proviso to section 2(71), a private company that is a subsidiary of a company which is not a private company is deemed to be a public company. So if Anvi is public, Kesar is deemed public.

Kesar owns some shares in Anvi, bought last year. That is caught by section 19(1) and is void, unless it falls in one of the three exceptions. It does not: Kesar is not a legal representative or a trustee, and it bought the shares after becoming a subsidiary, so exception (c) does not apply either.

Anvi also owns twenty-two per cent of Rangoli Spices Limited and cannot control it. Twenty-two per cent is at least twenty per cent of total voting power, so Anvi has significant influence and Rangoli is an associate company under section 2(6), not a subsidiary.

Distinctions that carry marks

What this does NOT mean

It does not mean fifty-one per cent is needed for a subsidiary. Control of Board composition is enough, at any shareholding.

It does not mean an associate is a small subsidiary. Section 2(6) expressly excludes a subsidiary. The two categories cannot overlap.

It does not mean a Government company is part of the Government. It is a company under section 9 with its own personality, and it sues and is sued in its own name.

It does not mean a dormant company is a dead one. It exists, it keeps directors, it files and it pays a fee, and it can be made active again under section 455(5).

Quick revision

• 2(87) subsidiary: control of Board composition or more than one-half of total voting power, alone or with other subsidiaries. Proviso: prescribed classes may not exceed prescribed layers.
• 2(46) holding: the mirror; "company" includes any body corporate.
• 2(6) associate: significant influence, not a subsidiary, includes a joint venture. Significant influence is at least twenty per cent of total voting power or participation in business decisions under an agreement.
• Section 19: a subsidiary may not hold shares in its holding company; any such allotment or transfer is void. Exceptions: legal representative, trustee, or a shareholder before becoming a subsidiary. Only the first two may vote.
• 2(45) Government company: not less than fifty-one per cent held by the Centre, a State, or both together; includes a subsidiary of such a company.
• Section 455 dormant: future project, holding an asset or intellectual property, no significant accounting transaction, or inactive. Four excluded transactions. Registrar may impose it after two years of non-filing.
• 2(42) foreign; section 406 Nidhi; Chapter XXIA producer companies; section 8 charitable.

Test yourself

1. State the two tests for a subsidiary company. Section 2(87): the holding company either controls the composition of the Board of Directors, or exercises or controls more than one-half of the total voting power, alone or together with one or more of its subsidiaries. Either test alone suffices.

2. What is significant influence? Under the Explanation to section 2(6), control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement.

3. A subsidiary buys shares in its holding company on the stock exchange. Is the purchase good? No. Section 19(1) makes any such holding, and any allotment or transfer to a subsidiary, void. None of the three exceptions in the first proviso applies to a purchase made after the company became a subsidiary.

4. Is a company in which the Central Government holds thirty per cent and the State of Maharashtra holds twenty-five per cent a Government company? Yes. Section 2(45) allows the holding to be partly by the Central Government and partly by one or more State Governments, and the aggregate here is fifty-five per cent, which is not less than fifty-one per cent.

5. What is a significant accounting transaction? Any transaction other than the four in Explanation (ii) to section 455: payment of fees to the Registrar, payments to fulfil the requirements of this or any other law, allotment of shares to fulfil the requirements of this Act, and payments for maintenance of the office and records.

6. Can the Registrar make a company dormant without an application? Yes. Under section 455(4), where a company has not filed financial statements or annual returns for two consecutive financial years, the Registrar shall issue a notice and enter its name in the register of dormant companies.

Where satisfied, the Government may by licence, issued in the prescribed manner and on such conditions as it deems fit, allow registration as a limited company without the addition to its name of the word "Limited" or the words "Private Limited", and the Registrar shall then register it on application.

The consequences: section 8(2), (3) and (4)

Section 8(2): it is a real company. It shall enjoy all the privileges and be subject to all the obligations of limited companies. Losing the word "Limited" does not lose the limited liability, and it does not buy any exemption from the rest of the Act except where the Act says so.

Section 8(3): a firm may be a member. This is a genuine exception. A partnership firm is not a person in law, and ordinarily cannot be a member of a company. Section 8(3) lets it be one here.

Section 8(4): two restrictions.

• (i) The company shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. So the constitutional documents are frozen without permission, which is how the Government keeps the objects charitable.
• (ii) The company may convert itself into a company of any other kind only after complying with such conditions as may be prescribed. Conversion out of section 8 is possible but controlled.

Bringing an existing company in: section 8(5)

An ordinary limited company already registered under this Act or a previous company law, which is found to have been formed with the section 8(1)(a) objects and with the (b) and (c) restrictions, may be licensed to be registered under section 8 and to change its name by omitting "Limited" or "Private Limited". Every provision of the section then applies to it.

Revocation: section 8(6), (7) and (8)

Section 8(6): when the licence can be revoked. The Central Government may by order revoke the licence if:

1. the company contravenes any of the requirements of this section; or
2. it contravenes any of the conditions subject to which the licence was issued; or
3. the affairs of the company are conducted fraudulently, or in a manner violative of the objects of the company, or prejudicial to public interest.

On revocation the Government directs the company to convert its status and change its name to add "Limited" or "Private Limited", and the Registrar registers it accordingly.

Two safeguards. The first proviso: no such order shall be made unless the company is given a reasonable opportunity of being heard. The second proviso: a copy of every such order shall be given to the Registrar.

Section 8(7): what may follow revocation. Where a licence is revoked, the Central Government may, if satisfied that it is essential in the public interest, direct that the company be wound up or amalgamated with another company registered under this section. Again, only after a reasonable opportunity of being heard.

Section 8(8): a forced amalgamation. Where the licence is revoked and the Government is satisfied that it is essential in the public interest that the company be amalgamated with another section 8 company having similar objects, it may by order provide for the amalgamation, notwithstanding anything to the contrary in this Act, specifying the constitution, properties, powers, rights, interests, authorities, privileges, liabilities, duties and obligations of the merged company. This is one of the few places where the Act allows a merger to be imposed by executive order rather than approved by a Tribunal.

What happens to the assets: section 8(9) and (10)

Section 8(9). If on winding up or dissolution any asset remains after satisfaction of the debts and liabilities, it may be:

• transferred to another section 8 company having similar objects, on such conditions as the Tribunal may impose; or
• sold, and the proceeds credited to the Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code 2016.

Notice what is missing: the members get nothing. In an ordinary company the surplus after paying creditors goes to the members. Here it cannot, because the whole basis of the licence is that members do not take value out.

Section 8(10). A section 8 company shall amalgamate only with another company registered under this section and having similar objects. So charitable assets cannot be walked out of the sector through a merger.

The penalty: section 8(11)

If a company makes any default in complying with the requirements of the section, then without prejudice to any other action under the section:

• the company shall be punishable with a fine not less than ten lakh rupees and up to one crore rupees; and
• the directors and every officer in default shall be punishable with a fine not less than twenty-five thousand rupees and up to twenty-five lakh rupees.

The proviso: when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447, the Act's fraud provision.

A worked example

A group of doctors in Nagpur wants to run a free diagnostic centre. They want corporate form so that the equipment can be owned in one name and the centre can survive them.

They apply for a licence under section 8, showing objects of social welfare and charity within clause (a), an intention to plough back any surplus under clause (b), and an article prohibiting dividends under clause (c). The Central Government grants a licence and they register as Vidarbha Free Diagnostics, with no "Limited" at the end.

Year three. The centre has a surplus of eleven lakh rupees. The doctors may spend it on a new scanner. They may not distribute it among themselves, because clause (c) and their own articles forbid it, and doing so would be a contravention exposing the company to a fine of at least ten lakh rupees under section 8(11).

Year five. They want to change the objects to include running a paid pharmacy. They cannot simply pass a special resolution: section 8(4)(i) requires the previous approval of the Central Government for any alteration of the memorandum or articles.

Year seven. It emerges that two directors have been routing payments to a firm they own. The Government may revoke the licence under section 8(6), because the affairs are being conducted fraudulently, after giving the company a hearing. On revocation the company must add "Limited" to its name. The Government may also direct winding up or amalgamation with another section 8 company under section 8(7), and the two directors face section 447 by the proviso to section 8(11).

On winding up. Suppose four lakh rupees remain after the debts are paid. It does not go to the doctors. Under section 8(9) it goes to another section 8 company with similar objects on the Tribunal's conditions, or is sold with the proceeds credited to the Insolvency and Bankruptcy Fund under section 224 of the Insolvency and Bankruptcy Code 2016.

Distinctions that carry marks

What this does NOT mean

It does not mean a section 8 company cannot make a profit. Section 8(1)(b) says "profits, if any", so profit is expected. What is forbidden is distributing it to members.

It does not mean there is no limited liability. Section 8(2) preserves all the privileges of limited companies. The word is dropped from the name, not the protection.

It does not mean it is exempt from the Act. Section 8(2) subjects it to all the obligations of limited companies as well.

It does not mean the licence is permanent. Section 8(6) lists three grounds of revocation, and section 8(7) allows a compulsory winding up or amalgamation to follow.

Quick revision

• Three conditions, section 8(1): charitable objects in the list, which ends "or any such other object"; profits applied to the objects; dividends prohibited. All three.
• The reward: registration as a limited company without "Limited" or "Private Limited", by Central Government licence on such conditions as it deems fit.
• 8(2): all the privileges and all the obligations of limited companies.
• 8(3): a firm may be a member.
• 8(4): no alteration of memorandum or articles without previous Central Government approval; conversion only on prescribed conditions.
• 8(5): an existing limited company may be brought in and drop the word from its name.
• 8(6): revocation for contravention of the section, of a licence condition, or where affairs are fraudulent, against the objects, or prejudicial to public interest. Hearing required; copy to the Registrar.
• 8(7) and (8): winding up, or amalgamation with another section 8 company, in the public interest.
• 8(9): surplus to another section 8 company on the Tribunal's conditions, or sold and credited to the Insolvency and Bankruptcy Fund under section 224 of the Insolvency and Bankruptcy Code 2016.
• 8(10): may amalgamate only with another section 8 company having similar objects.
• 8(11): company, ten lakh to one crore rupees; directors and officers in default, twenty-five thousand to twenty-five lakh rupees; fraud attracts section 447.

Test yourself

1. What three things must the Central Government be satisfied of before granting a section 8 licence? That the body has charitable objects within section 8(1)(a); intends to apply its profits or other income in promoting those objects, section 8(1)(b); and intends to prohibit the payment of any dividend to its members, section 8(1)(c).

2. Can a section 8 company change its objects by special resolution alone? No. Section 8(4)(i) requires the previous approval of the Central Government for any alteration of the memorandum or articles.

3. On what grounds may the licence be revoked? Section 8(6): contravention of the requirements of the section; contravention of a condition of the licence; or the affairs being conducted fraudulently, or in a manner violative of the objects, or prejudicial to public interest. The company must first be given a reasonable opportunity of being heard.

4. A section 8 company is wound up and two lakh rupees remain after the creditors are paid. Who gets it? Not the members. Under section 8(9) it may be transferred to another section 8 company with similar objects on such conditions as the Tribunal imposes, or sold and the proceeds credited to the Insolvency and Bankruptcy Fund under section 224 of the Insolvency and Bankruptcy Code 2016.

5. Can a partnership firm be a member of a section 8 company? Yes. Section 8(3) expressly permits it, which is an exception to the general position.

6. Can a section 8 company be a small company? No. Proviso (B) to section 2(85) excludes a company registered under section 8 from the definition, whatever its capital or turnover.

Look at what the three limbs are doing, because they are three very different ideas.

Limb (a) is formal. You are a promoter because a document says so, either the prospectus or the annual return under section 92. It is easy to prove and easy to avoid.

Limb (b) is factual control. It catches the person who runs the company whatever the paperwork says, and the words "directly or indirectly whether as a shareholder, director or otherwise" are drawn as wide as the drafter could manage.

Limb (c) is the shadow. A person whose advice, directions or instructions the Board is accustomed to act on is a promoter even if he holds no shares and no office. "Accustomed" means habitually, not once.

The proviso is essential and is regularly missed. A person acting merely in a professional capacity is outside limb (c). So the company's solicitor, its chartered accountant and its merchant banker do not become promoters by giving the advice they were engaged to give. If they step outside that role and start directing the business, the proviso stops protecting them.

The promoter's position: a fiduciary, not a trustee and not an agent

This is the part MU asks as "position of a promoter", and the answer is best given by saying what he is not first.

He is not an agent of the company, because an agent needs a principal and before incorporation there is no company to be the principal. This is why pre-incorporation contracts are a problem at all.

He is not a trustee of the company, because a trustee holds specific property for a beneficiary, and a promoter usually holds nothing of the company's.

He is in a fiduciary relationship with the company he is bringing into existence. From that single proposition the duties follow.

The duties

1. To disclose any interest and any profit. If the promoter sells his own property to the company, or takes a commission, he must disclose it. Disclosure is the operative duty; the profit itself is not unlawful.

2. To disclose to somebody capable of receiving the disclosure. Telling himself is not disclosure. It must be made either to an independent board of directors, or to the existing and intended shareholders, ordinarily through the prospectus. This is why section 26 requires a prospectus to state the promoters' interests and the amounts paid to them.

3. Not to make a secret profit. The corollary of the first two. A profit made and not disclosed must be handed over.

4. To give the company the benefit of what he acquires for it. Where the promoter acquires property while acting for the company in formation, he cannot keep the upside for himself.

5. To make full and truthful disclosure in the prospectus. This duty is enforced by sections 34, 35 and 36 and is the subject of its own chapters.

6. To act with reasonable care and not to mislead. Sections 7(5) and 7(6) make this concrete for the documents filed at incorporation.

The liabilities, section by section

This is where an answer earns its marks, because these are citable.

Section 7(5). Any person who furnishes false or incorrect particulars of any information, or suppresses any material information of which he is aware, in any document filed with the Registrar for registration, shall be liable for action under section 447.

Section 7(6). Where it is later proved that the company was got incorporated by false or incorrect information or representation, by suppressing a material fact, or by any fraudulent action, then the promoters, the persons named as first directors, and the persons who made the declaration under section 7(1)(b) shall each be liable for action under section 447. The promoter is named expressly.

Section 7(7). The Tribunal's consequential powers, including making the members' liability unlimited and winding the company up, are set out in [Lifting the Corporate Veil].

Section 35: civil liability for the prospectus. Where a person subscribes for securities acting on a misleading statement, or on the inclusion or omission of any matter, in the prospectus and sustains loss, then the company and every person who falls in clauses (a) to (e) is liable to pay compensation to every person who sustained the loss. Clause (c) is "is a promoter of the company", so the promoter's liability is written into the section by name, alongside directors, persons who authorised the issue, and experts.

Section 35(2) gives the defences, and they are the promoter's escape route: that he withdrew his consent to be a director before issue and the prospectus was issued without his authority; that the prospectus was issued without his knowledge or consent and that on becoming aware he forthwith gave a reasonable public notice to that effect; or, as regards an expert's statement, that it was a correct and fair representation and that he had reasonable ground to believe, and did believe up to the time of issue, that the expert was competent and had given and not withdrawn his consent.

Section 35(3) is the severe one. Where it is proved that a prospectus has been issued with intent to defraud the applicants or any other person, or for any fraudulent purpose, every person referred to in sub-section (1), which includes the promoter, shall be personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by any person who subscribed on the faith of it.

Section 300. In a winding up by the Tribunal, the Tribunal may direct the public examination of a promoter where the Company Liquidator's report alleges fraud in the promotion or formation of the company. The promoter can be put in the witness box and questioned on oath.

Section 447. The Act's general fraud provision, which sections 7(5), 7(6) and several others route into.

Pre-incorporation contracts

A promoter often has to contract before the company exists: to take a lease, to order machinery, to engage an architect.

The company is not bound by such a contract, because it did not exist and could not have authorised anyone to act for it. And it cannot ratify it after incorporation, because ratification requires that the principal existed and was competent at the time the act was done.

The promoter is personally liable on it. He purported to contract, there was no principal, and he cannot escape by pointing at a company that did not exist.

What can be done instead. After incorporation the company can enter into a fresh contract on the same terms, which is a novation: the old contract is discharged and a new one, to which the company is a party, takes its place. Where the contract was for the purposes of the company and warranted by the terms of incorporation, the specific relief legislation allows the company to enforce or be held to it, and this is the route ordinarily used in practice.

A worked example

Pravin owns a warehouse in Bhiwandi that he bought for thirty lakh rupees.

He decides to form Bhiwandi Cold Chain Limited to run a cold storage business. Before incorporation he signs a contract with a refrigeration supplier in the company's name, and he arranges for the company, once formed, to buy his warehouse for ninety lakh rupees. He then issues a prospectus inviting the public to subscribe, which states the object and the warehouse purchase but says nothing about the fact that the seller is Pravin or that he paid thirty lakh for it.

Is he a promoter? Yes, on all three limbs of section 2(69): he is named in the prospectus, he controls the affairs, and the first board acts on his instructions.

The warehouse sale. The sixty lakh rupee profit is not unlawful in itself. What makes it wrongful is that it was not disclosed to an independent board or to the intended shareholders. It is a secret profit, and the company may recover it, or rescind the sale and return the warehouse.

The prospectus. The omission of Pravin's interest is an omission of a matter in the prospectus within section 35(1). A subscriber who bought on the faith of it and lost money may claim compensation from the company and from Pravin, who is caught expressly by section 35(1)(c). Pravin cannot use any of the section 35(2) defences: he knew of the issue, he consented to it, and no expert's statement is involved.

If the omission is shown to have been made with intent to defraud, section 35(3) applies and Pravin is personally responsible without any limitation of liability for the losses.

The refrigeration contract. The company is not bound and cannot ratify it. Pravin is personally liable to the supplier. The sensible course after incorporation is a fresh contract between the supplier and the company on the same terms.

If the company is later wound up and the liquidator's report alleges fraud in its promotion, section 300 allows the Tribunal to direct Pravin's public examination on oath.

Distinctions that carry marks

What this does NOT mean

It does not mean a promoter cannot profit. He may. He must disclose, and disclose to someone able to act on the information.

It does not mean a professional adviser is a promoter. The proviso to section 2(69)(c) takes out a person acting merely in a professional capacity.

It does not mean a promoter is an agent or a trustee. He is neither, and saying so is a common error. He is a fiduciary.

It does not mean the company can ratify a pre-incorporation contract. It cannot. It can make a new one.

Limits and criticism

Disclosure is a weak remedy where the disclosure is made to a board the promoter selected. The Act tries to compensate through section 26's mandatory prospectus contents and through section 35's compensation regime, but the underlying problem, that the promoter chooses who receives the disclosure, is not fully solved.

The definition in section 2(69) has the opposite problem. Limb (b) is so wide that a controlling shareholder years after incorporation is a "promoter" for the Act's purposes, which is useful for regulation and is a long way from the ordinary meaning of the word.

Quick revision

• Definition, section 2(69): named as such in a prospectus or identified in the annual return under section 92; or has control over the affairs, directly or indirectly, as shareholder, director or otherwise; or the Board is accustomed to act on his advice, directions or instructions. Proviso: not a person acting merely in a professional capacity.
• Position: a fiduciary. Not an agent, not a trustee.
• Duties: disclose interest and profit, to an independent board or to the intended shareholders; make no secret profit; account for benefits acquired for the company; full disclosure in the prospectus.
• Liabilities: section 7(5) false particulars; section 7(6) incorporation obtained by fraud; section 35(1)(c) compensation for prospectus mis-statements, with the section 35(2) defences; section 35(3) personal liability without limit where the intent was to defraud; section 300 public examination in winding up; section 447 fraud.
• Pre-incorporation contracts: company not bound, cannot ratify; promoter personally liable; cure by a fresh contract after incorporation.

Test yourself

1. Define a promoter. Section 2(69): a person named as such in a prospectus or identified by the company in the annual return under section 92; or who has control over the affairs of the company directly or indirectly, whether as shareholder, director or otherwise; or in accordance with whose advice, directions or instructions the Board is accustomed to act. A person acting merely in a professional capacity is excluded from the third limb.

2. What is the legal position of a promoter? He stands in a fiduciary relationship to the company he is forming. He is neither its agent, because there is no principal before incorporation, nor its trustee, because he holds no specific property of the company.

3. A promoter sells his own land to the company at a profit and tells the two directors, both of whom he appointed and controls. Is that good disclosure? No. Disclosure must be to an independent board or to the existing and intended shareholders. Disclosure to a board the promoter controls is disclosure to himself, and the profit remains a secret profit that the company may recover.

4. Is a company bound by a contract its promoter made before incorporation? No, and it cannot ratify it, because the company did not exist when the contract was made. The promoter is personally liable. The company may make a fresh contract on the same terms after incorporation.

5. Under which clause of section 35 is a promoter liable for a misleading prospectus, and what is the effect of section 35(3)? Section 35(1)(c) names a promoter among those liable to pay compensation. Section 35(3) provides that where the prospectus was issued with intent to defraud, or for any fraudulent purpose, every person referred to in section 35(1) is personally responsible without any limitation of liability for the losses.

6. Can a promoter be examined on oath? Yes. Under section 300, in a winding up by the Tribunal, where the Company Liquidator's report alleges fraud in the promotion or formation of the company, the Tribunal may direct the public examination of a promoter.

• (a) the memorandum and articles, duly signed by all the subscribers to the memorandum in the prescribed manner;
• (b) a declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary, that all the requirements of this Act and the rules in respect of registration and matters precedent or incidental thereto have been complied with;
• (c) a declaration from each subscriber and from each person named as a first director that he is not convicted of any offence in connection with the promotion, formation or management of any company, or has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years, and that all the documents filed with the Registrar contain information that is correct and complete and true to the best of his knowledge and belief;
• (d) the address for correspondence till the registered office is established;
• (e) the particulars of every subscriber: name including surname or family name, residential address, nationality and such other particulars as may be prescribed, with proof of identity, and for a body corporate subscriber, such particulars as may be prescribed;
• (f) the particulars of the first directors named in the articles: names, Director Identification Number, residential address, nationality and other prescribed particulars including proof of identity; and
• (g) the particulars of the interests of those first directors in other firms or bodies corporate, along with their consent to act as directors.

Notice the pattern. Clause (b) is a professional's certificate that the law has been followed. Clause (c) is a personal declaration by each individual about his own past and about the truth of the papers. Clauses (e) to (g) are identification: who these people are, where they live, what else they are involved in. The register exists so that a stranger can answer those questions later.

Step three: what the Registrar does, section 7(2), (3) and (4)

Section 7(2). The Registrar, on the basis of the documents and information filed, shall register them and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act.

Section 7(3). On and from the date mentioned in the certificate, the Registrar shall allot a corporate identity number, which shall be a distinct identity for the company and shall also be included in the certificate.

Section 7(4). The company shall maintain and preserve at its registered office copies of all documents and information as originally filed under sub-section (1), till its dissolution. So the company keeps its own copy of its founding papers for its whole life.

And then section 9 operates, which is set out in [What a Company Is]: from the date on the certificate the members are a body corporate with perpetual succession and the power to hold property, contract and sue.

Step four: what happens if the filings were false

Section 7(5). If any person furnishes false or incorrect particulars of any information, or suppresses any material information of which he is aware, in any of the documents filed with the Registrar in relation to registration, he shall be liable for action under section 447.

Note the breadth of "any person": it is not limited to subscribers or directors.

Section 7(6). Without prejudice to sub-section (5), where at any time after incorporation it is proved that the company has been got incorporated by furnishing false or incorrect information or representation, by suppressing any material fact or information, or by any fraudulent action, then the promoters, the persons named as first directors, and the persons making the declaration under section 7(1)(b) shall each be liable for action under section 447.

So the professional who certified compliance under clause (b) is personally exposed. That is deliberate: the certificate is the gatekeeping mechanism and it would be worthless if signing it carried no risk.

Section 7(7). The Tribunal's powers, which include directing that the liability of the members shall be unlimited, are set out in [Lifting the Corporate Veil].

A worked example

Nikhil, Asha and five others want to form a public company to manufacture solar inverters in Pune.

Formation. They are seven, so section 3(1)(a) is satisfied for a public company. They subscribe their names to a memorandum stating the name, the State of Maharashtra, the objects, the liability clause and the capital clause, and each indicates the number of shares he takes.

Filing. Because the registered office is proposed to be in Pune, the papers go to the Registrar with jurisdiction there, under section 7(1). They file the memorandum and articles signed by all seven; a declaration by their company secretary in practice and by Nikhil, who is named in the articles as a director, that all requirements have been complied with; a declaration by each of the seven and by each first director about convictions, fraud and the truth of the papers; an address for correspondence; the personal particulars and identity proof of all seven; and the particulars, Director Identification Numbers and consents of the first directors, with their interests in other firms.

Registration. The Registrar registers the documents and issues a certificate of incorporation stating that Sunveer Inverters Limited is incorporated under the Act, bearing the date 3 August 2026, and allots a corporate identity number which appears in the certificate itself.

Effect. From 3 August 2026 the company exists as a body corporate under section 9. It must keep copies of everything filed at its registered office until it is dissolved, under section 7(4).

Change one fact. Suppose Asha had been found guilty of a breach of duty to another company four years ago, and her declaration under section 7(1)(c) said otherwise. That is a false particular in a document filed for registration, so section 7(5) exposes her to action under section 447. If it is later proved that the company was got incorporated by that suppression, then under section 7(6) the promoters, the first directors and the company secretary who signed the clause (b) declaration are each liable under section 447, and under section 7(7) the Tribunal may regulate the company's management, make the members' liability unlimited, strike it off, or wind it up.

What this does NOT mean

It does not mean the company can start trading on the day it is incorporated. A company with a share capital must first satisfy section 10A, which is the next chapter but five and is the trap of this module.

It does not mean the certificate cures every defect. Sections 7(5), (6) and (7) exist precisely to reach back behind a certificate that was obtained by lying.

It does not mean the Registrar verifies the truth of what is filed. He registers on the basis of the documents and information filed, section 7(2). The truth is guaranteed by the declarations and by the penalties, not by an investigation.

It does not mean the first directors are appointed by the Registrar. They are named in the articles, and their particulars and consents are filed under section 7(1)(f) and (g).

Quick revision

• Section 3(1): seven, two or one person, by subscribing to a memorandum and complying with the registration requirements.
• Section 7(1), seven items: (a) signed memorandum and articles; (b) professional's and officer's declaration of compliance; (c) each subscriber's and first director's declaration on convictions, fraud and truth; (d) correspondence address; (e) subscriber particulars with proof of identity; (f) first directors' particulars with DIN; (g) their other interests and consents.
• Filed with the Registrar in whose jurisdiction the registered office is proposed to be.
• Section 7(2): registration and certificate of incorporation. 7(3): corporate identity number, included in the certificate. 7(4): keep copies at the registered office till dissolution.
• Section 7(5): false particulars or suppression by any person, section 447.
• Section 7(6): incorporation got by fraud, promoters, first directors and the clause (b) declarants each liable under section 447.
• Section 9: the effect of the certificate.

Test yourself

1. With which Registrar are the incorporation documents filed? The Registrar within whose jurisdiction the registered office of the company is proposed to be situated: section 7(1).

2. Who must make the declaration of compliance under section 7(1)(b)? Two people: an advocate, chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of the company, and a person named in the articles as a director, manager or secretary.

3. What must each subscriber declare under section 7(1)(c)? That he is not convicted of any offence in connection with the promotion, formation or management of any company; or has not been found guilty of any fraud or misfeasance or breach of duty to any company under this or any previous company law during the preceding five years; and that all the documents filed contain information that is correct, complete and true to the best of his knowledge and belief.

4. How long must a company keep copies of its incorporation documents? Till its dissolution, at its registered office: section 7(4).

5. A chartered accountant certifies compliance knowing that a subscriber's declaration is false. What is his exposure? He is a person making the declaration under section 7(1)(b), so if it is proved that the company was got incorporated by the false information he is liable for action under section 447: section 7(6). He may also be caught by section 7(5) in his own right.

6. What does the Registrar allot besides the certificate? A corporate identity number, which is a distinct identity for the company and is included in the certificate: section 7(3).

(c) The objects clause

The objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.

This is the clause that generates the doctrine of ultra vires, which has its own chapter. Note the second half: matters necessary in furtherance of the objects are covered without being spelled out.

(d) The liability clause

The liability of members of the company, whether limited or unlimited, and also:

• (i) in a company limited by shares, that the liability of its members is limited to the amount unpaid, if any, on the shares held by them;
• (ii) in a company limited by guarantee, the amount up to which each member undertakes to contribute:
• (A) to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company, or of such debts and liabilities as may have been contracted before he ceases to be a member; and
• (B) to the costs, charges and expenses of winding up and for adjustment of the rights of the contributories among themselves.

The one year tail in (A) is the detail students miss. A member of a guarantee company who resigns is still on the hook for a year, and only for debts contracted before he ceased to be a member.

(e) The capital clause

In the case of a company having a share capital:

• (i) the amount of share capital with which the company is to be registered, its division into shares of a fixed amount, and the number of shares the subscribers agree to subscribe, which shall not be less than one share; and
• (ii) the number of shares each subscriber intends to take, indicated opposite his name.

So every subscriber must take at least one share, and must write against his own name how many.

(f) The nominee clause, for a One Person Company

In the case of a One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member of the company.

The machinery around this, consent and change of nominee, is in the four provisos to section 3(1), set out in [What a Company Is].

The name: section 4(2) to 4(5)

This is where marks are quietly available, because most answers stop at clause (a).

Section 4(2): two prohibitions. The name shall not:

• (a) be identical with or resemble too nearly the name of an existing company registered under this Act or any previous company law; or
• (b) be such that its use by the company (i) will constitute an offence under any law for the time being in force, or (ii) is undesirable in the opinion of the Central Government.

Section 4(3): names needing approval. Without prejudice to sub-section (2), a company shall not be registered with a name containing:

• (a) any word or expression likely to give the impression that the company is in any way connected with, or has the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by either under any law; or
• (b) such word or expression as may be prescribed,

unless the previous approval of the Central Government has been obtained.

Section 4(4): reservation. A person may apply to the Registrar, in the prescribed form and with the prescribed fee, to reserve a name either (a) as the name of a proposed company, or (b) as the name to which an existing company proposes to change its name.

Section 4(5)(i): how long. On receipt of the application the Registrar may, on the basis of the information and documents furnished, reserve the name for twenty days from the date of approval, or such other period as may be prescribed. Proviso: where the application is by an existing company, for reservation or for a change of name, the Registrar may reserve it for sixty days from the date of approval.

Section 4(5)(ii): reservation obtained by wrong information. Where it is found that the name was applied for by furnishing wrong or incorrect information, then:

• (a) if the company has not been incorporated, the reserved name shall be cancelled and the applicant shall be liable to a penalty which may extend to one lakh rupees;
• (b) if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard:
• (i) direct it to change its name within three months, after passing an ordinary resolution; or
• (ii) take action for striking off the name of the company from the register; or
• (iii) make a petition for winding up of the company.

Note the resolution in (b)(i): an ordinary resolution. A change of name normally requires a special resolution under section 13(1) and Central Government approval under section 13(2). Here, because the Registrar is directing it, an ordinary resolution suffices. That contrast is worth a line in an answer.

Form and one prohibition: section 4(6) and 4(7)

Section 4(6). The memorandum shall be in the respective forms specified in Tables A, B, C, D and E in Schedule I, as applicable. Table A is for a company limited by shares, and so on down the list.

Section 4(7). In a company limited by guarantee and not having a share capital, any provision in the memorandum or articles purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.

Section 10: what the memorandum does once registered

Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.

So the memorandum and articles operate as a statutory contract. Two consequences follow, and they are examined as a pair:

It binds the company to the members and the members to the company. A member can enforce the memorandum and articles against the company, and the company against him, in respect of their rights as members.

Section 10(2) adds that all monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company, which is how unpaid calls are recovered.

What it does not do is make the memorandum a contract between the company and an outsider, or between one member and another in their personal capacities. A person who is a member but is suing in some other character, say as the company's solicitor under an article appointing him, is an outsider for this purpose.

Section 6: the Act beats the memorandum

Whatever the memorandum says, section 6 provides that, save as otherwise expressly provided in the Act:

• (a) the provisions of this Act shall have effect notwithstanding anything to the contrary in the memorandum or articles, in any agreement executed by the company, or in any resolution of the company in general meeting or of its Board, whether before or after the commencement of this Act; and
• (b) any such provision shall, to the extent to which it is repugnant to the Act, become or be void.

A worked example

Seven people wish to incorporate a public company to make ceramic tiles in Morbi and register it in Gujarat.

Their memorandum states: (a) the name Morbi Ceramics Limited; (b) the State of Gujarat, not the street address; (c) objects of manufacturing and dealing in ceramic tiles and matters necessary in furtherance; (d) that liability is limited and, being limited by shares, limited to the amount unpaid on shares held; (e) a share capital of fifty lakh rupees divided into five lakh shares of ten rupees each, with each of the seven writing against his name the number of shares taken, none taking fewer than one; and (f) nothing, because it is not a One Person Company.

The name. They first apply under section 4(4) and the Registrar reserves Morbi Ceramics Limited for twenty days. Had an existing company applied to change its name to that, the reservation would have been for sixty days.

Suppose they had chosen "National Ceramics Limited". The word "National" is likely to give the impression of a connection with the Central Government, so section 4(3)(a) requires previous Central Government approval, and without it the company cannot be registered with that name.

Suppose the reservation was obtained by giving wrong information and this comes out after incorporation. Under section 4(5)(ii)(b) the Registrar, after hearing the company, may direct it to change its name within three months by an ordinary resolution, or move to strike it off, or petition for winding up.

Two years later a member sues the company for refusing to register a transfer his articles entitle him to. He can, because by section 10 the memorandum and articles bind the company to him as a member. The same man, as the company's landlord, cannot sue on an article about rent, because there he is an outsider.

Distinctions that carry marks

What this does NOT mean

It does not mean the memorandum states the company's address. It states the State: section 4(1)(b).

It does not mean every company has a capital clause. Clause (e) applies only to a company having a share capital, so a guarantee company without capital has no capital clause.

It does not mean the memorandum is a contract with the world. Section 10 binds the company and the members, in their capacity as members, and nobody else.

It does not mean a reserved name is yours forever. Twenty days, or sixty for an existing company, and it can be cancelled with a penalty of up to one lakh rupees if it was obtained by wrong information.

Quick revision

• Six clauses, section 4(1): (a) name with Limited or Private Limited, not for a section 8 company; (b) the State of the registered office; (c) objects and matters in furtherance; (d) liability, with the guarantee company's one year tail; (e) capital, division into shares, at least one share each, number opposite each name; (f) the OPC nominee.
• Section 4(2): not identical with or too nearly resembling an existing name; not an offence; not undesirable in the Central Government's opinion.
• Section 4(3): words suggesting Government connection or patronage, or as prescribed, need previous Central Government approval.
• Section 4(4) and (5): reservation, twenty days, or sixty days for an existing company. Wrong information: cancellation and up to one lakh rupees before incorporation; after incorporation, change of name in three months by ordinary resolution, striking off, or winding up petition, after a hearing.
• Section 4(6): Tables A to E of Schedule I. Section 4(7): no participation in divisible profits otherwise than as a member, in a guarantee company without share capital.
• Section 10: memorandum and articles bind company and members as a statutory contract; monies payable by a member are a debt.
• Section 6: the Act overrides both, and repugnant provisions are void.

Test yourself

1. State the six clauses of the memorandum. Name, registered office (the State), objects, liability, capital, and, for a One Person Company, the nominee: section 4(1)(a) to (f).

2. Does the memorandum give the company's address? No. Section 4(1)(b) requires only the State in which the registered office is to be situated. The address is governed by section 12.

3. For how long is a name reserved? Twenty days from the date of approval, or such other period as may be prescribed; sixty days where the application is by an existing company for reservation or change of name: section 4(5)(i) and its proviso.

4. A company obtained its reserved name by giving incorrect information, and has been incorporated. What can the Registrar do? After giving the company an opportunity of being heard, the Registrar may direct it to change its name within three months after passing an ordinary resolution, take action to strike its name off the register, or petition for its winding up: section 4(5)(ii)(b).

5. In a company limited by guarantee, for how long after resignation can a member be called on? The memorandum must state the amount he undertakes to contribute if the company is wound up while he is a member or within one year after he ceases to be a member, and then only for debts and liabilities contracted before he ceased to be a member: section 4(1)(d)(ii)(A).

6. Can a member sue the company on the articles in a capacity other than as a member? No. Section 10 binds the company and the members as members. A person suing in another character, such as a solicitor or a landlord, is an outsider and cannot rely on the statutory contract.

Section 6 then makes clear that the Act overrides the memorandum, and section 10 makes the memorandum bind the company and its members as a statutory contract. So the objects clause is not a private arrangement that the parties can waive; it is a registered public limit.

The four kinds of ultra vires, and only one of them is fatal

Students lose marks by treating every irregularity as ultra vires. There are four situations and the consequences differ sharply.

1. Ultra vires the company. The act is outside the objects in the memorandum. The company had no capacity to do it. The act is void, cannot be ratified by anyone, and is the true doctrine.

2. Ultra vires the Act. The act is forbidden by the Companies Act itself, for example a buy-back in a circumstance barred by section 70. Void, and no memorandum can authorise it, because of section 6.

3. Ultra vires the articles but intra vires the memorandum. The company had capacity; its internal rules were not followed. This is curable: the members can alter the articles under section 14, or ratify.

4. Ultra vires the directors but intra vires the company. The directors exceeded their own authority. Again curable: the company in general meeting can ratify, and an outsider may in any event be protected by the rule in Turquand, which is the next chapter but one.

Only the first two are void. The third and fourth are irregularities.

The consequences of a true ultra vires act

1. The act is void and unenforceable both ways. Neither the company nor the other party can sue on it. The company cannot enforce it even if the bargain was good for the company.

2. It cannot be ratified. This is the consequence that surprises people, and the reason is logical rather than punitive: ratification presupposes that the principal could have done the act. A company that never had the capacity cannot acquire it by a vote. Even a unanimous resolution of every member fails. The proper route is to alter the objects under section 13 and act afresh, and even that does not validate the earlier act.

3. Any member may restrain it. A member can seek an injunction to stop a proposed or continuing ultra vires act. He does not need to show loss.

4. The directors are personally liable to the company. They applied the company's funds to a purpose the company could not pursue, so they must make good the loss. Their duty to act within the memorandum is now also part of the statutory duties in section 166.

5. The company may trace its property. Where the company's money has been spent ultra vires and is identifiable in another's hands, the company can follow it.

6. An ultra vires lender is not simply left out in the cold. A lender whose money was in fact used to pay off the company's own lawful debts may stand in the place of the creditors who were paid off, because the company has been enriched to that extent. This is the practical qualification that keeps the doctrine from being absurd, and it is worth a sentence.

7. Ultra vires torts. A company is liable for a wrong committed by its servant only where the servant was acting within the scope of employment on business the company could lawfully carry on. Where the whole activity was ultra vires, the company's liability is doubtful, and this is the least settled corner of the doctrine.

The case, and how to answer on it

Ashbury Railway Carriage and Iron Co. Ltd. v. Riche is the decision every syllabus names. It established that a company's capacity is limited to its stated objects, that a contract outside them is void, and that the shareholders cannot ratify it, however unanimous they are.

It is named here without a citation and without facts, deliberately. No law report carrying it could be opened from where this book was written, and the house rule is that a citation goes only with a report that has been read. See authorities/cases.json and FINDINGS.md section 5.1.

How to answer. State the doctrine, ground it in section 4(1)(c), name Ashbury as the decision that settled that an ultra vires contract is void and unratifiable, and then take the consequences in order. An examiner is testing whether you know that ratification is impossible and why, not whether you can recite a nineteenth century railway dispute.

How the doctrine has been weakened, and why it still matters

Drafting killed most of it. Once companies learned to write objects clauses running to forty sub-clauses ending "and to carry on any other business which in the opinion of the Board can be advantageously carried on", almost nothing was outside the objects. The doctrine survived in form and shrank in practice.

Section 4(1)(c) has narrowed the drafting trick, because the objects must be stated for which the company is proposed to be incorporated, with matters necessary in furtherance, rather than an open catalogue of everything the promoters could imagine.

Section 13(8) is the modern successor to the protection. Where a company has raised money from the public through a prospectus and still holds any unutilised amount, it shall not change its objects unless a special resolution is passed and:

• (i) the prescribed details of the resolution are published in two newspapers, one English and one vernacular, in circulation where the registered office is, and placed on the company's website, with the justification for the change; and
• (ii) the dissenting shareholders are given an exit opportunity by the promoters and controlling shareholders, in accordance with SEBI regulations.

That is the same protective idea as ultra vires, delivered by disclosure and an exit rather than by voiding the act.

Section 245(1)(b) is the members' modern weapon. In a class action, members or depositors may apply to the Tribunal to restrain the company from committing an act which is ultra vires the articles or memorandum of the company. So the doctrine has a named statutory remedy in the current Act, which is the citation to give.

A worked example

Konkan Fisheries Limited has one object: to catch, process and sell fish. Its memorandum says nothing else.

The Board resolves to lend eight crore rupees to a film production house on the view that the returns will be better than fishing. A member, Deepa, objects.

Is it ultra vires? Yes. Financing film production is not within the object of catching, processing and selling fish, and it is not a matter necessary in furtherance of that object in the section 4(1)(c) sense. Buying a lorry to move fish would be; funding a film is not.

What can Deepa do? She may seek an injunction to restrain the payment. If it has already been made, she may press the company to recover from the directors personally, and under section 245(1)(b) she may join a class action asking the Tribunal to restrain the company from an act ultra vires its memorandum.

Can the shareholders fix it? No. Even if all of them vote to approve the loan, it remains void, because the company never had the capacity. What they can do is alter the objects under section 13(1) by special resolution, after which the company may lend afresh. The earlier loan is not thereby validated.

Where does that leave the film house? It cannot sue on the contract. But if it can show that its eight crore rupees were used by the company to pay off its own lawful trade creditors, it may stand in the shoes of those creditors to that extent, because the company has been enriched.

Change one fact. Suppose the memorandum did allow investment in other businesses, but the articles required Board loans above five crore rupees to be approved in general meeting, and the Board skipped that step. That is not ultra vires the company at all. It is ultra vires the articles, the company had capacity, and the members can ratify it.

Distinctions that carry marks

What this does NOT mean

It does not mean every act the directors were not allowed to do is ultra vires. Most such acts are within the company's capacity and are curable.

It does not mean the company keeps a windfall. The other party is not simply robbed; tracing and the subrogation of a lender whose money paid lawful debts both cut the other way.

It does not mean the objects clause can be ignored because clauses are widely drafted. Section 13(8) and section 245(1)(b) both assume it is real, and the second gives a direct remedy for breach of it.

It does not mean altering the objects validates what was already done. Alteration operates for the future.

Quick revision

• Meaning: beyond the powers. Capacity comes from section 4(1)(c), objects plus matters necessary in furtherance.
• Four kinds: ultra vires the company (void); ultra vires the Act (void, section 6); ultra vires the articles (curable); ultra vires the directors (curable, ratifiable).
• Consequences: void and unenforceable both ways; no ratification even by unanimous consent; injunction at a member's instance; directors personally liable; tracing; a lender whose money paid lawful debts may be subrogated; ultra vires torts doubtful.
• The case: Ashbury, for void and unratifiable. Named without a citation.
• Modern successors: section 13(8), no change of objects while prospectus money is unutilised without a special resolution, newspaper and website publication with justification, and an exit for dissenting shareholders; section 245(1)(b), class action to restrain an act ultra vires the memorandum or articles.

Test yourself

1. What does ultra vires mean, and what is its effect on a contract? Beyond the powers. A contract outside the objects stated in the memorandum under section 4(1)(c) is beyond the company's capacity and is void, so neither party can enforce it.

2. Can the shareholders ratify an ultra vires contract? No, not even unanimously. Ratification assumes the principal could have done the act; a company that lacked capacity cannot acquire it by vote. The only route forward is to alter the objects under section 13, which operates for the future.

3. Distinguish an act ultra vires the company from one ultra vires the directors. The first exceeds the company's capacity under the memorandum and is void and unratifiable. The second exceeds the directors' authority; the company had capacity, and the act can be ratified in general meeting.

4. What statutory remedy does a member have against an ultra vires act? Section 245(1)(b): in a class action, members or depositors may apply to the Tribunal to restrain the company from committing an act ultra vires the articles or memorandum. A member may also seek an injunction.

5. A company that raised money by prospectus still holds part of it. Can it change its objects? Only by special resolution and by complying with section 13(8): publishing the prescribed details in one English and one vernacular newspaper in circulation where the registered office is, and on its website, with the justification; and giving dissenting shareholders an exit through the promoters and controlling shareholders in accordance with SEBI regulations.

6. A company's sole object is running schools. It buys a bus to carry pupils. Ultra vires? No. Carrying pupils is a matter necessary in furtherance of the object of running schools, and section 4(1)(c) covers it expressly without a separate object clause.

Entrenchment: section 5(3), (4) and (5)

This is the newest idea in the section and it is short enough to learn word for word.

Section 5(3). The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution are met or complied with.

The point. Ordinarily articles are altered by special resolution under section 14. Entrenchment lets a company say that a particular article can be altered only by something harder: unanimity, or the consent of a named class, or a higher majority.

Why anybody wants it. A minority investor who is promised a seat on the Board wants that promise in the articles, and wants to know it cannot be voted away by the majority who gave it. Entrenchment is how that promise is made secure.

Section 5(4): when it may be created. Entrenchment provisions shall only be made:

• either on formation of a company; or
• by an amendment in the articles agreed to by all the members in the case of a private company, and by a special resolution in the case of a public company.

Note the asymmetry and remember it, because it is counter-intuitive. To entrench later, a private company needs unanimity, while a public company needs only a special resolution. Students routinely get this the wrong way round on the assumption that public companies are always more heavily regulated.

Section 5(5): notice. Where the articles contain entrenchment provisions, whether made on formation or by amendment, the company shall give notice to the Registrar in the prescribed form and manner. That is what makes the entrenchment public, so an outsider can discover it.

The model articles: section 5(6), (7), (8) and (9)

Section 5(6). The articles shall be in the respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable. The memorandum uses Tables A to E under section 4(6); the articles use F to J.

Section 5(7). A company may adopt all or any of the regulations contained in the model articles applicable to it.

Section 5(8) is the default rule and the one worth quoting. For a company registered after the commencement of this Act, in so far as its registered articles do not exclude or modify the regulations in the applicable model articles, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles.

Read that as a gap filler. Silence in a company's own articles is not a gap; it is an adoption. If your articles say nothing about who chairs a general meeting, the model article on that subject is your article.

Section 5(9). Nothing in this section applies to the articles of a company registered under any previous company law, unless amended under this Act. So a company incorporated in 1978 keeps its own articles and the section 5(8) default does not silently rewrite them.

The effect of the articles: section 10

Set out in full in [The Memorandum of Association], and it applies to the articles in exactly the same way. The articles, when registered, bind the company and the members as if signed by each of them and containing covenants to observe all their provisions, and monies payable by a member under them are a debt due to the company.

Two limits, both examinable:

The articles bind members as members, not as outsiders. An article providing that a named person shall be the company's solicitor does not give him a contract, even if he happens also to be a member, because he is enforcing it in a capacity other than as a member.

The articles are subordinate to the memorandum and to the Act. Section 6 makes any provision repugnant to the Act void to that extent, and no article can widen the objects.

A worked example

Sahyadri Textiles Private Limited is being incorporated by four founders and one outside investor, Renuka, who is putting in three crore rupees for twenty per cent.

The basic articles. They adopt Table F with modifications, which is what section 5(7) permits. Anything they leave alone stays as Table F by force of section 5(8).

The compulsory private company content. Because it is a private company, section 2(68) requires the articles to restrict transfer of shares, cap members at two hundred and prohibit public invitations. They put those in.

Renuka's protection. She will not invest unless the article giving her the right to nominate one director is safe from the four founders, who between them can pass any special resolution. So the articles are drafted on formation with an entrenchment provision: the nomination article may be altered only with Renuka's written consent. That is permitted by section 5(3), it is made on formation so section 5(4) is satisfied without more, and the company gives notice to the Registrar under section 5(5).

Two years later the founders want to entrench a different article, about pre-emption on transfers. Now section 5(4) bites in its second limb, and because this is a private company the amendment must be agreed to by all the members, Renuka included. Had it been a public company a special resolution would have sufficed.

A member sues. One founder refuses to offer his shares to the others before selling outside, in breach of the pre-emption article. The others can enforce it, because by section 10 the articles bind the members to each other through the company as a statutory contract, in their capacity as members.

A different suit fails. Renuka's husband is named in the articles as the company's architect and is not paid. He cannot sue on the article. He is an outsider to the section 10 contract, whether or not he is a member, because he is enforcing a right in another capacity.

Distinctions that carry marks

What this does NOT mean

It does not mean the articles can do anything the members agree on. Section 6 voids anything repugnant to the Act, and the articles cannot go beyond the memorandum.

It does not mean a company that says nothing has no rule. Section 5(8) supplies the model article for a company registered after the commencement of this Act.

It does not mean entrenchment makes a provision unalterable. It makes it alterable only on a more restrictive condition. An article that could never be changed at all would sit badly with section 14 and with section 6.

It does not mean an article can create rights for outsiders. Section 10 binds the company and the members as members.

Quick revision

• Section 5(1) and (2): regulations for management, plus prescribed matters; additional matters permitted.
• Private company: section 2(68) forces three articles: restrict transfer, cap two hundred members, prohibit public invitation.
• Entrenchment, section 5(3): specified provisions alterable only on conditions more restrictive than a special resolution.
• Section 5(4): on formation, or later by all the members in a private company and by special resolution in a public company.
• Section 5(5): notice to the Registrar.
• Section 5(6): Tables F to J of Schedule I. 5(7): may adopt all or any. 5(8): model articles apply so far as not excluded or modified, for companies registered after the commencement of this Act. 5(9): not for companies under previous company law unless amended under this Act.
• Section 10: statutory contract, binding on company and members as members; monies payable are a debt.
• Section 6: the Act overrides; repugnant provisions void.

Test yourself

1. What must the articles contain? The regulations for management of the company, section 5(1), and such matters as may be prescribed, section 5(2), with liberty to include any additional matters considered necessary for management.

2. What is entrenchment? A provision in the articles to the effect that specified provisions may be altered only if conditions or procedures more restrictive than those applicable to a special resolution are met: section 5(3).

3. A private company wants to add an entrenchment provision three years after incorporation. What does it need? The agreement of all the members: section 5(4). A public company in the same position would need only a special resolution.

4. A company's articles are silent on the appointment of a chairman of a general meeting. What is the rule? The applicable model article in Schedule I applies, because under section 5(8) the model regulations apply so far as the company's registered articles do not exclude or modify them, for a company registered after the commencement of this Act.

5. Which Tables of Schedule I contain the model articles? Tables F, G, H, I and J: section 5(6). Tables A to E hold the forms of memorandum under section 4(6).

6. Can a person named in the articles as the company's solicitor sue on that article? No. Section 10 binds the company and the members in their capacity as members. A person enforcing a right in another capacity is an outsider to the statutory contract, even if he is also a member.

The proviso removes one case. No such approval is necessary where the only change is the deletion or addition of the word "Private", consequent on conversion of one class of company to another under the Act.

Section 13(3): when it is complete. The Registrar shall enter the new name in the register in place of the old and issue a fresh certificate of incorporation with the new name, and the change shall be complete and effective only on the issue of such a certificate. Not on the resolution, and not on the approval.

Shifting the registered office from one State to another, section 13(4) and (5)

The alteration shall not have any effect unless it is approved by the Central Government on an application in the prescribed form and manner.

Section 13(5) puts a clock and a test on that. The Central Government shall dispose of the application within sixty days, and before passing its order may satisfy itself either that the alteration has the consent of the creditors, debenture holders and other persons concerned, or that sufficient provision has been made for the due discharge of all the company's debts and obligations, or that adequate security has been provided for such discharge.

That is a creditor protection test, and it is the reason an inter-State shift is harder than any other alteration except a change of objects funded by the public.

Filing, section 13(6) and (7)

Save as provided in section 64, the company shall file with the Registrar (a) the special resolution, and (b) the Central Government's approval, if the alteration involves a change of name.

Section 13(7). Where the alteration transfers the registered office from one State to another, a certified copy of the Central Government's order shall be filed with the Registrar of each of the States, within the prescribed time and manner, and the Registrar of the State to which the office is shifted shall issue a fresh certificate of incorporation indicating the alteration.

Change of objects after a public issue, section 13(8)

This is the heaviest requirement in the section. A company which has raised money from the public through a prospectus and still has any unutilised amount out of that money shall not change its objects unless a special resolution is passed and:

• (i) the prescribed details of the resolution are published in the newspapers, one in English and one in the vernacular language, in circulation at the place where the registered office is situated, and placed on the company's website, if any, indicating the justification for the change; and
• (ii) the dissenting shareholders are given an opportunity to exit by the promoters and shareholders having control, in accordance with regulations to be specified by the Securities and Exchange Board.

Two protections doing different work: disclosure with a reason, so the market can judge, and an exit, so a shareholder who disagrees is not trapped.

Registration and effect, section 13(9), (10) and (11)

Section 13(9). The Registrar shall register any alteration of the objects and certify the registration within thirty days of the filing of the special resolution.

Section 13(10). No alteration made under this section shall have any effect until it has been registered in accordance with this section. So registration, not resolution, is the operative moment throughout.

Section 13(11). In a company limited by guarantee and not having a share capital, any alteration purporting to give a person a right to participate in divisible profits otherwise than as a member is void. This mirrors section 4(7).

Altering the articles: section 14

The general rule, section 14(1)

Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may by a special resolution alter its articles, including alterations having the effect of conversion of (a) a private company into a public company, or (b) a public company into a private company.

So conversion between the two classes is done through the articles, which is why section 14 rather than section 13 is the conversion section.

The three provisos

First proviso: losing private status by accident. Where a private company alters its articles so that they no longer include the restrictions and limitations required for a private company under the Act, the company shall, as from the date of such alteration, cease to be a private company. It happens automatically. No order, no application, no certificate. Drop the transfer restriction from your articles and you are a public company from that date.

Second proviso: converting public to private. Any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government on an application in the prescribed form and manner.

Note the asymmetry and it is examined. Private to public: special resolution alone. Public to private: special resolution plus a Central Government order. The reason is obvious once stated: going public adds obligations and protections, while going private removes them.

Third proviso: transitional. Any application pending before the Tribunal on the commencement of the Companies (Amendment) Act 2019 shall be disposed of by the Tribunal under the law applicable before that commencement. This records that the approving authority for public to private conversion moved from the Tribunal to the Central Government in 2019.

Filing, section 14(2)

Every alteration of the articles, and a copy of the Central Government's order approving it where required, shall be filed with the Registrar together with a printed copy of the altered articles, within fifteen days, in the prescribed manner, and the Registrar shall register the same.

Noting the alteration in every copy: section 15

Section 15(1). Every alteration made in the memorandum or articles shall be noted in every copy of the memorandum or articles.

Section 15(2). On default, the company and every officer in default shall be liable to a penalty of one thousand rupees for every copy of the memorandum or articles issued without the alteration.

The penalty is per copy, which is the sting. A company that circulates a hundred out of date copies faces a lakh of rupees.

Conversion of an existing company: section 18

Section 18(1). A company of any class registered under this Act may convert itself into a company of another class by alteration of memorandum and articles in accordance with this Chapter.

Section 18(2). On the company's application, the Registrar, after satisfying himself that the provisions applicable for registration of companies have been complied with, shall close the former registration and, after registering the documents, issue a certificate of incorporation in the same manner as its first registration.

Section 18(3) is the protective sub-section. Registration under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into by or on behalf of the company before conversion, and they may be enforced as if such registration had not been done.

So conversion changes the company's clothes, not its identity. Its creditors are exactly where they were.

A worked example

Deccan Agro Limited, a public company registered in Telangana, wants to do four things.

1. Change its name to Deccan Agri Foods Limited. Special resolution under section 13(1), and the written approval of the Central Government under section 13(2), the name being checked against section 4(2) and (3). The change takes effect only when the Registrar issues a fresh certificate of incorporation, section 13(3).

2. Move its registered office to Maharashtra. Special resolution, and Central Government approval under section 13(4). The Government has sixty days and will look for creditor consent, or sufficient provision for the debts, or adequate security, under section 13(5). A certified copy of the order goes to the Registrar of both States, and the Maharashtra Registrar issues a fresh certificate of incorporation indicating the alteration, section 13(7).

3. Add a new object, food processing. Special resolution. But the company raised forty crore rupees by a prospectus two years ago and eleven crore is still unspent, so section 13(8) applies: the details must be published in one English and one vernacular newspaper where the registered office is, and on the website, with the justification, and the dissenting shareholders must be offered an exit by the promoters and controlling shareholders under SEBI regulations. The Registrar then registers the change of objects and certifies within thirty days, section 13(9), and nothing takes effect until registration, section 13(10).

4. Convert into a private company. Special resolution altering the articles under section 14(1), plus an order of the Central Government under the second proviso. The alteration, the order and a printed copy of the altered articles go to the Registrar within fifteen days, section 14(2).

And a warning. Once converted, if the company later amends its articles and drops the restriction on transfer of shares, the first proviso to section 14(1) operates automatically: from the date of that alteration it ceases to be a private company, whether or not anybody intended it.

Distinctions that carry marks

What this does NOT mean

It does not mean every memorandum change needs a special resolution. Section 13(1) opens "save as provided in section 61", and the capital clause is altered by ordinary resolution where the articles allow.

It does not mean the resolution changes anything by itself. Section 13(10) says no alteration has effect until registered, and section 13(3) says a name change is complete only on the fresh certificate.

It does not mean conversion creates a new company. Section 18(3) preserves every debt, liability, obligation and contract incurred before conversion.

It does not mean a private company must apply to become public. It can lose private status automatically under the first proviso to section 14(1) simply by dropping the required restrictions from its articles.

Quick revision

• Section 13(1): special resolution, save section 61 for capital.
• 13(2) and (3): name needs Central Government written approval, subject to section 4(2) and (3); no approval needed for merely adding or deleting "Private" on conversion; effective only on the fresh certificate.
• 13(4) and (5): State to State shift needs Central Government approval, decided in sixty days, looking at creditor consent, provision for debts or adequate security.
• 13(6) and (7): file the resolution and the approval; on an inter-State shift file the certified order with the Registrar of each State.
• 13(8): unutilised prospectus money means special resolution plus two newspapers and the website with a justification, plus an exit for dissenting shareholders under SEBI regulations.
• 13(9) and (10): objects registered and certified in thirty days; nothing effective until registration.
• Section 14(1): articles by special resolution, including conversion either way. First proviso: dropping the private company restrictions means the company ceases to be private from that date. Second proviso: public to private needs a Central Government order. Third proviso: pending Tribunal applications under the pre 2019 law.
• 14(2): file within fifteen days with a printed copy of the altered articles.
• Section 15: note every alteration in every copy; one thousand rupees per copy on default.
• Section 18: conversion by altering both documents; former registration closed, fresh certificate issued; debts, liabilities, obligations and contracts survive.

Test yourself

1. What is needed to change a company's name? A special resolution under section 13(1) and the written approval of the Central Government under section 13(2), the new name satisfying section 4(2) and (3). The change is effective only on the issue of a fresh certificate of incorporation: section 13(3).

2. Within what time must the Central Government decide an application to shift the registered office to another State, and what does it look at? Sixty days, section 13(5). It may satisfy itself that the alteration has the consent of creditors, debenture holders and other persons concerned, or that sufficient provision has been made for the discharge of the company's debts and obligations, or that adequate security has been provided.

3. A listed company that still holds unspent prospectus money wants to change its objects. What must it do? Pass a special resolution and comply with section 13(8): publish the prescribed details in one English and one vernacular newspaper in circulation where the registered office is, and on its website, with the justification; and ensure that dissenting shareholders are given an exit by the promoters and controlling shareholders in accordance with SEBI regulations.

4. How does a public company become a private company? By a special resolution altering its articles under section 14(1)(b), which is not valid unless approved by an order of the Central Government under the second proviso. The alteration, the order and a printed copy of the altered articles are filed with the Registrar within fifteen days.

5. A private company amends its articles and deletes the restriction on transfer of shares. What happens? By the first proviso to section 14(1) it ceases to be a private company from the date of that alteration. No order or application is needed; the consequence is automatic.

6. Does conversion under section 18 wipe out the company's old debts? No. Section 18(3) provides that registration under the section does not affect any debts, liabilities, obligations or contracts incurred before conversion, and they may be enforced as if the registration had not been done.

What must be displayed: section 12(3)

Every company shall:

• (a) paint or affix its name, and the address of its registered office, and keep them painted or affixed, on the outside of every office or place in which its business is carried on, in a conspicuous position, in legible letters, and if those characters are not those of the language, or one of the languages, in general use in that locality, also in the characters of that language;
• (b) have its name engraved in legible characters on its seal, if any;
• (c) get its name, the address of its registered office and the Corporate Identity Number, along with telephone number, fax number if any, e-mail and website addresses if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications; and
• (d) have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed.

Clause (b) is another casualty of 2015. It reads "on its seal, if any", because the common seal ceased to be compulsory when the words "and a common seal" were omitted from section 9 by the Companies (Amendment) Act 2015 with effect from 29 May 2015. See [The Characteristics of a Company].

Two provisos, both examinable.

The first proviso: former names. Where a company has changed its name or names during the last two years, it shall paint, affix or print, along with its name, the former name or names so changed during the last two years, as required by clauses (a) and (c).

The second proviso: One Person Company. The words "One Person Company" shall be mentioned in brackets below the name of such a company, wherever its name is printed, affixed or engraved.

Changing the office: section 12(4) to (7)

This is the part with four levels, and the level depends on how far the office moves.

Level one: anywhere, notice is required. Section 12(4). Notice of every change of the situation of the registered office after incorporation, verified in the prescribed manner, shall be given to the Registrar within thirty days of the change, and he shall record it.

Level two: outside the local limits, special resolution. Section 12(5). Except on the authority of a special resolution, the registered office shall not be changed:

• (a) in the case of an existing company, outside the local limits of any city, town or village where it is situated at the commencement of this Act, or where it may later be situated by virtue of a special resolution; and
• (b) in the case of any other company, outside the local limits of any city, town or village where it is first situated, or where it may later be situated by virtue of a special resolution.

So a move within the same city needs only the section 12(4) notice. A move to a different city needs a special resolution.

Level three: to another Registrar within the same State, Regional Director. The proviso to section 12(5). No company shall change the place of its registered office from the jurisdiction of one Registrar to the jurisdiction of another Registrar within the same State unless such change is confirmed by the Regional Director on an application in the prescribed manner.

Section 12(6) puts a timetable on that confirmation. The Regional Director shall communicate it within thirty days from the date of receipt of the application; the company shall file the confirmation with the Registrar within sixty days of the date of confirmation; and the Registrar shall register it and certify the registration within thirty days of the filing.

Section 12(7). That certificate shall be conclusive evidence that all the requirements of this Act with respect to change of registered office under sub-section (5) have been complied with, and the change shall take effect from the date of the certificate.

Level four: to another State, Central Government. This is not in section 12 at all. It is an alteration of the memorandum's registered office clause under section 4(1)(b), so it goes through section 13(4) to (7), needs Central Government approval decided within sixty days with creditor protection, and ends in a fresh certificate of incorporation from the new State's Registrar. See [Alteration of the Memorandum and the Articles].

Service of documents: section 20

Section 20(1): serving the company or its officer. A document may be served by sending it to the company or the officer at the registered office by registered post, speed post, courier service, by leaving it at the registered office, or by such electronic or other mode as may be prescribed.

The proviso allows a depository, where securities are held with it, to serve the records of beneficial ownership on the company by electronic or other mode.

Section 20(2): serving the Registrar or a member. Save as provided in the Act or the rules for filing documents with the Registrar in electronic mode, a document may be served on the Registrar or any member by post, registered post, speed post, courier, delivery at his office or address, or such electronic or other mode as may be prescribed.

The proviso is the members' option. A member may request delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting. So a member who insists on a paper copy by courier can have it, and pays for it.

The Explanation defines "courier" as a person or agency which delivers the document and provides proof of its delivery. Proof of delivery is the defining feature, which is why an ordinary messenger will not do.

A worked example

Nashik Vintners Private Limited is incorporated on 5 May 2026 with its memorandum stating Maharashtra as the State.

By 4 June 2026 it must have a registered office capable of receiving and acknowledging communications, section 12(1), and must furnish verification of it to the Registrar, section 12(2). Until then the address for correspondence filed under section 7(1)(d) does the work. And until the verification is filed the company may not commence business, because of section 10A(1)(b).

Display. Its name and the registered office address are painted outside the winery and outside its Pune sales office, in a conspicuous position and in legible letters. Because Marathi is in general use in the locality, the name also appears in Marathi characters, as clause (a) requires. Its letterhead carries the name, the registered office address, the Corporate Identity Number, telephone, e-mail and website, under clause (c).

Moving, four ways.

1. Across Nashik city. Notice to the Registrar within thirty days, section 12(4). Nothing more.
2. From Nashik to Dhule, both within the same Registrar's jurisdiction. It is outside the local limits of the city where the office was first situated, so a special resolution is needed under section 12(5)(b), plus the section 12(4) notice.
3. From Nashik to a place under a different Registrar in Maharashtra. Special resolution, plus confirmation by the Regional Director under the proviso to section 12(5). He communicates within thirty days; the company files within sixty days of the confirmation; the Registrar certifies within thirty days of filing; and the change takes effect from the date of that certificate, which is conclusive evidence of compliance, section 12(6) and (7).
4. From Maharashtra to Goa. Not section 12 at all. Alteration of the memorandum under section 13(4), Central Government approval within sixty days with creditors considered under section 13(5), certified copy filed with the Registrar of both States, and a fresh certificate of incorporation from the Goa Registrar under section 13(7).

Two years later the company changes its name to Godavari Vintners Private Limited. For the next two years, wherever its name is painted or printed under clauses (a) and (c), the former name must appear alongside it, by the first proviso to section 12(3).

Distinctions that carry marks

What this does NOT mean

It does not mean the memorandum contains the address. Section 4(1)(b) requires only the State. That is why moving within a State never touches the memorandum and moving between States always does.

It does not mean a company must have its office from day one. Section 12(1) gives thirty days from incorporation.

It does not mean any address will do. It must be capable of receiving and acknowledging communications, and the verification must be furnished to the Registrar.

It does not mean a company may quietly drop its old name. For two years the former name travels with the new one under the first proviso to section 12(3).

Quick revision

• 12(1): registered office within thirty days of incorporation and at all times thereafter, capable of receiving and acknowledging communications.
• 12(2): verification to the Registrar within thirty days. Feeds section 10A(1)(b).
• 12(3): (a) paint or affix name and address outside every place of business, conspicuous, legible, and in the local language characters where needed; (b) name engraved on the seal, if any; (c) name, address, CIN, telephone, fax, e-mail, website on letters, billheads, letter papers, notices and official publications; (d) name on hundies, promissory notes and bills of exchange. Former name for two years. "One Person Company" in brackets below the name.
• 12(4): notice of every change within thirty days.
• 12(5): special resolution to move outside the local limits; Regional Director confirmation to move to another Registrar in the same State.
• 12(6): thirty days to confirm, sixty days to file, thirty days to certify. 12(7): the certificate is conclusive evidence and the change takes effect from its date.
• Another State: sections 13(4) to (7), Central Government.
• Section 20: service on the company at the registered office by registered post, speed post, courier, leaving it there, or prescribed electronic mode; on the Registrar or a member by those routes; a member may demand a particular mode and pay the fee fixed in the annual general meeting; "courier" means one who provides proof of delivery.

Test yourself

1. Within what time must a company have a registered office, and what must it be capable of? Within thirty days of incorporation and at all times thereafter, and it must be capable of receiving and acknowledging all communications and notices addressed to it: section 12(1).

2. What must a company print on its business letters? Its name, the address of its registered office and the Corporate Identity Number, along with telephone number, fax number if any, e-mail and website addresses if any: section 12(3)(c).

3. A company moves its office from one Registrar's jurisdiction to another within the same State. What is required, and when does it take effect? A special resolution under section 12(5) and confirmation by the Regional Director under the proviso. The confirmation is communicated within thirty days, filed with the Registrar within sixty days, and the Registrar certifies within thirty days of filing. The change takes effect from the date of that certificate, which is conclusive evidence of compliance: section 12(6) and (7).

4. A company changed its name eighteen months ago. What must appear outside its factory? Its present name and the address of its registered office under section 12(3)(a), and alongside them the former name, because the change was within the last two years: first proviso to section 12(3).

5. How may a document be served on a company? By sending it to the company or the officer at the registered office by registered post, speed post or courier service, by leaving it at the registered office, or by such electronic or other mode as may be prescribed: section 20(1).

6. Can a member insist on receiving documents by a particular mode? Yes. Under the proviso to section 20(2) a member may request delivery of any document through a particular mode, on paying such fees as may be determined by the company in its annual general meeting.

So a company limited by guarantee without a share capital is outside section 10A altogether, and so is a company incorporated before the 2019 Amendment came into force. Both limits are on the face of the section and both are worth stating, because they are the easiest marks in the topic.

The two conditions: section 10A(1)

A company to which the section applies shall not commence any business or exercise any borrowing powers unless:

• (a) a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company, in such form and verified in such manner as may be prescribed, with the Registrar, that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and
• (b) the company has filed with the Registrar a verification of its registered office as provided in sub-section (2) of section 12.

Both, because the clauses are joined by "and". A company that has taken the subscription money but not verified its office may not trade, and neither may one that has verified its office but not collected the money.

Take the wording of (a) apart, because every phrase in it does work:

• "a declaration is filed by a director": any one director will do, and it must be a director, not the auditor or the company secretary.
• "within a period of one hundred and eighty days of the date of incorporation": the clock runs from the date on the certificate under section 9, not from the date of filing.
• "every subscriber": not most of them, and not the majority in value.
• "has paid the value of the shares agreed to be taken by him": the whole of what he agreed to take under section 4(1)(e)(ii), not a part.
• "on the date of making of such declaration": the payment must be complete when the declaration is made, so a director cannot certify an intention to pay.

And note what is not there: no minimum paid-up capital. Section 10A does not require any particular amount. It requires that whatever was agreed has actually been paid. A company whose subscribers agreed to take one share of ten rupees each satisfies section 10A when those rupees are in.

The penalty: section 10A(2)

If any default is made in complying with the requirements of this section:

• the company shall be liable to a penalty of fifty thousand rupees; and
• every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which the default continues, but not exceeding an amount of one lakh rupees.

Two features to note. The company's penalty is a flat fifty thousand rupees, while the officer's is a daily one thousand rupees. And the officer's exposure is capped at one lakh rupees, which is reached after one hundred days of default.

The striking off consequence: section 10A(3)

This is the sub-section that gives the section teeth, and it did not exist in the old section 11.

Where no declaration has been filed with the Registrar under clause (a) of sub-section (1) within a period of one hundred and eighty days of the date of incorporation, and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

Three conditions before the Registrar may move:

1. No declaration has been filed within one hundred and eighty days; and
2. The Registrar has reasonable cause to believe that the company is not carrying on any business or operations; and
3. He acts without prejudice to sub-section (2), so the penalties still run.

The second condition is a genuine safeguard. Failure to file is not by itself enough; the Registrar must also have reason to think the company is dormant in fact. A trading company that simply forgot to file faces the penalty, not extinction.

A worked example

Kolhapur Foundry Private Limited is incorporated on 12 January 2027. Its two subscribers, Vikas and Sameena, each agreed in the memorandum to take five thousand shares of ten rupees, so fifty thousand rupees each.

The clock. One hundred and eighty days from 12 January 2027 runs to 11 July 2027.

What must happen by then. Vikas and Sameena must actually pay their fifty thousand rupees each, and a director must file a declaration with the Registrar stating that every subscriber has paid the value of the shares agreed to be taken, as at the date of the declaration. Separately, the company must have filed verification of its registered office under section 12(2), which section 12(2) itself requires within thirty days of incorporation.

Until both are filed, the company may not commence any business or exercise any borrowing powers. So it cannot sign a supply contract as a trading company and cannot take the working capital loan the bank has offered.

Suppose Sameena pays only thirty thousand rupees. A director cannot make the declaration, because it must state that every subscriber has paid the value of the shares agreed to be taken. A declaration made anyway is a false particular filed with the Registrar and exposes the director to section 447 through the general machinery of the Act.

Suppose nothing is filed by 11 July 2027 and the company has in fact never traded. Two things follow. Under section 10A(2) the company incurs a penalty of fifty thousand rupees and every officer in default incurs one thousand rupees a day, capped at one lakh rupees. And under section 10A(3), since no declaration was filed within one hundred and eighty days and the Registrar has reasonable cause to believe the company is not carrying on any business or operations, he may initiate action to remove its name from the register under Chapter XVIII.

Change one fact. Suppose the company had been trading vigorously throughout but its director simply overlooked the filing. The penalties under section 10A(2) still apply, but section 10A(3) does not, because the Registrar cannot have reasonable cause to believe it is not carrying on business.

Change another. Suppose Kolhapur Foundry had been a company limited by guarantee without a share capital. Section 10A would not apply to it at all, because it applies only to a company having a share capital.

Distinctions that carry marks

What this does NOT mean

It does not mean the company does not exist until the declaration is filed. It exists from the date on the certificate under section 9. What it may not do is commence business or exercise borrowing powers.

It does not mean every company must file it. Only a company with a share capital, incorporated after the 2019 Amendment.

It does not mean there is a minimum capital. There is none, in this section or anywhere else, since 29 May 2015.

It does not mean failing to file destroys the company. Section 10A(3) requires the Registrar to have reasonable cause to believe the company is not carrying on business as well.

And it does not mean section 11 is the answer. Section 11 is printed in the Act as omitted, in square brackets, with no text under it. Citing it is citing a provision that has not existed since 29 May 2015.

Quick revision

• Applies to: a company incorporated after the Companies (Amendment) Act 2019 and having a share capital.
• Two conditions, section 10A(1): (a) a declaration by a director within one hundred and eighty days of incorporation, filed with the Registrar, that every subscriber has paid the value of the shares agreed to be taken, as at the date of the declaration; and (b) verification of the registered office filed under section 12(2). Both.
• Prohibition: may not commence any business or exercise any borrowing powers.
• Penalty, 10A(2): company fifty thousand rupees; every officer in default one thousand rupees per day, maximum one lakh rupees.
• 10A(3): no declaration in one hundred and eighty days plus reasonable cause to believe the company is not carrying on business or operations equals action to strike off under Chapter XVIII, without prejudice to the penalty.
• Section 11 is OMITTED, with effect from 29 May 2015.

Test yourself

1. Which section governs commencement of business, and what happened to section 11? Section 10A, inserted by the Companies (Amendment) Act 2019. Section 11 was omitted by the Companies (Amendment) Act 2015 with effect from 29 May 2015, and the Act prints it as omitted, in square brackets, with no text under it.

2. What are the two conditions in section 10A(1)? A declaration filed by a director with the Registrar within one hundred and eighty days of incorporation that every subscriber has paid the value of the shares agreed to be taken by him as at the date of the declaration; and the filing of verification of the registered office under section 12(2). Both are required.

3. What may a company not do until they are satisfied? It may not commence any business or exercise any borrowing powers: section 10A(1).

4. State the penalties. The company, fifty thousand rupees. Every officer in default, one thousand rupees for each day the default continues, subject to a maximum of one lakh rupees: section 10A(2).

5. When may the Registrar move to strike the company off? Where no declaration has been filed within one hundred and eighty days of incorporation and he has reasonable cause to believe the company is not carrying on any business or operations. He may then initiate action under Chapter XVIII, without prejudice to the penalties: section 10A(3).

6. Does section 10A apply to a company limited by guarantee with no share capital? No. The section applies only to a company having a share capital, and only to one incorporated after the commencement of the Companies (Amendment) Act 2019.

The doctrine of constructive notice

What it says. Every person dealing with a company is deemed to have notice of the contents of its memorandum and articles, and of any other document registered with the Registrar that is open to public inspection.

Where it comes from in the Act. Not from a section that states it, but from section 399(1)(a), which gives any person the right to inspect by electronic means any documents kept by the Registrar filed or registered in pursuance of the Act, on payment of the prescribed fee, and from section 399(1)(b), which lets any person require a certified copy or extract. Because inspection is available to all, notice is imputed to all.

Section 17 points the same way for members: on request, and on payment of the prescribed fee, the company must within seven days send a member a copy of (a) the memorandum, (b) the articles, and (c) every agreement and resolution referred to in section 117(1) so far as not already embodied in them. Default costs the company and every officer in default one thousand rupees for each day, or one lakh rupees, whichever is less.

The consequence. A person who deals with the company contrary to what the registered documents say cannot plead ignorance. If the articles forbid the company from borrowing more than a stated amount, a lender who lends more is fixed with notice of the limit.

Two limits on section 399 itself, both in its proviso and both worth a mark. The right of inspection in relation to documents delivered with a prospectus under section 26 may be exercised only during the fourteen days beginning with the date of publication of the prospectus, and at other times only with the permission of the Central Government; the same applies to documents delivered under section 388(1)(b). And by section 399(2), no process to compel production of a document kept by the Registrar may issue from any court or the Tribunal except with its leave, and any such process must say on its face that it was issued with leave.

The doctrine of indoor management: the rule in Turquand's case

What it says. A person dealing with a company in good faith, having satisfied himself that the transaction is consistent with the memorandum and articles, is not bound to inquire into the regularity of the company's internal proceedings. He may assume that whatever the articles require to be done internally has been done.

Royal British Bank v. Turquand is the decision that established the rule, and it is universally cited by that name. It is named here without a citation and without facts, deliberately: no report carrying it could be opened from where this book was written, and the house rule is that a citation goes only with a report that has been read. See authorities/cases.json and FINDINGS.md section 5.1.

Why it is fair. The internal proceedings are within the company's own control and knowledge and outside the outsider's. The company chose its directors, kept its minute book and knows whether the resolution was passed. As between an innocent outsider and a company whose own house was disordered, the loss belongs on the company.

The exceptions to indoor management

These are where the marks are, because the rule is easy and the exceptions are the examinable part. There are five and they should be given with a reason each.

1. Knowledge of the irregularity. A person who actually knows that the internal procedure was not followed cannot rely on the rule. He is not being misled; he is taking a chance.

2. Suspicion, or being put upon inquiry. Where the circumstances are such that a reasonable person would have made inquiries, and the outsider made none, he cannot claim the benefit. A transaction that is obviously outside the ordinary course, or of extravagant size for the company, puts a person on inquiry.

3. Forgery. The rule protects against irregularity, not against nullity. A forged document is not an irregular act of the company; it is not the company's act at all, and there is nothing for the rule to regularise.

4. Negligence, or failure to read what he was bound to read. The rule presupposes that the outsider has done what constructive notice requires. A person who never looked at the articles cannot say he assumed compliance with them.

5. Acts void or ultra vires. Where the act is beyond the company's capacity under its memorandum, no assumption about internal procedure can help, because the company could not have done the act however regularly it proceeded. See [The Doctrine of Ultra Vires].

A sixth is sometimes given: no representation at all. Where the outsider did not rely on the articles or on any holding out by the company, there is nothing on which the assumption of regularity can rest.

How the two doctrines fit together

Set them side by side and the logic is clean.

Constructive notice looks outward and binds the outsider. He is deemed to know the public documents, because he could have read them.

Indoor management looks inward and protects the outsider. He is not deemed to know the private proceedings, because he could not have read them.

The dividing line is availability. Anything on the register is his responsibility; anything in the minute book is the company's.

A worked example

Aurangabad Springs Limited has articles providing that the Board may borrow up to fifty lakh rupees, and that any borrowing above that requires an ordinary resolution of the members in general meeting.

Case one. A bank lends eighty lakh rupees. Its officer inspects the articles, sees the limit, and asks the managing director whether the members' resolution has been passed. He is told it has. In fact no meeting was ever held.

The bank is fixed with constructive notice of the fifty lakh limit and of the requirement of a resolution, because the articles are on the register and open to inspection under section 399. But whether the resolution was actually passed is an internal proceeding. The bank could not have discovered it, and it made the inquiry it could. The rule in Turquand protects it, and the company is bound to repay the eighty lakh rupees. Its remedy is against its own directors.

Case two. Same facts, but the bank's officer is the managing director's brother-in-law and knows perfectly well that no meeting took place. Exception 1 applies. He knew of the irregularity, so the rule does not protect him.

Case three. Same facts, but the loan is for eleven crore rupees, the company's entire turnover is two crore rupees, and the money is to be paid into an account in the managing director's own name. Any reasonable lender would have asked questions. Exception 2 applies: the bank was put upon inquiry and made none.

Case four. The board resolution and the members' resolution produced to the bank are both forged by the company secretary. Exception 3 applies. A forgery is not an irregular act of the company but no act of the company at all, and the rule cannot cure a nullity.

Case five. The articles limit borrowing, but the memorandum contains no object permitting the company to lend money, and the transaction is a loan by the company to a film producer. Exception 5 applies: the act is ultra vires the company, it is void, and no assumption about internal regularity can rescue it.

Case six. The bank never looked at the articles at all. Exception 4 applies. The rule assumes the outsider has discharged the duty constructive notice imposes on him.

Distinctions that carry marks

What this does NOT mean

It does not mean the outsider must actually read the articles. He is deemed to know them whether he reads them or not. Reading them is how he protects himself; not reading them does not protect him.

It does not mean indoor management cures everything. It cures irregularity, not incapacity and not forgery.

It does not mean the company can never recover. Where the outsider is bound, the company is bound to him, but it retains its remedies against the directors who acted improperly.

It does not mean constructive notice extends to everything a company holds. It extends to what is registered and open to inspection. Minute books, registers of the company's own internal decisions and correspondence are not on the register.

Limits and criticism

Constructive notice has been criticised for a long time as a fiction that suits companies and traps outsiders. Nobody reads the articles of every company they buy from, and pretending they do produces results no commercial person would predict.

The counter is that the doctrine is now mostly defanged. Between indoor management, the doctrine of ostensible authority and the modern practice of drafting objects and powers as widely as possible, the number of cases in which constructive notice actually defeats an honest outsider is small. What remains is a rule that encourages people to look at what is genuinely available to them, which is not an unreasonable thing to ask.

Quick revision

• Constructive notice: everyone dealing with a company is deemed to know its memorandum and articles and other registered documents, because section 399(1) gives any person the right to inspect them electronically and to take certified copies. Section 17 gives members copies within seven days.
• Section 399 provisos: prospectus documents under section 26 and documents under section 388(1)(b) may be inspected only within fourteen days of publication, otherwise with Central Government permission. Section 399(2): no process to compel production except with the leave of the court or Tribunal.
• Indoor management, the rule in Turquand: an outsider need not inquire into internal proceedings and may assume they were regular.
• Five exceptions: actual knowledge of the irregularity; suspicion or being put upon inquiry; forgery; negligence in not reading the public documents; and acts void or ultra vires.
• The line between them is availability: public documents bind the outsider, internal proceedings do not.

Test yourself

1. What is the doctrine of constructive notice and what is its statutory footing? Every person dealing with a company is deemed to have notice of its memorandum, articles and other registered documents. It rests on section 399(1), under which any person may inspect documents kept by the Registrar by electronic means and require certified copies, on payment of the prescribed fees.

2. State the rule in Turquand's case. A person dealing with a company in good faith, whose transaction is consistent with the memorandum and articles, is not bound to inquire into the regularity of the company's internal proceedings and may assume that everything required to be done internally has been done.

3. Give the exceptions to indoor management. Actual knowledge of the irregularity; circumstances putting the outsider upon inquiry; forgery; negligence in failing to read the public documents; and acts that are void or ultra vires the company.

4. Why is forgery an exception? Because the rule regularises an irregular act of the company. A forged document is not an act of the company at all but a nullity, and there is nothing for the rule to operate on.

5. A lender reads a company's articles, sees that a members' resolution is needed, asks and is told it was passed. It was not. Can the lender recover? Yes, subject to the exceptions. Whether the resolution was passed is an internal proceeding which the lender could not verify, so the rule in Turquand applies and the company is bound. The company's remedy is against its own directors.

6. How long may documents delivered with a prospectus be inspected under section 399? Only during the fourteen days beginning with the date of publication of the prospectus, and at other times only with the permission of the Central Government: proviso (i) to section 399(1).

Three things to fix. The test is the Central Government's opinion. The earlier company must have been previously registered, so priority in time decides. And the resolution required is an ordinary one, not a special one.

Clause (b): clash with a registered trade mark

Where, on an application by a registered proprietor of a trade mark that the name is identical with or too nearly resembles a registered trade mark of his under the Trade Marks Act 1999, and in the opinion of the Central Government it is, the Government may direct a change, and the company shall change the name within three months of the direction, again after adopting an ordinary resolution.

The three year limitation is the detail that is examined. The proprietor's application must be made to the Central Government within three years of incorporation or registration or change of name of the company, whether under this Act or any previous company law. A proprietor who sleeps on his rights for four years cannot use section 16.

And note who must move. Under clause (a) the Government may act of its own motion. Under clause (b) it acts on an application by the proprietor.

Notice to the Registrar: section 16(2)

Where a company changes its name or obtains a new name under sub-section (1), it shall, within fifteen days from the date of the change, give notice of the change to the Registrar along with the order of the Central Government, and the Registrar shall carry out the necessary changes in the certificate of incorporation and the memorandum.

What happens if the company does nothing: section 16(3)

This is the sub-section with teeth.

If a company is in default in complying with any direction given under sub-section (1), the Central Government shall allot a new name to the company in such manner as may be prescribed and the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name, which the company shall use thereafter.

Read the verb: the Central Government shall allot. There is no discretion once the company defaults, and no further proceeding. The company loses the name whether it cooperates or not.

The proviso preserves choice for the future. Nothing in the sub-section prevents the company from subsequently changing its name in accordance with section 13. So a company saddled with a Government allotted name may pick a better one later, by the ordinary route: special resolution and Central Government approval under section 13(1) and (2), effective on the fresh certificate under section 13(3).

The other closing sections of Chapter II

MU names none of these, and they are taught because the Act contains them.

Section 17: copies of the memorandum and articles to members. On a member's request, and subject to payment of the prescribed fees, the company shall within seven days send him a copy of (a) the memorandum, (b) the articles, and (c) every agreement and every resolution referred to in section 117(1), so far as they are not embodied in the memorandum or articles. On default, the company and every officer in default are liable, for each default, to a penalty of one thousand rupees for each day the default continues or one lakh rupees, whichever is less.

That section is the practical partner of constructive notice: the documents the outsider is deemed to know are the documents a member can demand within a week.

Section 19: a subsidiary may not hold shares in its holding company. Set out in [Types of Companies by Control and Purpose]. In short: no company shall hold shares in its holding company, whether itself or through nominees, and no holding company shall allot or transfer shares to its subsidiary, and any such allotment or transfer is void. The three exceptions are legal representative of a deceased member, trustee, and a shareholder who held before becoming a subsidiary, and only the first two may vote.

Section 21: authentication of documents, proceedings and contracts. Save as otherwise provided in the Act, a document or proceeding requiring authentication by a company, or contracts made by or on behalf of a company, may be signed by any key managerial personnel or an officer or employee of the company duly authorised by the Board in this behalf.

Two points. It is not confined to directors: key managerial personnel under section 2(51), or any officer or employee the Board authorises, may sign. And the authorisation must be by the Board, so a self-appointed signatory is not covered.

Section 22: execution of bills of exchange and deeds. Set out in [The Characteristics of a Company]. In short: a bill of exchange, hundi or promissory note is deemed to be made on behalf of the company if made, accepted, drawn or endorsed in the name of, or on behalf of, or on account of the company by any person acting under its authority, express or implied; a company may authorise an attorney to execute deeds under its common seal, if any, and where there is no seal, by two directors or by a director and the Company Secretary.

A worked example

Sanjivani Pharma Limited is incorporated in Nagpur on 2 February 2026.

Case one, clause (a). A company called Sanjeevani Pharma Limited has existed in Chennai since 2011. In the Central Government's opinion the two names too nearly resemble each other, and the Chennai company was previously registered. The Government directs the Nagpur company to change its name. It must do so within three months of the direction, after passing an ordinary resolution, and must give notice with the order to the Registrar within fifteen days of the change, whereupon the Registrar amends the certificate of incorporation and the memorandum.

Case two, clause (b). Suppose instead that Sanjivani is a registered trade mark of a Hyderabad firm under the Trade Marks Act 1999. The proprietor applies to the Central Government. His application must be made within three years of the company's incorporation, so by 1 February 2029. If he applies in 2027 he is in time; if he applies in 2030 section 16 is closed to him and he must look to the Trade Marks Act instead.

Case three, default. The direction issues on 1 June 2027 and the company ignores it. Three months pass. Under section 16(3) the Central Government shall allot a new name, the Registrar enters it in place of the old, and a fresh certificate of incorporation issues with that name, which the company shall use thereafter. It has no say in the choice.

Afterwards. Two years later the company wants a name it actually likes. It may change it under section 13: special resolution, Central Government approval in writing, and effect only on the issue of a fresh certificate. The proviso to section 16(3) preserves exactly that.

And for two years after each change, wherever the company paints or prints its name under section 12(3)(a) and (c), the former name must appear alongside, by the first proviso to section 12(3).

Distinctions that carry marks

What this does NOT mean

It does not mean any similar name can be attacked at any time. Under clause (b) the trade mark proprietor has three years from incorporation, registration or change of name.

It does not mean a special resolution is needed. Both limbs of section 16(1) require only an ordinary resolution, because the change is being compelled rather than chosen.

It does not mean the company is stuck with the allotted name. The proviso to section 16(3) preserves a later change under section 13.

It does not mean only directors can sign for a company. Section 21 allows any key managerial personnel, or any officer or employee duly authorised by the Board.

Quick revision

• Section 16(1)(a): name identical with or too nearly resembling a previously registered company, in the Central Government's opinion. Direction to change within three months by ordinary resolution.
• Section 16(1)(b): on the application of a registered trade mark proprietor, made within three years of incorporation, registration or change of name. Same three months, same ordinary resolution.
• Section 16(2): notice to the Registrar with the order within fifteen days; Registrar amends the certificate and the memorandum.
• Section 16(3): on default the Central Government shall allot a new name; fresh certificate issues; the company shall use it. Proviso: a later change under section 13 remains open.
• Section 17: memorandum, articles and section 117(1) agreements and resolutions to a member within seven days; default costs one thousand rupees a day or one lakh rupees, whichever is less.
• Section 19: subsidiary may not hold shares in its holding company; such allotment or transfer is void; three exceptions; only two of them may vote.
• Section 21: authentication by any key managerial personnel or an officer or employee duly authorised by the Board.
• Section 22: negotiable instruments by a person acting under express or implied authority; deeds by an attorney under the seal if any, else by two directors or a director and the Company Secretary.

Test yourself

1. Who may direct a company to change its name under section 16, and on what grounds? The Central Government, where in its opinion the name is identical with or too nearly resembles the name of a previously registered company, or, on the application of a registered trade mark proprietor, a registered trade mark under the Trade Marks Act 1999.

2. What resolution and what time limit apply? An ordinary resolution, and the change must be made within three months from the issue of the direction: section 16(1).

3. Within what time must a trade mark proprietor apply? Within three years of the incorporation or registration or change of name of the company, whether under this Act or any previous company law: section 16(1)(b).

4. What happens if the company ignores the direction? The Central Government shall allot a new name, the Registrar enters it in the register in place of the old name and issues a fresh certificate of incorporation with the new name, which the company shall use thereafter: section 16(3). The company may later change it under section 13.

5. Within what time must a company supply a member with a copy of its articles? Within seven days of the request, subject to the prescribed fee: section 17(1). Default costs the company and every officer in default one thousand rupees for each day, or one lakh rupees, whichever is less.

6. Who may sign a contract on behalf of a company? Any key managerial personnel, or an officer or employee of the company duly authorised by the Board in that behalf: section 21.

The Explanation defines a public offer, and it is broader than students expect:

"public offer" includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.

So an offer for sale by an existing shareholder is a public offer even though the company is issuing nothing. That is why section 25 deems the offer document to be a prospectus and why section 28 exists.

The two routes for a private company: section 23(2)

A private company may issue securities:

• (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or
• (b) through private placement by complying with the provisions of Part II of this Chapter.

Route (a) of section 23(1) is missing, and its absence is the point. A private company cannot make a public offer, because section 2(68) requires its articles to prohibit any invitation to the public to subscribe for its securities. Section 23(2) is the same prohibition stated from the other side.

Listing abroad: section 23(3) and (4)

Section 23(3). Such class of public companies as may be prescribed may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions, or such other jurisdictions as may be prescribed.

Section 23(4). The Central Government may, by notification, exempt any class of those companies from any of the provisions of Chapter III, Chapter IV, section 89, section 90 or section 127, and a copy of every such notification shall be laid before both Houses of Parliament as soon as may be after it is issued.

These two sub-sections are the direct listing framework. They matter for the exam mainly as an illustration of how the Act now contemplates Indian companies listing outside India, and of the parliamentary check on the exemption power.

Who administers Chapters III and IV: section 24

This section answers a question students often cannot: when is it SEBI's job and when is it the Government's?

Section 24(1). The provisions of Chapter III, Chapter IV and section 127 shall:

• (a) in so far as they relate to (i) issue and transfer of securities and (ii) non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, except as provided in this Act, be administered by the Securities and Exchange Board by making regulations; and
• (b) in any other case, be administered by the Central Government.

The Explanation removes the doubt that follows. All powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be.

So SEBI's writ under section 24 is narrow and precise: two subjects (issue and transfer of securities, and non-payment of dividend) for two kinds of company (listed, and intending to list). Everything else stays with the Government, the Tribunal or the Registrar.

Section 24(2) gives SEBI its enforcement toolkit: in respect of the matters in sub-section (1), and matters delegated to it under the proviso to section 458(1), it may exercise the powers conferred on it by sections 11(1), 11(2A), 11(3), 11(4), 11A, 11B and 11D of the Securities and Exchange Board of India Act 1992.

A worked example

Three companies want money. Follow each through section 23.

Vidyut Power Limited, a listed public company, wants three hundred crore rupees from the market. It is a public offer under section 23(1)(a), so Part I of Chapter III applies: a prospectus under section 26, dematerialised issue under section 29, allotment under section 39, and listing under section 40. Because it is listed and the subject is the issue of securities, SEBI administers it under section 24(1)(a)(i).

The same company later declares a dividend and fails to pay it. Non-payment of dividend by a listed company is the second subject in section 24(1)(a), so that too is SEBI's.

The same company wants to reduce its share capital. That is section 66, and it is not "issue and transfer of securities" or "non-payment of dividend". It goes to the Tribunal, and the Explanation to section 24 confirms that all other matters stay with the Central Government, the Tribunal or the Registrar.

Nashik Vintners Private Limited wants two crore rupees. It is a private company, so section 23(2) gives it two routes only. It may make a rights issue to its existing members under section 62(1)(a), or a private placement under section 42. It may not invite the public, and if it tried, it would breach both section 23(2) and its own articles under section 2(68).

Sagar Shipping Limited, an unlisted public company, has a founder who wants to sell forty per cent of his own shares to the public. The company issues nothing. Even so, by the Explanation to section 23 an offer for sale of securities to the public by an existing shareholder through issue of a prospectus is a public offer. So section 25 deems the offer document a prospectus, section 28 governs the mechanics, and prospectus liability under sections 34 to 38 attaches. The company is not listed and does not intend to be, so administration is with the Central Government under section 24(1)(b).

Distinctions that carry marks

What this does NOT mean

It does not mean a private company can never take outside money. It can, by private placement under section 42, which is a genuine and much used route. What it cannot do is invite the public.

It does not mean SEBI regulates everything a listed company does. Section 24(1)(a) is confined to two subjects, and the Explanation puts everything else with the Government, the Tribunal or the Registrar.

It does not mean a public offer requires the company to issue new shares. An offer for sale by an existing shareholder is a public offer under the Explanation to section 23.

It does not mean a company intending to list is treated as unlisted. Section 24(1)(a) covers companies which intend to get their securities listed, so SEBI's jurisdiction attaches before the listing does.

Quick revision

• Section 23(1), public company, three routes: public offer through prospectus; private placement under Part II; rights or bonus issue, with the SEBI Act as well for listed companies or those intending to list.
• Section 23(2), private company, two routes: rights or bonus issue; private placement. No public offer.
• Explanation to section 23: public offer includes an initial or further public offer, and an offer for sale by an existing shareholder through a prospectus.
• Section 23(3) and (4): prescribed classes may list on permitted foreign exchanges; the Central Government may exempt them from Chapter III, Chapter IV, sections 89, 90 or 127, by notification laid before both Houses.
• Section 24(1): SEBI administers Chapters III and IV and section 127, so far as they relate to issue and transfer of securities and non-payment of dividend, for listed companies and those intending to list. Everything else, and every other company, is with the Central Government.
• Explanation to section 24: all other matters relating to prospectus, return of allotment and redemption of preference shares are for the Central Government, the Tribunal or the Registrar.
• Section 24(2): SEBI exercises its powers under sections 11(1), (2A), (3), (4), 11A, 11B and 11D of the SEBI Act 1992.

Test yourself

1. What are the three ways a public company may issue securities? To the public through a prospectus, that is a public offer; through private placement under Part II of Chapter III; or through a rights issue or bonus issue, and for a listed company or one intending to list, also in accordance with the SEBI Act 1992: section 23(1).

2. May a private company make a public offer? No. Section 23(2) gives it only a rights or bonus issue and private placement, and section 2(68) requires its articles to prohibit any invitation to the public to subscribe for its securities.

3. Is an offer for sale by an existing shareholder a public offer? Yes. The Explanation to section 23 expressly includes an offer for sale of securities to the public by an existing shareholder through the issue of a prospectus.

4. Which matters does SEBI administer under section 24? Chapters III and IV and section 127, so far as they relate to the issue and transfer of securities and to non-payment of dividend, and only for listed companies or those which intend to get their securities listed. All other cases are administered by the Central Government.

5. A listed company wants to reduce its share capital. Is that SEBI's jurisdiction under section 24? No. It is neither issue and transfer of securities nor non-payment of dividend. By the Explanation to section 24, all other matters are exercised by the Central Government, the Tribunal or the Registrar; capital reduction under section 66 goes to the Tribunal.

6. What check applies to an exemption granted under section 23(4)? A copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.

Four things follow, and they are what the definition is for.

A document need not call itself a prospectus. The words "any notice, circular, advertisement or other document" catch a document by what it does, not by its title. A glossy pamphlet inviting the public to apply for debentures is a prospectus whatever it is headed.

It must invite offers from the public. A document circulated to four named investors is not a prospectus; it is a private placement offer letter under section 42.

It must relate to securities of a body corporate, not merely of a company, which is wider.

Two named documents are inside the definition: the red herring prospectus and the shelf prospectus. Both are dealt with in the next chapter.

And two more are deemed to be prospectuses by other sections: an offer for sale document under section 25, and the offer document in a section 28 offer for sale by members. Deeming was necessary precisely because those documents are issued by shareholders, not by the company.

What must be stated: section 26(1), as it now stands

Every prospectus issued by or on behalf of a public company, either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall:

state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government

with a proviso: until SEBI specifies that information and those reports, the regulations already made by SEBI under the Securities and Exchange Board of India Act 1992 in respect of such financial information or reports shall apply.

And clause (c), which survives, requires the prospectus to:

make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act 1956 and the Securities and Exchange Board of India Act 1992 and the rules and regulations made thereunder.

What happened to the rest. Clauses (a), (b) and (d) of section 26(1), which contained the long catalogue of names, addresses, objects, capital structure, minimum subscription, underwriting particulars, auditors' reports and the rest, were omitted by the Companies (Amendment) Act 2017 (Act 1 of 2018), with effect from 7 May 2018.

How to answer MU's label honestly. Say that the Act no longer prescribes the contents; that section 26(1) as amended requires the prospectus to state such information and financial reports as SEBI may specify in consultation with the Central Government, with SEBI's existing regulations applying in the meantime; and that the only content requirement left in the section itself is the declaration of compliance in clause (c). Then give the machinery in sub-sections (2) to (9), which is what section 26 now mostly consists of.

When section 26(1) does not apply: section 26(2) and (3)

Section 26(2). Nothing in sub-section (1) applies:

• (a) to the issue to existing members or debenture holders of a prospectus or form of application relating to shares in or debentures of the company, whether or not the applicant has a right to renounce under section 62(1)(a)(ii) in favour of any other person; or
• (b) to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange.

Clause (a) is the rights issue exemption and clause (b) is the further issue of an identical, already quoted security. Both rest on the same idea: the recipient already has the information.

Section 26(3). Subject to sub-section (2), sub-section (1) applies to a prospectus or form of application whether issued on or with reference to the formation of a company or subsequently.

The Explanation is a small point that gets asked: the date indicated in the prospectus shall be deemed to be the date of its publication.

Filing, experts and validity: section 26(4) to (8)

Section 26(4): delivery before publication. No prospectus shall be issued by or on behalf of a company, or in relation to an intended company, unless on or before the date of its publication there has been delivered to the Registrar for filing a copy signed by every person named in it as a director or proposed director, or by his duly authorised attorney.

Section 26(5): the expert. A prospectus shall not include a statement purporting to be made by an expert unless the expert:

• is a person who is not, and has not been, engaged or interested in the formation or promotion or management of the company; and
• has given his written consent to the issue of the prospectus; and
• has not withdrawn that consent before the delivery of a copy of the prospectus to the Registrar for filing,

and a statement to that effect shall be included in the prospectus.

That triple condition is the reason an expert's report carries weight, and it is the reason section 35(2)(c) gives a defence to a person who reasonably relied on such a report.

Section 26(6): what must appear on the face of it. Every prospectus shall, on the face of it, (a) state that a copy has been delivered for filing to the Registrar as required by sub-section (4); and (b) specify any documents required to be attached to the copy so delivered, or refer to statements in the prospectus which specify those documents.

Sub-section (7) was omitted by the Companies (Amendment) Act 2019 with effect from 15 August 2019.

Section 26(8): the ninety day rule. No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4).

The penalty: section 26(9)

If a prospectus is issued in contravention of the section:

• the company shall be punishable with fine not less than fifty thousand rupees and up to three lakh rupees; and
• every person who is knowingly a party to the issue of such prospectus shall be punishable with fine not less than fifty thousand rupees and up to three lakh rupees.

Note what has gone. The words "with imprisonment for a term which may extend to three years or" were omitted by the Companies (Amendment) Act 2020 with effect from 21 December 2020, and "three lakh rupees, or with both" was substituted at the same time. So a contravention of section 26 is now punishable by fine only. That is part of the wider decriminalisation of the Act, and it is a good example to give if asked about recent reform.

Advertisement of a prospectus: section 30

Where an advertisement of any prospectus of a company is published in any manner, it shall be necessary to specify therein the contents of its memorandum as regards the objects, the liability of members and the amount of share capital of the company, and the names of the signatories to the memorandum and the number of shares subscribed for by them, and its capital structure.

Six things, and they are worth listing because this is a favourite short note: objects, liability of members, amount of share capital, names of the signatories to the memorandum, the number of shares each subscribed for, and the capital structure.

Application forms and the abridged prospectus: section 33

Section 33(1). No form of application for the purchase of any securities of a company shall be issued unless it is accompanied by an abridged prospectus.

Two exceptions in the proviso, where it is shown that the form was issued:

• (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement in respect of the securities; or
• (b) in relation to securities which were not offered to the public.

Section 33(2). A copy of the full prospectus shall, on request by any person before the closing of the subscription list and the offer, be furnished to him. So the abridged version is a convenience, not a substitute: anybody who wants the whole thing can have it.

Section 33(3). On default, the company shall be liable to a penalty of fifty thousand rupees for each default.

A worked example

Aravalli Cements Limited, an unlisted public company, decides to go to the market.

The document. Its offer document is a prospectus under section 2(70), whatever it is headed, because it invites offers from the public for the subscription of its securities.

Contents. Its advisers do not go to section 26 for a list, because clauses (a), (b) and (d) were omitted in 2018. They go to SEBI's regulations, because section 26(1) as amended requires the prospectus to state such information and financial reports as SEBI specifies, and the proviso applies SEBI's existing regulations in the meantime. Into the document goes the clause (c) declaration that nothing in it is contrary to this Act, the Securities Contracts (Regulation) Act 1956 or the SEBI Act 1992.

Signature and filing. It is dated, and by the Explanation to section 26(3) that date is deemed to be the date of publication. It is signed by every director and proposed director, and a signed copy is delivered to the Registrar for filing on or before the date of publication, under section 26(4). On its face it states that a copy has been so delivered, under section 26(6)(a).

The valuer's report. The prospectus quotes a valuation of the limestone reserves. The valuer must be a person not and never engaged or interested in the formation, promotion or management of the company, must have given written consent, and must not have withdrawn it before delivery to the Registrar, and the prospectus must say so: section 26(5).

The clock. The copy is delivered on 1 September 2026. The prospectus is not valid if issued after 30 November 2026, ninety days later, under section 26(8).

The advertisement. The newspaper advertisement must specify the memorandum's objects, the liability of members, the amount of share capital, the names of the signatories to the memorandum, the number of shares each subscribed for, and the capital structure: section 30.

The application form. Every form must be accompanied by an abridged prospectus, section 33(1), unless it goes with a bona fide underwriting invitation or relates to securities not offered to the public. Any person asking before the subscription list closes must be given the full prospectus, section 33(2). A default costs fifty thousand rupees each time, section 33(3).

And if the prospectus is issued in breach of section 26? The company and every person knowingly a party to the issue face a fine of fifty thousand to three lakh rupees. There is no imprisonment, those words having been omitted with effect from 21 December 2020.

What this does NOT mean

It does not mean the Act still lists what a prospectus must contain. Clauses (a), (b) and (d) of section 26(1) were omitted on 7 May 2018. Reciting them is reciting repealed law.

It does not mean a prospectus must be called one. Section 2(70) catches any notice, circular, advertisement or other document that invites offers from the public.

It does not mean an abridged prospectus is enough. Section 33(2) gives any person the right to the full document before the subscription list closes.

It does not mean a prospectus lasts as long as the offer. Ninety days from delivery to the Registrar, under section 26(8).

Quick revision

• Section 2(70): any document described or issued as a prospectus, and any notice, circular, advertisement or other document inviting offers from the public for securities of a body corporate. Includes red herring and shelf prospectuses.
• Section 26(1): dated and signed; contents as SEBI may specify in consultation with the Central Government, SEBI's existing regulations applying meanwhile; clause (c) declaration of compliance. Clauses (a), (b) and (d) OMITTED w.e.f. 7 May 2018.
• 26(2): does not apply to a rights issue to existing members or debenture holders, or to securities uniform with those already quoted.
• 26(3) Explanation: the date in the prospectus is deemed to be the date of publication.
• 26(4): signed copy delivered to the Registrar for filing on or before publication.
• 26(5): an expert must be independent, must consent in writing, must not have withdrawn before delivery, and the prospectus must say so.
• 26(6): on the face of it, state the delivery and specify the attached documents. 26(7) omitted w.e.f. 15 August 2019.
• 26(8): invalid if issued more than ninety days after delivery.
• 26(9): fine fifty thousand to three lakh rupees on the company and on every person knowingly a party. Imprisonment removed w.e.f. 21 December 2020.
• Section 30: an advertisement must specify objects, liability of members, share capital, signatories, shares subscribed by them, and capital structure.
• Section 33: application form must carry an abridged prospectus; exceptions for a bona fide underwriting invitation and for securities not offered to the public; full prospectus on request before closing; fifty thousand rupees per default.

Test yourself

1. Define a prospectus. Section 2(70): any document described or issued as a prospectus, including a red herring prospectus under section 32 or a shelf prospectus under section 31, or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

2. What matters must be stated in a prospectus? Since 7 May 2018 the Act no longer lists them. Section 26(1) requires the prospectus to be dated and signed and to state such information and set out such reports on financial information as may be specified by SEBI in consultation with the Central Government, with SEBI's existing regulations applying until it does; and clause (c) requires a declaration that nothing in it is contrary to this Act, the Securities Contracts (Regulation) Act 1956 or the SEBI Act 1992.

3. When must a copy be delivered to the Registrar, and by whom must it be signed? On or before the date of publication, signed by every person named in it as a director or proposed director, or by his duly authorised attorney: section 26(4).

4. What are the conditions for including an expert's statement? The expert must not be, and must never have been, engaged or interested in the formation, promotion or management of the company; must have given written consent to the issue of the prospectus; and must not have withdrawn that consent before delivery of a copy to the Registrar. A statement to that effect must appear in the prospectus: section 26(5).

5. For how long is a prospectus valid? It is not valid if issued more than ninety days after the date on which a copy was delivered to the Registrar: section 26(8).

6. Must an application form carry an abridged prospectus? Yes, unless the form was issued in connection with a bona fide invitation to enter into an underwriting agreement, or in relation to securities not offered to the public: section 33(1) and its proviso. A copy of the full prospectus must be furnished to any person who asks before the subscription list closes.

Section 31(2): the information memorandum. A company filing a shelf prospectus shall file an information memorandum containing all material facts relating to new charges created, changes in the financial position between the first or previous offer and the succeeding offer, and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer.

The proviso protects applicants who are already in. Where the company or any other person has received applications for allotment along with advance payments of subscription before the change, it shall intimate the changes to those applicants, and if they express a desire to withdraw, shall refund all the monies received as subscription within fifteen days.

Section 31(3). Where an information memorandum is filed, every time an offer is made under sub-section (2), the memorandum together with the shelf prospectus shall be deemed to be a prospectus. So the full weight of prospectus liability attaches to the pair.

The Explanation defines it: a shelf prospectus is a prospectus in respect of which the securities or class of securities included in it are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

Red herring prospectus: section 32

Section 32(1). A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.

Section 32(2). It shall be filed with the Registrar at least three days prior to the opening of the subscription list and the offer.

Section 32(3). It shall carry the same obligations as are applicable to a prospectus, and any variation between the red herring prospectus and the prospectus shall be highlighted as variations in the prospectus.

Section 32(4). Upon the closing of the offer, the prospectus stating the total capital raised, whether by way of debt or share capital, the closing price of the securities, and any other details not included in the red herring prospectus, shall be filed with the Registrar and with SEBI.

The Explanation defines it: a red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

Notice the shape of the process. A red herring goes out first, without quantum or price; three days later the subscription list opens; the offer closes; and only then is the final prospectus filed, with the money raised and the closing price. The name comes from the practice of printing a warning in red on the cover.

Abridged prospectus

Defined in section 2(1) as a memorandum containing such salient features of a prospectus as may be specified by SEBI, and made compulsory by section 33(1): no form of application for the purchase of securities may be issued unless accompanied by an abridged prospectus, save for a bona fide underwriting invitation or securities not offered to the public. Any person may demand the full prospectus before the subscription list closes, and default costs fifty thousand rupees for each default. The full treatment is in [What a Prospectus Is, and What It Must Say].

Deemed prospectus: section 25

This is the one students find hardest, so take it slowly.

The mischief. A company that wants to reach the public without issuing a prospectus can allot its whole issue to an intermediary, an issuing house, which then offers the shares on to the public. The company has issued no prospectus; the intermediary is not the company. Without section 25 the public would get no disclosure and no remedy.

Section 25(1). Where a company allots or agrees to allot any securities with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale is made shall for all purposes be deemed to be a prospectus issued by the company. All enactments and rules of law as to the contents of a prospectus and as to liability for mis-statements in and omissions from a prospectus apply, with the modifications in sub-sections (3) and (4), as if the securities had been offered to the public for subscription and as if persons accepting the offer were subscribers, but without prejudice to the liability of the persons by whom the offer is made for mis-statements in the document.

Read the two "as if" clauses. They convert a sale into a subscription and a buyer into a subscriber, which is what makes the whole prospectus machinery fit a transaction it was not designed for. And the closing words preserve the intermediary's own liability, so the deeming adds a defendant rather than substituting one.

Offer for sale by members: section 28

Section 28(1). Where certain members of a company propose, in consultation with the Board of Directors, to offer the whole or part of their holding of shares to the public, in accordance with any law for the time being in force, they may do so in accordance with such procedure as may be prescribed.

Section 28(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 and rules as to the contents of a prospectus and as to liability for mis-statements in and omissions from it apply as if it were a prospectus issued by the company.

Section 28(3): who pays and who authorises. The members whose shares are offered, whether individuals or bodies corporate or both, shall collectively authorise the company to take all actions in respect of the offer for sale for and on their behalf, and shall reimburse the company all expenses incurred by it on the matter.

That last provision is fair and is often asked: the company does the work, the selling shareholders take the money, so the selling shareholders bear the cost.

How section 28 differs from section 25. In section 25 the company allots to an intermediary who then sells on. In section 28 existing members sell their own shares directly to the public, in consultation with the Board. Both documents are deemed prospectuses; the routes are different.

A worked example

Godavari Infra Limited plans to raise money four times over the next year.

Shelf prospectus. If it belongs to a class SEBI has provided for, it may file a shelf prospectus at the first offer, valid for up to one year from the opening of that first offer. Before the second and each later offer it files an information memorandum with the new charges created and the changes in its financial position. Because two hundred applicants had already applied with advance payments before a change, the company must intimate them and refund within fifteen days any who ask to withdraw. Each time, the information memorandum and the shelf prospectus together are deemed to be a prospectus.

Red herring prospectus. For its main equity issue it uses book building, so it issues a red herring prospectus without the quantum or price, files it with the Registrar at least three days before the subscription list opens, and carries the same obligations as a full prospectus. When the offer closes it files the prospectus with the Registrar and SEBI, stating the total capital raised, the closing price and everything the red herring omitted, with any variations highlighted.

Application forms. Every form carries an abridged prospectus, and anybody who asks before closing gets the full document.

Deemed prospectus. Suppose instead the company allots its entire issue to Konkan Issuing House Limited, which then offers the shares to the public. The company has issued no prospectus. Section 25 deems the issuing house's offer document to be a prospectus issued by the company, buyers are treated as subscribers, and the company and its directors carry prospectus liability, without prejudice to the issuing house's own liability.

Offer for sale by members. Two years later the founders wish to sell thirty per cent of their own shares to the public. In consultation with the Board, they do so under section 28. Their offer document is deemed a prospectus issued by the company, they must collectively authorise the company to act for them, and they must reimburse the company its expenses.

Distinctions that carry marks

What this does NOT mean

It does not mean a red herring prospectus is a draft. By section 32(3) it carries the same obligations as a prospectus, so liability attaches to it fully.

It does not mean a shelf prospectus lasts a year from filing. The year runs from the date of opening of the first offer under it.

It does not mean an abridged prospectus limits what the applicant can see. Section 33(2) gives any person the full prospectus on request before closing.

It does not mean a deemed prospectus lets the intermediary off. Section 25(1) preserves the liability of the persons by whom the offer is made, without prejudice.

Quick revision

• Shelf, section 31: classes SEBI provides for; filed at the first offer; validity up to one year from the opening of the first offer; information memorandum before each later offer with new charges and financial changes; applicants who paid in advance must be intimated and refunded within fifteen days if they withdraw; memorandum plus shelf prospectus deemed a prospectus.
• Red herring, section 32: issued before the prospectus; filed at least three days before the subscription list opens; same obligations as a prospectus; variations highlighted; after closing, the prospectus with total capital raised and closing price filed with the Registrar and SEBI; lacks quantum or price.
• Abridged, section 2(1) and section 33: must accompany every application form; exceptions for bona fide underwriting and securities not offered to the public; full prospectus on request; fifty thousand rupees per default.
• Deemed, section 25: company allots with a view to onward sale to the public; the offer for sale document is deemed a prospectus issued by the company; buyers deemed subscribers; the offerors' own liability preserved.
• Offer for sale by members, section 28: members offer their own holding in consultation with the Board; document deemed a prospectus issued by the company; members must collectively authorise the company and reimburse its expenses.

Test yourself

1. What is a shelf prospectus and how long is it valid? A prospectus in respect of which the securities included in it are issued for subscription in one or more issues over a certain period without a further prospectus. It indicates a period not exceeding one year as its validity, commencing from the date of opening of the first offer under it: section 31(1) and its Explanation.

2. What must a company do before a second offer under a shelf prospectus? File an information memorandum with the Registrar containing all material facts about new charges created and changes in the financial position since the first or previous offer, within the prescribed time and prior to the issue: section 31(2).

3. What is a red herring prospectus and when must it be filed? A prospectus that does not include complete particulars of the quantum or price of the securities. It must be filed with the Registrar at least three days prior to the opening of the subscription list and the offer: section 32(2) and the Explanation.

4. What must be filed after a red herring issue closes? The prospectus stating the total capital raised, whether by debt or share capital, the closing price of the securities and any other details not in the red herring prospectus, filed with the Registrar and with SEBI: section 32(4).

5. What is a deemed prospectus? Where a company allots or agrees to allot securities with a view to their being offered for sale to the public, the document by which that offer for sale is made is deemed for all purposes to be a prospectus issued by the company, buyers being treated as subscribers, without prejudice to the liability of the persons making the offer: section 25(1).

6. Who bears the cost of an offer for sale by members under section 28? The members whose shares are offered. They must collectively authorise the company to act for them and shall reimburse the company all expenses incurred by it on the matter: section 28(3).

2. Nothing may be stated that is untrue. The obvious limb, and the one that is easiest to prove.

3. Nothing may be so stated as to mislead, even if literally true. This is the limb the phrase exists for. "The company has an order from a public sector undertaking" may be true and still misleading if the order was cancelled last month. Section 34 is drafted to catch exactly this: it applies where a statement is untrue or misleading in form or context in which it is included, or where any inclusion or omission of any matter is likely to mislead.

4. The arrangement must not mislead. Burying a material qualification in a footnote while the claim it qualifies is in bold on the cover offends the rule even though both appear.

Where the rule lives in the Act

Section 26(1) carries the modern disclosure standard. Since 7 May 2018 the contents themselves are specified by SEBI in consultation with the Central Government, with SEBI's existing regulations applying meanwhile, and the surviving clause (c) requires a declaration of compliance with this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992. See [What a Prospectus Is, and What It Must Say] and FINDINGS.md section 3.6.

Section 26(5) protects the reader against a dressed up expert: an expert's statement may not be included unless the expert is not and has never been engaged or interested in the formation, promotion or management of the company, has consented in writing, and has not withdrawn that consent before delivery to the Registrar, and the prospectus must say so.

Section 34 enforces the rule criminally, section 35 civilly, and section 36 catches fraudulent inducement even outside a prospectus. Those three have their own chapters.

Section 27: the rule after the money is raised

The golden rule would be worth little if a company could tell the truth in the prospectus and then spend the money on something else. Section 27 closes that gap, and MU's syllabus reaches it through the same topic.

Section 27(1). A company shall not at any time vary the terms of a contract referred to in the prospectus, or the objects for which the prospectus was issued, except subject to the approval of, or authority given by, the company in general meeting by way of special resolution.

The first proviso adds publicity with a reason. The prescribed details of the notice of that resolution to shareholders shall also be published in the newspapers, one in English and one in the vernacular language, in the city where the registered office is situated, indicating clearly the justification for such variation.

The second proviso is a flat prohibition and is easy to miss: such a company shall not use any amount raised through the prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. So prospectus money cannot be turned into a share portfolio.

Section 27(2): the exit. Dissenting shareholders, being those 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 SEBI may specify by regulations.

Compare section 13(8), which does the same work for a change of objects while prospectus money is unutilised: special resolution, newspaper and website publication with a justification, and an exit for dissenters. The two sections are deliberately parallel, and an answer that notices the parallel reads well.

A worked example

Palghar Textiles Limited issues a prospectus to raise sixty crore rupees. It states three objects: building a dyeing unit, buying looms, and general corporate purposes. It also refers to a supply contract with a large garment exporter.

A half truth. The prospectus says "the company has a long term supply arrangement with a leading garment exporter". True when written. But the exporter served a termination notice a fortnight before the prospectus was dated, and that is not mentioned. The statement is literally true and misleading in the context in which it is included, which is precisely what section 34 covers, and the omission is one likely to mislead. Every person who authorised the issue is liable under section 447 unless he proves the omission was immaterial or that he had reasonable grounds to believe, and did believe up to the time of issue, that the inclusion or omission was necessary.

Concealment. The prospectus does not mention that the land for the dyeing unit is subject to a pending title suit. That is a material fact a reasonable investor would weigh, so the golden rule is broken by silence.

Varying the contract. A year later the company wants to replace the supply contract referred to in the prospectus with a different one on worse terms. Section 27(1) requires a special resolution. The prescribed details of the notice must be published in one English and one vernacular newspaper in the city of the registered office, with the justification. And section 27(2) requires the promoters or controlling shareholders to offer an exit to shareholders who did not agree, at the price and on the conditions SEBI specifies.

And a flat prohibition. The company has eleven crore rupees of prospectus money left and its treasurer proposes to park it in the shares of a listed cement company. The second proviso to section 27(1) forbids it outright: prospectus money may not be used for buying, trading or otherwise dealing in equity shares of any other listed company. No resolution can authorise it.

Distinctions that carry marks

What this does NOT mean

It does not mean everything must be disclosed. The test is materiality. A prospectus that recited every fact about a company would be unreadable and would conceal by volume.

It does not mean an honest belief is always a defence. Under the proviso to section 34 the belief must be held on reasonable grounds and up to the time of issue.

It does not mean the rule stops at the date of issue. Section 27 keeps the company to the contracts and objects the prospectus described, and section 13(8) keeps it to the objects while the money is unspent.

It does not mean only subscribers can sue. Section 37 allows a suit or any other action under sections 34, 35 or 36 by any person, group of persons or association of persons affected.

Quick revision

• The rule: full, frank and honest disclosure of every material fact; nothing untrue; nothing misleading in form or context; nothing misleading by arrangement or omission.
• The case named for it: New Brunswick and Canada Railway and Land Co. v. Muggeridge. Named without a citation.
• In the Act: section 26(1), contents as SEBI specifies plus the clause (c) declaration; section 26(5), the independent, consenting expert; enforced by sections 34, 35 and 36; complainants defined by section 37.
• Section 27(1): no variation of a contract referred to in the prospectus, or of the objects for which it was issued, except by special resolution; notice details published in one English and one vernacular newspaper in the city of the registered office with the justification; and prospectus money may not be used to buy, trade or deal in equity shares of any other listed company.
• Section 27(2): dissenting shareholders get an exit offer from promoters or controlling shareholders at the price and on the conditions SEBI specifies.
• Parallel: section 13(8) for a change of objects while prospectus money is unutilised.

Test yourself

1. State the golden rule for framing a prospectus. Those who issue a prospectus must make a full, frank and honest disclosure of every material fact. Nothing untrue may be stated, nothing may be stated so as to mislead even if literally true, and nothing material may be concealed or buried.

2. Which provision catches a statement that is literally true but misleading? Section 34, which applies where a statement is untrue or misleading in form or context in which it is included, or where any inclusion or omission of any matter is likely to mislead.

3. What is needed to vary the terms of a contract referred to in a prospectus? A special resolution of the company in general meeting, with the prescribed details of the notice published in one English and one vernacular newspaper in the city where the registered office is situated, clearly indicating the justification: section 27(1) and its first proviso.

4. What must be offered to shareholders who do not agree to such a variation? An exit offer by the promoters or controlling shareholders, at such exit price and in such manner and conditions as SEBI may specify by regulations: section 27(2).

5. May a company invest its unspent prospectus money in the shares of a listed company? No. The second proviso to section 27(1) prohibits a company from using any amount raised through a prospectus for buying, trading or otherwise dealing in the equity shares of any other listed company.

6. Who may take action for a misleading prospectus? Any person, group of persons or association of persons affected by the misleading statement or by the inclusion or omission of any matter, by suit or any other action under sections 34, 35 or 36: section 37.

shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.

Take the list apart, because each entry catches a different person.

(a) Directors at the time of issue. The date of issue fixes the class. A person who resigned the day before is outside it, subject to (b).

(b) Named or agreed to be named. This catches the person lent to a prospectus for respectability. He is liable because he authorised himself to be named and was named, even though he never acted as a director, and even where he agreed to become one only after an interval of time.

(c) Promoters. Defined by section 2(69), and dealt with in [Promoters: Position, Duties and Liabilities].

(d) Anyone who authorised the issue. The widest limb, and it catches persons who hold no office at all. It is the same expression used in section 34.

(e) The expert. But only an expert within section 26(5), that is, a person independent of the formation, promotion and management of the company who gave written consent to the issue and did not withdraw it. An expert is liable for his own statement, not for the rest of the prospectus.

Three elements the claimant must show, and they are the marks in a problem question:

1. He subscribed for securities of the company;
2. He acted on the misleading statement, inclusion or omission, so there is reliance; and
3. He sustained loss or damage as a consequence, so there is causation.

Note who is not on the list. A person who bought the shares in the market from an earlier subscriber has not subscribed on the faith of the prospectus, and section 35(1) does not reach him. His remedies lie elsewhere.

The three defences: section 35(2)

No person shall be liable under sub-section (1) if he proves one of the following. The burden is squarely on the defendant.

Defence (a): withdrawal of consent before issue. That, having consented to become a director, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent. Both limbs are needed: withdrawing is not enough if the prospectus went out with his blessing anyway.

Defence (b): issued without knowledge or consent, plus a public notice. That the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

The word "forthwith" carries the defence. A director who learns of the prospectus in March and publishes a notice in July has not acted forthwith, and the defence fails however genuine his ignorance was. And the notice must be public and reasonable, so a letter to the Board is not enough.

Defence (c): reasonable reliance on an expert. That, as regards every misleading statement purporting to be made by an expert, or contained in what purports to be a copy of or an extract from a report or valuation of an expert:

• it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and
• he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it, and that the expert had given the consent required by section 26(5) and had not withdrawn it before filing of a copy of the prospectus with the Registrar, or, to the defendant's knowledge, before allotment thereunder.

This is the defence that makes the expert regime in section 26(5) work. A director may rely on a valuer's report, but only if he reproduced it accurately and reasonably believed the valuer was competent and had consented.

Fraud: section 35(3)

Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in sub-section (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

Three things change when fraud is proved.

The defences go. The sub-section opens "notwithstanding anything contained in this section", which sweeps away sub-section (2).

Liability becomes unlimited. "Personally responsible, without any limitation of liability" means the whole of the person's estate answers, not a proportionate share.

The class of losses widens. "All or any of the losses or damages that may have been incurred by any person who subscribed" is broader than the loss flowing from the particular misstatement.

Note also the wording of the trigger. It is enough that the prospectus was issued with intent to defraud the applicants or any other person, or for any fraudulent purpose. The intent need not be aimed at the particular claimant.

Who may sue: section 37

A suit may be filed or any other action may be taken under section 34 or section 35 or section 36 by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.

Short, and it does two useful things. It confirms that the same facts can support proceedings under the criminal sections and the civil one. And it lets a group or association act together, which is the practical answer to the problem that each individual investor's loss may be too small to be worth a suit on its own. Read it with the class action in section 245.

A worked example

Chandrapur Steels Limited issues a prospectus in June 2026. It says the company holds a mining lease valid to 2041. In fact the lease expired in 2025 and the renewal was refused.

The prospectus names five directors; Mr Deshpande, who agreed to become a director three months after listing and consented to be named; and it carries a valuer's report on the ore body by an independent valuer who consented in writing. Ms Rane, a promoter, approved the issue. Mr Bhatt, a consultant holding no office, gave the final instruction to print and publish.

Amol subscribes for two lakh rupees of shares relying on the lease statement, and loses most of it when the truth emerges.

Who is liable under section 35(1)? The company; the five directors under clause (a); Mr Deshpande under clause (b), because he authorised himself to be named and agreed to become a director after an interval; Ms Rane under clause (c) as a promoter; Mr Bhatt under clause (d) as a person who authorised the issue; and the valuer under clause (e), but only for his own statement, which was accurate.

Amol must show that he subscribed, that he acted on the statement, and that he lost money as a result.

Defences. One director, Ms Fernandes, had resigned and withdrawn her consent before the prospectus was issued, and it went out without her authority. She is protected by defence (a). Another, Mr Iyer, was abroad and knew nothing of the issue; he learned of it on 2 July and published a reasonable public notice on 4 July. He is protected by defence (b). Had he waited until September, he would not be.

The remaining directors say they relied on the valuer. That is defence (c), but it protects them only as regards the valuer's statement, which was correct. It does nothing about the lease statement, which was the company's own. They remain liable.

Now suppose it is proved that the lease statement was inserted deliberately to induce subscriptions. Section 35(3) applies. The defences fall away, and every person named in sub-section (1) is personally responsible without any limitation of liability for the losses of everyone who subscribed on the faith of the prospectus.

And Amol need not sue alone. Under section 37 any person, group of persons or association of persons affected may sue or take action under sections 34, 35 or 36.

Distinctions that carry marks

What this does NOT mean

It does not mean every investor who lost money can recover. He must have subscribed, must have acted on the misleading matter, and must show the loss was a consequence of it. A person who bought in the market, or who never read the prospectus, fails on the first or second element.

It does not mean a named director escapes because he never acted. Clause (b) catches a person who authorised himself to be named, even if he was to become a director only later.

It does not mean an expert answers for the whole prospectus. He is liable under clause (e) for his own statement.

It does not mean the defences survive fraud. Section 35(3) begins "notwithstanding anything contained in this section".

Quick revision

• Section 35(1), five categories plus the company: (a) a director at the time of issue; (b) a person who authorised himself to be named and is named as a director, or agreed to become one, immediately or after an interval; (c) a promoter; (d) a person who authorised the issue; (e) an expert under section 26(5).
• Claimant must show: subscription, reliance, and loss as a consequence.
• Section 35(2), three defences: (a) consent withdrawn before issue and issued without his authority or consent; (b) issued without his knowledge or consent and he forthwith gave reasonable public notice; (c) an expert's statement correctly and fairly represented, with reasonable belief in the expert's competence and consent up to the time of issue.
• Section 35(3): prospectus issued with intent to defraud or for a fraudulent purpose means every person in sub-section (1) is personally responsible without any limitation of liability, and the defences do not apply.
• Section 37: any person, group of persons or association of persons affected may sue or act under sections 34, 35 or 36.

Test yourself

1. Who is liable to pay compensation under section 35(1)? The company, and every person who is a director at the time of the issue; who authorised himself to be named and is named as a director or agreed to become one, immediately or after an interval; who is a promoter; who authorised the issue of the prospectus; and who is an expert referred to in section 26(5).

2. What must the claimant prove? That he subscribed for securities of the company acting on a misleading statement, or on the inclusion or omission of a matter, in the prospectus, and that he sustained loss or damage as a consequence.

3. State the three defences. That, having consented to become a director, he withdrew his consent before the issue and the prospectus was issued without his authority or consent; that it was issued without his knowledge or consent and, on becoming aware, he forthwith gave a reasonable public notice to that effect; and, as regards an expert's statement, that it was correctly and fairly represented and that he had reasonable ground to believe, and did believe up to the time of issue, that the expert was competent and had given and not withdrawn his consent.

4. A director who knew nothing of the prospectus publishes a public notice four months after learning of it. Is he protected? No. Defence (b) requires him to have given the notice forthwith on becoming aware of the issue. A delay of four months is not forthwith, however genuine his ignorance.

5. What is the effect of proving that the prospectus was issued with intent to defraud? Section 35(3) applies notwithstanding anything else in the section: every person referred to in sub-section (1) becomes personally responsible, without any limitation of liability, for all or any of the losses incurred by any person who subscribed on the basis of the prospectus, and the sub-section (2) defences fall away.

6. Can a group of investors act together? Yes. Section 37 permits a suit to be filed or any other action to be taken under sections 34, 35 or 36 by any person, group of persons or association of persons affected.

"Every person who authorises the issue" identifies the defendant. It is not limited to directors, promoters or officers.

The proviso gives the defence:

nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

Two routes out, and the burden is on the accused. Immateriality, which is an objective question. Or honest belief on reasonable grounds, held up to the time of issue. A belief formed carelessly will not do, and a belief abandoned before issue will not do either.

Section 36: fraudulently inducing persons to invest money

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution,

shall be liable for action under section 447.

Section 36 is much wider than section 34 and the differences are the marks.

No prospectus is needed. Section 36 catches a statement made in a telephone call, an advertisement, a message or a meeting.

The mental element is spelled out: knowingly or recklessly. Recklessness is enough, so a person who makes a confident forecast without caring whether it is true is within the section.

The conduct includes forecasts and promises, not merely statements of existing fact, and includes deliberate concealment of material facts.

Clause (c) is not about securities at all. An agreement for obtaining credit facilities from any bank or financial institution is covered, so a person who lies to get a company loan is caught by a section that sits in the prospectus chapter. Students consistently miss this.

Section 38: personation for acquisition of securities

Section 38(1). Any person who:

• (a) makes or abets making of an application in a fictitious name to a company for acquiring or subscribing for its securities; or
• (b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or
• (c) otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name,

shall be liable for action under section 447.

Clause (b) is the one to read twice. It catches not only different names but different combinations of his own name or surname. So "R. K. Sharma", "Rajesh Sharma" and "Rajesh Kumar Sharma", all the same man, are multiple applications.

And note "makes or abets making" in both (a) and (b): the person who arranges the applications is as liable as the person who signs them.

Section 38(2): a warning that must be printed. The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities. This is why the warning appears on application forms, and it makes ignorance of the offence very hard to plead.

Section 38(3): disgorgement and seizure. Where a person has been convicted under the section, the Court may also order:

• disgorgement of gain, if any, made by such person; and
• seizure and disposal of the securities in his possession.

Section 38(4): where the money goes. The amount received through disgorgement or disposal shall be credited to the Investor Education and Protection Fund, which is constituted under section 125. So it does not go to the company; it goes to a fund that exists for investors generally.

Section 447: the punishment all three lead to

Since sections 34, 36 and 38 all say "shall be liable for action under section 447", the punishment is in that section and it must be learned.

The main punishment. Without prejudice to any liability including repayment of any debt, any person found guilty of fraud involving an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower, shall be punishable with:

• imprisonment for not less than six months and up to ten years; and
• a fine not less than the amount involved in the fraud and up to three times that amount.

First proviso: public interest. Where the fraud involves public interest, the term of imprisonment shall not be less than three years.

Second proviso: small frauds. Where the fraud involves an amount less than ten lakh rupees or one per cent of turnover, whichever is lower, and does not involve public interest, the punishment is imprisonment up to five years, or a fine up to fifty lakh rupees, or both. Note that here there is no minimum imprisonment and imprisonment is not compulsory.

The Explanation defines fraud, and it is worth quoting because it is unusually wide:

"fraud", in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

The closing words are the point: "whether or not there is any wrongful gain or wrongful loss". Fraud under this Act does not require anybody to have gained or lost. The intent to deceive is enough. The Explanation goes on to define wrongful gain as gain by unlawful means of property to which the person is not legally entitled, and wrongful loss as loss by unlawful means of property to which the person losing is legally entitled.

A worked example

Nagothane Chemicals Limited issues a prospectus. It states that the company holds environmental clearance for a new plant. The clearance application was in fact rejected.

Section 34. The statement is untrue. Every person who authorised the issue of the prospectus is liable under section 447. A director who can prove the matter was immaterial, or that he had reasonable grounds to believe, and did believe up to the time of issue, that the clearance had been granted, escapes under the proviso.

Section 36, and note that no prospectus is needed. The company's marketing head telephones two hundred wealthy individuals and tells them, recklessly, that the plant will be commissioned in six months and will triple the share price. That is a statement, promise or forecast which is false, deceptive or misleading, made recklessly, to induce them to enter into an agreement for subscribing for securities. He is liable under section 447, whatever happens to the prospectus.

And clause (c). The same man tells a bank that the clearance exists, to obtain a term loan. That is an agreement for, or with a view to obtaining credit facilities from a bank, and section 36(c) catches it even though no securities are involved.

Section 38. An applicant, Mr Salvi, wants a larger allotment. He applies as "P. Salvi", "Prakash Salvi" and "Prakash D. Salvi", and gets his driver to apply in a name that belongs to nobody. He is caught by clause (b) for the multiple applications in different combinations of his own name, and by clause (a), as an abettor, for the application in a fictitious name. On conviction the Court may order disgorgement of his gain and seizure and disposal of the securities in his possession, and the proceeds go to the Investor Education and Protection Fund.

And note where the warning was. The text of section 38(1) was prominently reproduced in the prospectus and on the application form, as section 38(2) requires.

Punishment. If the amounts involved are ten lakh rupees or more, or one per cent of turnover, whichever is lower, section 447 gives six months to ten years' imprisonment and a fine of one to three times the amount, with a minimum of three years if public interest is involved. If the amount is below that threshold and there is no public interest, the second proviso applies: up to five years, or a fine up to fifty lakh rupees, or both.

Distinctions that carry marks

What this does NOT mean

It does not mean somebody must actually have been misled under section 34. The section applies where the inclusion or omission is likely to mislead.

It does not mean section 36 is confined to securities. Clause (c) covers agreements for obtaining credit facilities from any bank or financial institution.

It does not mean fraud under section 447 requires a gain or a loss. The Explanation says "whether or not there is any wrongful gain or wrongful loss".

It does not mean multiple applications are only in other people's names. Section 38(1)(b) catches different combinations of the applicant's own name or surname.

Quick revision

• Section 34: a prospectus issued, circulated or distributed with a statement untrue or misleading in form or context, or an inclusion or omission likely to mislead, makes every person who authorises the issue liable under section 447. Proviso: immateriality, or reasonable grounds for belief held up to the time of issue.
• Section 36: any person who knowingly or recklessly makes a false, deceptive or misleading statement, promise or forecast, or deliberately conceals material facts, to induce another to enter into (a) an agreement for acquiring, disposing of, subscribing for or underwriting securities, (b) an agreement to secure a profit from the yield of securities or from fluctuations in their value, or (c) an agreement for obtaining credit facilities from a bank or financial institution, is liable under section 447.
• Section 38: (a) application in a fictitious name; (b) multiple applications in different names or different combinations of his own name or surname; (c) otherwise inducing allotment or transfer to himself or another in a fictitious name. Making or abetting both caught. 38(2): the sub-section must be prominently reproduced in every prospectus and application form. 38(3): on conviction the Court may order disgorgement and seizure and disposal. 38(4): proceeds to the Investor Education and Protection Fund.
• Section 447: fraud of at least ten lakh rupees or one per cent of turnover, whichever is lower: six months to ten years and a fine of one to three times the amount. Public interest: minimum three years. Below the threshold and no public interest: up to five years, or fine up to fifty lakh rupees, or both. Fraud is defined to include act, omission, concealment or abuse of position with intent to deceive, whether or not there is any wrongful gain or wrongful loss.

Test yourself

1. Who is criminally liable for a misleading prospectus, and what must be shown? Every person who authorises the issue of the prospectus, where it includes a statement untrue or misleading in the form or context in which it is included, or where an inclusion or omission is likely to mislead: section 34. Nobody need actually have been misled.

2. What defences does section 34 give? That the statement or omission was immaterial, or that the accused had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or that the inclusion or omission was necessary.

3. Does section 36 require a prospectus? No. It applies to any person who knowingly or recklessly makes a false, deceptive or misleading statement, promise or forecast, or deliberately conceals material facts, to induce another into the agreements listed in clauses (a) to (c), which include an agreement for obtaining credit facilities from a bank or financial institution.

4. A man applies for shares as "S. Kulkarni", "Sanjay Kulkarni" and "Sanjay R. Kulkarni". Which provision does that offend? Section 38(1)(b), which covers multiple applications in different names or in different combinations of his name or surname. He is liable for action under section 447.

5. What may a Court order on conviction under section 38, and where does the money go? Disgorgement of any gain made, and seizure and disposal of the securities in the convict's possession: section 38(3). The amount received is credited to the Investor Education and Protection Fund: section 38(4).

6. Define fraud under section 447 and state the punishment for a fraud of fifty lakh rupees not involving public interest. Fraud includes any act, omission, concealment of any fact or abuse of position committed with intent to deceive, to gain undue advantage from, or to injure the interests of the company, its shareholders, its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. Fifty lakh rupees exceeds the ten lakh threshold, so the punishment is imprisonment of not less than six months and up to ten years, and a fine of not less than the amount involved and up to three times it.

Section 29(1A) carries that further: in the case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act 1996 and its regulations. Note the difference in verb: sub-section (1) is about issue, sub-section (1A) about holding or transfer.

Section 29(2). Any other company may convert its securities into dematerialised form, or issue them in physical form in accordance with this Act, or in dematerialised form in accordance with the Depositories Act 1996. So for companies outside sub-sections (1) and (1A) it is a choice.

Allotment: section 39

Section 39(1): the minimum subscription rule.

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.

Two conditions, both necessary. The minimum has been subscribed, that is, applied for. And the application money for that amount has been paid to and received by the company, and by cheque or other instrument, which excludes cash.

Section 39(2): how much must be paid on application. The 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 SEBI may specify by regulations.

Section 39(3): what happens if the minimum does not come in. If the stated minimum amount has not been subscribed and the sum payable on application is not received within thirty days from the date of issue of the prospectus, or such other period as SEBI may specify, the amount received under sub-section (1) shall be returned within such time and manner as may be prescribed.

Section 39(4): the return of allotment. Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in the prescribed manner.

Section 39(5): the penalty. 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 the default continues, or one lakh rupees, whichever is less.

Note that the penalty attaches to failures under (3) and (4) only, that is, failure to refund and failure to file the return.

Stock exchange dealings: section 40

Section 40(1): apply before you offer. Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in that exchange or those exchanges.

Section 40(2): say where. Where a prospectus states that such an application has been made, the prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with.

Section 40(3): the separate account. All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than:

• (a) for adjustment against allotment of securities, where the securities have been permitted to be dealt with in the stock exchange specified in the prospectus; or
• (b) for the repayment of monies within the time specified by SEBI, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities.

Read (a) and (b) together and the design is clear: the money may be used only if listing permission has come, and must otherwise be returned. There is no third option.

Section 40(4): no contracting out. Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void. So a clause in an application form asking the applicant to give up these protections is worth nothing.

Section 40(5): the penalty. On default:

• the company shall be punishable with a fine of not less than five lakh rupees and up to fifty lakh rupees; and
• every officer of the company who is in default shall be punishable with a fine of not less than fifty thousand rupees and up to three lakh rupees.

Section 40(6): commission. A company may pay commission to any person in connection with the subscription to its securities, subject to such conditions as may be prescribed. So underwriting and brokerage commission are lawful, within the prescribed conditions.

A worked example

Latur Solar Limited issues a prospectus on 1 October 2026 offering forty crore rupees of equity, stating a minimum subscription of thirty crore rupees. Each share has a nominal value of ten rupees.

Before the offer. Under section 40(1) the company must already have applied to one or more recognised stock exchanges and obtained permission for the securities to be dealt with. The prospectus states that the application has been made and names the exchanges, as section 40(2) requires. Under section 29(1)(a), being a company making a public offer, it must issue the securities only in dematerialised form under the Depositories Act 1996.

Application money. Under section 39(2) the amount payable on application on each share must be at least five per cent of ten rupees, that is fifty paise, unless SEBI has specified otherwise.

The money comes in. All application monies go into a separate bank account in a scheduled bank under section 40(3) and may be touched only for adjustment against allotment once listing permission is in hand, or for repayment.

Case one, the issue succeeds. Applications for thirty four crore rupees are received and the application money is paid by cheque. The minimum of thirty crore has been subscribed and the money received, so section 39(1) is satisfied and the company may allot. It then files a return of allotment with the Registrar under section 39(4).

Case two, the issue fails. Only twenty two crore rupees is subscribed and by 31 October 2026, thirty days from the date of issue of the prospectus, the balance has not come in. Under section 39(3) the amount received must be returned in the prescribed time and manner. If the company delays, section 39(5) imposes on the company and every officer in default a penalty of one thousand rupees a day, or one lakh rupees, whichever is less, for each default.

Case three, listing is refused. The exchange declines permission. The money in the separate account cannot be used for adjustment against allotment, because clause (a) of section 40(3) applies only where the securities have been permitted to be dealt with. It must be repaid under clause (b) within the time SEBI specifies. A clause in the application form by which applicants purported to waive this is void under section 40(4). Default costs the company five to fifty lakh rupees and every officer in default fifty thousand to three lakh rupees under section 40(5).

Distinctions that carry marks

What this does NOT mean

It does not mean a company can allot as soon as the applications add up. The application money for the minimum amount must actually have been paid to and received by the company, and not in cash.

It does not mean listing permission can be sought afterwards. Section 40(1) requires the application to be made and permission obtained before making the offer.

It does not mean the company may use the money while listing is pending. Section 40(3)(a) permits use only where the securities have been permitted to be dealt with.

It does not mean dematerialisation is only for listed companies. Section 29(1)(a) covers every company making a public offer, and since 15 August 2019 the power to prescribe under clause (b) is no longer limited to public companies.

Quick revision

• Section 29(1): every company making a public offer, and such other classes as may be prescribed, shall issue securities only in dematerialised form under the Depositories Act 1996. The word "public" was omitted from clause (b) w.e.f. 15 August 2019. 29(1A): prescribed classes of unlisted companies must hold or transfer only in demat form. 29(2): others may choose.
• Section 39(1): no allotment unless the minimum amount stated in the prospectus is subscribed and the application money received by cheque or other instrument, not cash.
• 39(2): application money at least five per cent of nominal value, or as SEBI specifies.
• 39(3): if not received within thirty days of the issue of the prospectus, or as SEBI specifies, the money must be returned.
• 39(4): return of allotment to the Registrar whenever a company having share capital allots.
• 39(5): default under (3) or (4) costs one thousand rupees a day or one lakh rupees, whichever is less, for each default, on the company and the officer in default.
• Section 40(1) and (2): apply for and obtain stock exchange permission before making the offer, and name the exchanges in the prospectus.
• 40(3): monies in a separate account in a scheduled bank, usable only for adjustment against allotment where permission has been given, or for repayment.
• 40(4): any waiver is void. 40(5): company five to fifty lakh rupees; officer in default fifty thousand to three lakh rupees. 40(6): commission payable subject to prescribed conditions.

Test yourself

1. When may a company allot securities offered to the public? Only when the amount stated in the prospectus as the minimum amount has been subscribed, and the sums payable on application for that amount have been paid to and received by the company by cheque or other instrument: section 39(1). Cash is excluded.

2. What is the minimum application money per security? Not less than five per cent of the nominal amount of the security, or such other percentage or amount as SEBI may specify: section 39(2).

3. The minimum subscription is not received within thirty days. What follows? The amount received must be returned within such time and manner as may be prescribed: section 39(3). Default attracts a penalty of one thousand rupees for each day, or one lakh rupees, whichever is less, on the company and every officer in default: section 39(5).

4. When must a company apply for listing? Before making the public offer. Section 40(1) requires it to apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with, before making the offer.

5. For what may the monies in the separate account be used? Only for adjustment against allotment where the securities have been permitted to be dealt with in the exchange specified in the prospectus, or for repayment where the company is for any other reason unable to allot: section 40(3).

6. An application form says the applicant waives the requirements of section 40. Is that effective? No. Section 40(4) makes void any condition purporting to require or bind an applicant to waive compliance with any requirement of the section.

The permitted group: section 42(1), (2) and (3)

Section 42(1). A company may, subject to the provisions of this section, make a private placement of securities.

Section 42(2): the number. A private placement shall be made only to a select group of persons who have been identified by the Board, called identified persons, whose number shall not exceed fifty or such higher number as may be prescribed, excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of section 62(1)(b), in a financial year, subject to such conditions as may be prescribed.

Four things to hold on to. The persons must be identified by the Board, so the company cannot advertise for takers. The number is fifty or such higher number as prescribed. Qualified institutional buyers and ESOP employees are excluded from the count, which is why a company can place with several institutions without eating into its allowance. And the count is per financial year, not per issue.

Section 42(3): the document. A company making a private placement shall issue a private placement offer and application in the prescribed form and manner to identified persons whose names and addresses are recorded by the company in the prescribed manner.

The proviso is the anti-avoidance rule: the private placement offer and application shall not carry any right of renunciation.

Explanation I defines it: private placement means any offer or invitation to subscribe or issue of securities to a select group of persons by a company, other than by way of public offer, through private placement offer cum application, which satisfies the conditions specified in this section.

Explanation II defines a qualified institutional buyer by reference to SEBI's Issue of Capital and Disclosure Requirements Regulations 2009, as amended.

Explanation III is the deeming rule and it is drafted very widely. If a company, listed or unlisted, makes an offer to allot, or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment has been received or not, and whether the company intends to list or not, in or outside India, the same shall be deemed to be an offer to the public and shall be governed by Part I of this Chapter, that is, the prospectus rules.

Read the three "whethers". They close every escape route a clever adviser might look for.

The money: section 42(4), (5) and (6)

Section 42(4): how it is paid. Every identified person willing to subscribe shall apply in the private placement and application issued to him, with the subscription money paid by cheque or demand draft or other banking channel and not by cash.

The proviso: a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar under sub-section (8). So the money is frozen until the paperwork is done.

Section 42(5): one offer at a time. No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed, or that offer or invitation has been withdrawn or abandoned.

The proviso softens it: subject to the maximum number of identified persons in sub-section (2), a company may at any time make more than one issue of securities to such class of identified persons as may be prescribed.

Section 42(6): sixty days, then fifteen, then interest. A company making an offer under this section shall allot its securities within sixty days from the date of receipt of the application money. If it cannot, it shall repay the application money within fifteen days from the expiry of the sixty days. If it fails to repay within that period, it is liable to repay the money with interest at twelve per cent per annum from the expiry of the sixtieth day.

The proviso requires the monies received on application to be kept in a separate bank account in a scheduled bank, usable only (a) for adjustment against allotment, or (b) for repayment where the company is unable to allot. That mirrors section 40(3) for public offers.

No advertising: section 42(7)

No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

Four prohibited routes, and the last one matters: agents. A company cannot keep its own hands clean by hiring somebody to spread the word.

Filing and penalties: section 42(8), (9), (10) and (11)

Section 42(8): the return of allotment. A company making any allotment under this section shall file with the Registrar a return of allotment within fifteen days from the date of the allotment, in the prescribed manner, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

Section 42(9): late return. On default in filing within the prescribed period, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day the default continues, not exceeding twenty-five lakh rupees.

Section 42(10): offer or acceptance in contravention. Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable to a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within thirty days of the order imposing the penalty.

Section 42(11): the deeming provision. Notwithstanding sub-sections (9) and (10), any private placement issue not made in compliance with sub-section (2) shall be deemed to be a public offer, and all the provisions of this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992 shall be applicable.

That is the real sanction. Breaking the numerical limit does not merely cost a penalty. It converts the transaction into a public offer retrospectively, so the company is treated as having made a public offer without a prospectus, without listing permission under section 40, and without any of the protections Part I requires, with the criminal and civil consequences that follow.

A worked example

Ratnagiri Marine Foods Private Limited wants eighteen crore rupees.

Route. As a private company it cannot make a public offer, so under section 23(2)(b) its choices are a rights issue or a private placement under section 42.

The list. The Board identifies thirty two investors by name and records their names and addresses. It also approaches two mutual funds, which are qualified institutional buyers, and offers shares to eleven employees under an employees stock option scheme under section 62(1)(b). Neither the funds nor the employees count towards the fifty, by the express exclusion in section 42(2), so the company has used thirty two of its allowance for that financial year.

The document. A private placement offer and application goes to each identified person. It carries no right of renunciation, by the proviso to section 42(3). No advertisement is placed, no agent is engaged, and no marketing channel is used, because section 42(7) forbids all of it.

The money. Subscriptions come in by cheque and bank transfer, not cash, into a separate account in a scheduled bank. The company cannot touch the money until allotment is made and the return of allotment is filed, by the proviso to section 42(4).

The clock. Application money is received on 1 November 2026. Allotment must be made within sixty days, by 31 December 2026. If it is not, the money must be repaid within fifteen days of that, by 15 January 2027. If the company still fails, it must repay with interest at twelve per cent per annum from 31 December 2026.

The filing. Allotment is made on 20 December 2026, so the return of allotment, with the full names, addresses and number of securities of every allottee, must be filed by 4 January 2027. A late filing costs the company, its promoters and its directors one thousand rupees a day, capped at twenty-five lakh rupees.

Now change one fact. Suppose the company had offered to sixty three identified persons in the same financial year, ignoring the limit. Section 42(11) applies notwithstanding the penalties: the issue is deemed to be a public offer, and the whole of this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992 apply to it. The company, a private company, is then in the position of having made a public offer it was never permitted to make, in breach of section 23(2) and of its own articles under section 2(68), with no prospectus, no section 40 listing application and no separate account compliance.

And under section 42(10) the company, its promoters and its directors face a penalty of up to the amount raised or two crore rupees, whichever is lower, and the company must refund all monies with interest within thirty days of the order.

Distinctions that carry marks

What this does NOT mean

It does not mean fifty is the number of investors. Qualified institutional buyers and employees offered securities under an ESOP are excluded from the count.

It does not mean the limit is per issue. It is per financial year.

It does not mean the company may spend the money on allotment. The proviso to section 42(4) also requires the return of allotment to be filed before the monies may be utilised.

It does not mean a breach is just a fine. Section 42(11) converts a non compliant placement into a public offer, which is a far larger problem than the penalty in section 42(10).

Quick revision

• Section 41: depository receipts in any foreign country, after a special resolution, in the prescribed manner and on prescribed conditions.
• 42(2): identified by the Board; not more than fifty or as prescribed; excluding QIBs and ESOP employees; per financial year.
• 42(3): private placement offer and application to identified persons whose names and addresses are recorded; no right of renunciation. Explanation III: exceeding the number, whether or not paid, whether or not listing is intended, is deemed an offer to the public.
• 42(4): payment by cheque, demand draft or banking channel, not cash; monies not to be used until allotment is made and the return filed.
• 42(5): no fresh offer until earlier allotments are complete, or the offer is withdrawn or abandoned.
• 42(6): allot within sixty days; else repay within fifteen days; else twelve per cent per annum from the sixtieth day. Separate account in a scheduled bank.
• 42(7): no public advertisement, media, marketing or distribution channels or agents.
• 42(8): return of allotment within fifteen days, with a complete list of allottees.
• 42(9): late return, one thousand rupees a day, cap twenty-five lakh rupees, on the company, promoters and directors.
• 42(10): offer or acceptance in contravention, penalty up to the amount raised or two crore rupees, whichever is lower, plus refund with interest within thirty days of the order.
• 42(11): non compliance with sub-section (2) means the issue is deemed a public offer, and this Act, the SCRA 1956 and the SEBI Act 1992 all apply.

Test yourself

1. To how many persons may a private placement be made? A select group of persons identified by the Board, not exceeding fifty or such higher number as may be prescribed, in a financial year, excluding qualified institutional buyers and employees offered securities under an employees stock option scheme under section 62(1)(b): section 42(2).

2. May the offer be renounced in favour of somebody else? No. The proviso to section 42(3) provides that the private placement offer and application shall not carry any right of renunciation.

3. When may the company use the money it raises? Only after allotment is made and the return of allotment is filed with the Registrar under section 42(8): proviso to section 42(4). Until then the monies stay in a separate account in a scheduled bank.

4. What is the timetable for allotment and refund? Allotment within sixty days of receipt of the application money; failing that, repayment within fifteen days of the expiry of the sixty; failing that, repayment with interest at twelve per cent per annum from the expiry of the sixtieth day: section 42(6).

5. What happens if a company places securities with more than the permitted number of persons? Section 42(11) applies notwithstanding the penalty provisions: the issue is deemed to be a public offer, and all the provisions of this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992 become applicable.

6. What is required before a company may issue global depository receipts? A special resolution passed in general meeting; the issue is then made in any foreign country in such manner and subject to such conditions as may be prescribed: section 41.

Equity share capital, and shares with differential rights

Explanation (i) defines it residually: all share capital which is not preference share capital. So you identify preference capital first and everything left is equity.

Clause (a)(ii) is MU's separate label, "Equity Shares with Differential Voting Rights". Equity shares may carry differential rights as to dividend, voting or otherwise, in accordance with such rules as may be prescribed.

Three points to make about them. The differential may be as to dividend, as to voting, or otherwise, so the category is wider than the popular name suggests. The conditions are in the rules, not in the section, so a company cannot simply invent a class. And the commercial reason for them is control: a founder can raise equity capital without surrendering proportionate control, by issuing shares with lower voting rights, or can attract income investors with shares carrying a higher dividend and fewer votes.

Preference share capital

Explanation (ii) defines it as that part of the issued share capital which carries or would carry a preferential right with respect to:

• (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may be free of or subject to income tax; and
• (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not there is a preferential right to payment of any fixed premium or premium on any fixed scale specified in the memorandum or articles.

Explanation (iii): participating preference shares are still preference shares. Capital shall be deemed to be preference capital notwithstanding that it is entitled to either or both of:

• (a) in respect of dividends, in addition to its preferential right, a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right; and
• (b) in respect of capital, in addition to the preferential right to repayment on winding up, a right to participate, whether fully or to a limited extent, in any surplus remaining after the entire capital has been repaid.

That Explanation exists to stop an argument. A shareholder who has both a preference and a share of the surplus looks like an equity holder, and Explanation (iii) says he is not: he remains a preference shareholder.

The nature of a share: sections 44 and 45

Section 44.

The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

Movable property, so it passes like goods and not like land. Transferable, which is what gives an investor an exit. In the manner provided by the articles, which is what lets a private company restrict transfer under section 2(68) while remaining a company.

And notice the three words "or other interest". The section is not confined to shares and debentures; it covers whatever interest a member has.

Section 45: numbering.

Every share in a company having a share capital shall be distinguished by its distinctive number.

The proviso disapplies it for a share held by a person whose name is entered as holder of beneficial interest in such share in the records of a depository, that is, a dematerialised share. Since section 29 makes dematerialisation compulsory for public offers, the proviso now covers most shares in the market, and distinctive numbers survive mainly in unlisted companies holding physical certificates.

What a share actually is. Putting sections 43, 44 and 45 together: a share is a unit of the share capital, measured in money, carrying a bundle of rights against the company (to vote, to dividend when declared, to a share in the surplus on winding up), constituting movable property, transferable as the articles provide, and identified by a distinctive number unless held in electronic form.

Voting rights: section 47

MU does not label this separately but it is the practical meaning of the two kinds, so it belongs here.

Section 47(1). Subject to section 43, section 50(2) and section 188(1):

• (a) every member of a company limited by shares holding equity share capital shall have a right to vote on every resolution placed before the company; and
• (b) his voting right on a poll shall be in proportion to his share in the paid-up equity share capital.

The opening words matter. Section 43 lets equity shares carry differential voting rights, so 47(1) yields to a validly created class. Section 50(2) deals with a member who has paid calls in advance and provides that he does not get extra voting rights for it. Section 188(1) stops an interested related party voting on its own contract.

Section 47(2): preference shareholders vote only sometimes. Every member holding preference share capital shall, in respect of that capital, have a right to vote only on resolutions which directly affect the rights attached to his preference shares, and on any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. His voting right on a poll is in proportion to his share in the paid-up preference share capital.

The first proviso fixes the relative weight: the proportion of the voting rights of equity shareholders to those of preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares.

The second proviso is the one to remember. Where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, that class shall have a right to vote on all the resolutions placed before the company.

That is the bargain stated plainly. A preference shareholder gives up his vote in exchange for a preferential dividend. If the dividend stops for two years, the consideration has failed and the vote comes back.

A worked example

Belgaum Bearings Limited has a paid-up capital of three crore rupees: two crore rupees of equity shares of ten rupees each, and one crore rupees of nine per cent preference shares of one hundred rupees each.

Kinds. Under section 43 there are exactly two kinds and both are present. The preference shares carry a preferential right to a dividend at a fixed rate of nine per cent and to repayment of capital on winding up, so they satisfy Explanation (ii). The rest is equity share capital by Explanation (i), because it is not preference capital.

Participating shares. Suppose the preference shares also entitle their holders to share in any surplus after all capital is repaid. By Explanation (iii)(b) they are still preference shares, notwithstanding that additional right.

Differential rights. The founders want to raise sixty lakh rupees without losing control. They issue equity shares with differential rights under section 43(a)(ii), carrying a higher dividend and one vote for every ten shares, in accordance with the prescribed rules.

Voting in an ordinary year. On a resolution to appoint an auditor, the equity shareholders vote, in proportion to their paid-up equity capital on a poll, under section 47(1). The preference shareholders do not, because the resolution does not directly affect the rights attached to their shares.

Voting on a capital reduction. Now the company proposes to reduce its share capital. The preference shareholders do vote, because section 47(2) expressly covers a resolution for the repayment or reduction of equity or preference share capital. Their votes on a poll are in proportion to their paid-up preference capital, and the relative weight of the two classes is fixed by the first proviso: two crore to one crore, so two to one.

Two bad years. The company pays no preference dividend for two years. By the second proviso to section 47(2) the preference shareholders now have a right to vote on all resolutions placed before the company, not merely those affecting their own class.

Transfer. A preference shareholder sells. His shares are movable property transferable in the manner provided by the articles under section 44, and if the shares are in physical form each carries a distinctive number under section 45. Had they been held with a depository, the proviso to section 45 would disapply the numbering requirement.

Distinctions that carry marks

What this does NOT mean

It does not mean there are many kinds of share capital. Section 43 says two. Everything else is a variety within one of the two.

It does not mean participating preference shares are equity. Explanation (iii) expressly deems them preference capital.

It does not mean every equity share carries one vote. Section 43(a)(ii) permits differential rights as to voting, and section 47(1) is expressly subject to section 43.

It does not mean preference shareholders never vote. They vote on resolutions directly affecting their rights, on winding up, on repayment or reduction of capital, and on everything once the dividend has been unpaid for two years.

Quick revision

• Section 43: two kinds only. (a) equity, with voting rights or with differential rights as to dividend, voting or otherwise as prescribed; (b) preference.
• Explanation (i): equity is all capital that is not preference.
• Explanation (ii): preference carries a preferential right to dividend at a fixed amount or fixed rate and to repayment of capital on winding up.
• Explanation (iii): participating shares are still preference shares.
• Section 44: shares, debentures or other interest are movable property transferable in the manner provided by the articles.
• Section 45: every share must have a distinctive number, except a share held in a depository.
• Section 47(1): equity holders vote on every resolution; on a poll, in proportion to paid-up equity capital. Subject to sections 43, 50(2) and 188(1).
• Section 47(2): preference holders vote only on resolutions directly affecting their rights, and on winding up or repayment or reduction of capital. Relative weight in proportion to paid-up capital of each class. If the dividend is unpaid for two years or more, they vote on all resolutions.

Test yourself

1. What are the kinds of share capital? Two: equity share capital, with voting rights or with differential rights as to dividend, voting or otherwise in accordance with the prescribed rules; and preference share capital: section 43.

2. How is preference share capital defined? As that part of the issued share capital carrying a preferential right to payment of dividend, either as a fixed amount or at a fixed rate, and to repayment on a winding up or repayment of capital of the amount paid-up or deemed paid-up: Explanation (ii) to section 43.

3. Are participating preference shares equity shares? No. Explanation (iii) to section 43 provides that capital is deemed preference capital notwithstanding a right to participate in dividends beyond the preference, or in the surplus after all capital is repaid.

4. What is the nature of a share? Movable property, transferable in the manner provided by the articles of the company: section 44. Every share in a company having share capital must carry a distinctive number, unless held in dematerialised form with a depository: section 45.

5. When may preference shareholders vote? On resolutions that directly affect the rights attached to their preference shares, and on any resolution for winding up or for the repayment or reduction of the company's equity or preference share capital: section 47(2). Their voting right on a poll is in proportion to their paid-up preference capital.

6. What happens if a preference dividend is not paid for two years? By the second proviso to section 47(2) that class of preference shareholders acquires a right to vote on all the resolutions placed before the company.

Three points. It binds a company limited by shares. It applies to shares issued after the commencement of this Act, so irredeemable preference shares issued long ago under earlier law are untouched, and the proviso to section 43 protects the winding-up rights of such holders. And it is absolute: no resolution, no article and no approval can authorise an irredeemable preference share.

The permission and the twenty year rule: section 55(2)

A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed.

Two threshold requirements. The articles must authorise it, so a company whose articles are silent must first alter them under section 14. And redemption must be within twenty years from the date of issue.

The first proviso, infrastructure. A company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

Read that carefully, because it is often misstated. The exception does not create a perpetual share. It allows a longer term for infrastructure, and it gives the shareholder an annual option to have a prescribed percentage redeemed. The choice is his, not the company's.

The four conditions: the second proviso to section 55(2)

(a) The source of the money. No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of such redemption.

Two permitted sources, and no third. In particular, redemption may not be made out of borrowed money or out of ordinary capital.

(b) Fully paid. No such shares shall be redeemed unless they are fully paid. A company cannot return capital on a share while part of it is still owed to the company.

(c) The Capital Redemption Reserve Account. Where the shares are redeemed out of profits, there shall out of such profits be transferred a sum equal to the nominal amount of the shares to be redeemed to a reserve called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital shall, except as provided in this section, apply as if that Account were paid-up share capital of the company.

This is the sub-clause that makes the whole scheme work. Profits that could have been paid out as dividend are converted into something that is treated as capital, and can be touched only by going through section 66. The creditors' cushion is preserved in substance even though preference shares have gone.

Note that (c) applies only where profits are used. Where the redemption is funded by a fresh issue, no transfer is needed, because new capital has already replaced the old.

(d) The premium on redemption. Where a premium is payable on redemption:

• (i) in the case of such class of companies as may be prescribed, whose financial statements comply with the accounting standards prescribed under section 133, the premium shall be provided for out of the profits of the company, before the shares are redeemed. A further proviso allows the premium on preference shares issued on or before the commencement of this Act by such a company to be provided out of profits or out of the securities premium account.
• (ii) in any other case, the premium shall be provided for out of the profits of the company or out of the company's securities premium account, before the shares are redeemed.

So the general rule permits the securities premium account to be used, and the prescribed class of companies is confined to profits for shares issued after the Act. Section 52(2)(d) is the matching provision on the securities premium side, permitting that account to be applied in providing for the premium payable on redemption of redeemable preference shares.

A worked example

Sangli Sugars Limited has articles authorising redeemable preference shares.

The issue. On 1 April 2027 it issues two lakh, ten per cent redeemable preference shares of one hundred rupees each, redeemable at par at the end of eight years. That is within twenty years, so section 55(2) is satisfied, and because they are redeemable, section 55(1) is not offended.

Could it have issued them irredeemable? No. Section 55(1) is absolute for a company limited by shares.

Could it have issued them for thirty years? Only for an infrastructure project, under the first proviso, and then the shareholders would have an annual option to have a prescribed percentage redeemed.

Redemption, case one, out of profits. In 2035 the company redeems the whole two crore rupees out of distributable profits. Conditions: the shares must be fully paid, by proviso (b); the money must come from profits which would otherwise be available for dividend, by proviso (a); and a sum equal to the nominal amount redeemed, two crore rupees, must be transferred out of those profits to the Capital Redemption Reserve Account, by proviso (c). That Account is then treated as paid-up share capital, so it can be reduced only under section 66.

Redemption, case two, out of a fresh issue. Instead the company issues two crore rupees of new equity for the purposes of the redemption and uses the proceeds. Proviso (a) is satisfied by the second limb. No transfer to the Capital Redemption Reserve Account is required, because the capital has been replaced rather than paid away.

Redemption, case three, out of a bank loan. Not permitted. Proviso (a) allows only profits available for dividend or the proceeds of a fresh issue.

A premium. Suppose the shares are redeemable at a premium of ten rupees each, twenty lakh rupees in all. Under proviso (d)(ii) that premium must be provided for out of profits or out of the securities premium account, before redemption, and section 52(2)(d) expressly allows the securities premium account to be applied for exactly that. If the company falls in the prescribed class under (d)(i), it must use profits for shares issued after the commencement of the Act.

Partly paid shares. Ten thousand of the preference shares have twenty rupees unpaid. Those shares cannot be redeemed until they are fully paid, by proviso (b).

And note the voting consequence. If the company fails to pay the preference dividend for two years or more, the second proviso to section 47(2) gives that class a right to vote on all resolutions, which is a real lever when redemption is being negotiated.

Distinctions that carry marks

What this does NOT mean

It does not mean preference shares must be redeemed within twenty years. They must be liable to be redeemed within that period. The company and the terms decide when within it.

It does not mean infrastructure preference shares are irredeemable. The first proviso allows a longer period, with an annual redemption option for the shareholder of a prescribed percentage.

It does not mean a Capital Redemption Reserve is always needed. Only where the redemption is out of profits.

It does not mean the premium can always come from the securities premium account. For a prescribed class of companies whose statements comply with section 133 standards, the premium on shares issued after the commencement of this Act must come out of profits.

Quick revision

• 55(1): no company limited by shares may issue irredeemable preference shares after the commencement of this Act. Absolute.
• 55(2): redeemable preference shares, if authorised by the articles, redeemable within twenty years of issue, on prescribed conditions.
• First proviso: longer than twenty years for infrastructure projects, with annual redemption of a prescribed percentage at the shareholder's option.
• Second proviso, four conditions:
• (a) redeem only out of profits otherwise available for dividend or the proceeds of a fresh issue made for the purpose;
• (b) only if the shares are fully paid;
• (c) where profits are used, transfer a sum equal to the nominal amount to the Capital Redemption Reserve Account, which is treated as paid-up share capital;
• (d) the premium on redemption is provided before redemption, out of profits for a prescribed class under section 133, and otherwise out of profits or the securities premium account.
• Section 52(2)(d) permits the securities premium account to be applied to that premium.
• Section 47(2) second proviso: dividend unpaid for two years gives the class a vote on all resolutions.

Test yourself

1. May a company issue irredeemable preference shares? No. Section 55(1) prohibits a company limited by shares from issuing any irredeemable preference shares after the commencement of this Act.

2. What is the maximum period for redemption, and what is the exception? Twenty years from the date of issue: section 55(2). The exception, in the first proviso, is for infrastructure projects, where a longer period is permitted subject to redemption of such percentage as may be prescribed on an annual basis at the option of the preference shareholders.

3. Out of what may preference shares be redeemed? Only out of the profits of the company which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of the redemption: proviso (a) to section 55(2).

4. When must a Capital Redemption Reserve Account be created, and what is its effect? Where the shares are redeemed out of profits. A sum equal to the nominal amount of the shares redeemed is transferred out of those profits to the Account, and the provisions relating to reduction of share capital apply as if the Account were paid-up share capital: proviso (c).

5. Can partly paid preference shares be redeemed? No. Proviso (b) to section 55(2) requires that no such shares shall be redeemed unless they are fully paid.

6. Out of what may the premium on redemption be provided? Generally out of the profits of the company or the securities premium account, before redemption: proviso (d)(ii), and section 52(2)(d) permits the latter. For a prescribed class of companies whose financial statements comply with the section 133 standards, it must come out of profits for shares issued after the commencement of this Act.

"Whether for cash or otherwise" matters: a premium on shares issued for a consideration other than cash goes into the account too.

And the deeming is the whole point. By treating the account as paid-up share capital, the Act makes it reducible only by going through section 66, the capital reduction procedure, with the Tribunal and the creditors' objections. It cannot be distributed as dividend.

Section 52(2): the five permitted applications. Notwithstanding sub-section (1), the securities premium account may be applied by the company:

• (a) towards the issue of unissued shares to the members as fully paid bonus shares;
• (b) in writing off the preliminary expenses of the company;
• (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures;
• (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures; or
• (e) for the purchase of its own shares or other securities under section 68.

Learn these five. They are a closed list, and any other use is a reduction of capital requiring section 66.

Section 52(3): a narrower list for a prescribed class. Notwithstanding sub-sections (1) and (2), the account may be applied by such class of companies as may be prescribed, whose financial statements comply with the accounting standards prescribed under section 133, only:

• (a) in paying up unissued equity shares to be issued to members as fully paid bonus shares;
• (b) in writing off the expenses of, or the commission paid or discount allowed on, any issue of equity shares; or
• (c) for the purchase of its own shares or other securities under section 68.

Compare the two lists. For the prescribed class, writing off preliminary expenses and providing for the premium on redemption are not available, and the surviving items are confined to equity shares. So the prescribed class has three uses, not five.

The ban on shares at a discount: section 53

Section 53(1). Except as provided in section 54, a company shall not issue shares at a discount.

Section 53(2). Any share issued by a company at a discount shall be void.

Not voidable, not irregular: void. So the allottee acquires nothing.

Section 53(2A): the one statutory exception besides sweat equity. Notwithstanding sub-sections (1) and (2), a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines, directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act 1934 or the Banking Regulation Act 1949.

This is the rescue exception. When a failing company's debt is converted into equity, insisting on face value would defeat the restructuring, because the shares are not worth face value.

Section 53(3): the penalty. Where a company fails to comply:

• the company and every officer in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount, or five lakh rupees, whichever is less; and
• the company shall also refund all monies received, with interest at twelve per cent per annum from the date of issue of the shares, to the persons to whom the shares were issued.