Membership In a Company.
Meetings and proceedings
Borrowing powers, Debentures & charges
Accounts & auditors.
Prevention of oppression & miss management
Compromises arrangements & reconstructions.
Members (Section 41): A company when incorporated is an artificial person. It
is a constitution of natural persons called members of a company.
Who are the members of a company?
(1) Subscribers to the memorandum of a company and entered as members in the
Register of Members;
(2) Every other person who agrees in writing to become a member of a company and
whose name is entered in its Register of Members;
(3) Every person holding equity share capital and whose name is entered as beneficial
owner in the records of the depository.
A registered co-operative society
A Non-Resident Indian [NRI]
Registered Trade Union
Shareholding in joint names
Membership By Subscription
Membership By Application & Registration
By Application & Allotment
II. By Transfer
III. By Succession
IV. Agreement to be in Writing
Membership By Beneficial Ownership
Membership By Qualification Shares
Cessation Of Membership By Act Of The Parties
Transfer Of Shares
Shares are Forfeited
III. Redeemable Preference Shares are Redeemed.
IV. Surrender Of Shares
Cessation Of Membership By Operation Of Law
III. Sale Of Shares
IV. Winding Up Of Company
To receive notices of all general
To attend & vote at general
meetings, appoint directors &
To receive copies of accounts of
Entitled to a copy of report of a
To inspect the minutes of proceedings
of any general meeting.
To inspect the register, index of
members, debenture holders.
To receive share certificate.
To receive dividends in case of
To make an application to the Central
Government for ordering investigation
into the affairs of the company.
Board of Directors fail to convene the
To present a petition to the Court for
winding up of company
To transfer his shares.
Priority to have shares offered if there
is increase of capital by the company.
Company With Unlimited Liability – Liable for full debt of the company,
during the period he was a member.
Company limited By Shares – Liable for the nominal value of the shares.
Company limited By Guarantee – Liable to Contribute the amount
Name, address & occupation.
Shares held by each member, distinguishing each share by its number, and
the amount paid on those shares.
Date at which each member was entered in the register.
Date on which any person cease to be member.
Every company having more than 50 members shall keep an
index in the form of a „Card-index‟ of the names of the members
of the company.
The index, shall at all times, be kept at the same place as the
register of members.
On payment of a fee of Re. 1 for each inspection, any
member may make extracts from any register or acquire a
copy of any register.
A company which has a share capital or which has issued debentures may
keep in any State or country outside India a branch register of members
or debenture holders resident in the State or country.
Every company has to file every year
with the Registrar annual returns containing certain particulars. Shall give
the particulars as on the date of holding the annual general meeting.
Share Capital means the capital raised by a company by the
issue of shares. The word ‘Capital’ in connection with a
company is used in Several Senses:I.
Nominal, Authorised or Registered Capital.
Issued & Subscribed Capital.
2 Classes of Shares [Sec 86 as amended in 2002] A. Equity Share [Sec 85(2)]
"Equity Share Capital means all share capital which is not
preference share capital."
The equity shareholders receive dividend out of profits declared
Dividend declared only after depreciation allowance and payment
of preference shareholders.
Voting right is in proportion to paid-up equity capital.
B. Preference Shares [Sec 85(1)]
Preference shares capital is that part of share capital which
fulfills following two conditions:
Carries preferential right with respect to dividend- fixed
amount or at fixed rate; and
II. Carries preferential right with respect to repayment of
capital on winding up.
A. From Promoters
Private companies cannot invite general public to subscribe its share
Public companies can raise the necessary capital by private placement
without inviting the general public to subscribe. (not made to more
than 49 persons at a time)
B. From Public
By issuing a prospectus.
By an offer for sale or by deemed prospectus:
Company offers/agrees to allocate shares to a financial institution or an Issue
House for sale to public.
The issue house publishes a document called an Offer For Sale at a price
higher than what its holder/s had paid or at par.
The document is deemed to be a prospectus u/s 64(1).
By placing of shares:
A broker or an underwriter finds persons who wish to buy shares.
The broker acts merely as an agent.
No need to issue a prospectus.
C. From Existing Shareholders
By issue of right shares to existing shareholders [Sec 81] allotted in
proportion to their existing holding. E.g.. 2 shares for every lot of 5
Companies are required to issue Letter Of Offer to the existing
shareholders of the company.
A Share is evidenced by a share certificate (sec.84). A share
certificate is issued by a company under its common seal.
Stock is the aggregate of fully paid-up shares ,consolidated &
divided for the purpose of convenient holding into different parts.
It may be transferable or split up into fractions of any
amount, without regards to the original face value.
Types Of Share
Preference Shares is a stock which may have any combination of features
not possessed by common stock including properties of both an equity and
a debt instrument, and is generally considered a hybrid instrument.
Equity Shares are those shares which are ordinary in the course of
company's business. They are also called as ordinary shares.
*Sweat Equity Shares are equity shares issued by a company to its
employees or directors at a discount, or as a consideration for providing
know-how or a similar value to the company.
Companies may issue shares at premium irrespective of the fact
whether the shares are listed or not.
No restriction in Companies Act on issue at premium, the only
restriction is on the utilization of premium amount.
Premium cannot be treated as profit as such the amount not
available for distribution as dividend.
Premium amount must be kept in separate account called
Securities Premium Account.
If premium is received in kind, an amount equal to premium amount
must be transferred to Securities Premium Account.
Premium to be used only for the following purposes as mentioned in
For issuing fully paid bonus shares;
For writing off preliminary expenses;
For writing off commission, discount expenses on issue of debentures; and
For providing for premium payable on redemption of Redeemable
Preference Shares or debentures.
Called Right Shares.
May be issued at any time after two years from incorporation or
one year from first allotment, whichever is earlier.
Must be offered to the existing shareholders in proportion to their
For listed company, information on quantum and proportion
shall be supplied to the concerned stock exchange.
Company must give notice of offer and the number of shares
offered to existing shareholders.
Give shareholders 15 days to decide.
The notice must state the shareholder's right to renounce the offer in
whole or in part in favour of some other person.
The board may dispose of the shares in a manner beneficial to the
Condition of issue of shares to persons other than existing
shareholders.[Section 81 (1A)]:
Pass a special resolution in general meeting, and
II. In case of ordinary resolution Central Govt.'s approval must be
When company accumulates large distributable profits it convert it
Divide the capital among the existing shareholders in proportion to
Members do not have to pay for such shares.
Bonus issue is a machinery for capitalizing distributable profits.
Must be sanctioned in the AGM on the recommendation of the board.
Bonus shares is not income and hence not taxable.
A prospectus shall be filed with Registrar.
No allotment of shares shall be made to public unless the minimum
subscription amount stated in the prospectus is raised and received by the
Application for shares should be made in prescribed form.
No allotment shall be made until the beginning of the 5th day after a date on
which prospectus is issued.
Companies intending to offer must make an application to one or more stock
exchanges for permission.
The whole of the application money should have been paid and received by
company in cash.
All moneys received shall be deposited in a Scheduled Bank until the certificate
to commence business is obtained.
A share is a movable property, transferable in the manner provided by the
A share holder has a statutory right, in the absence of restrictions in the
articles, to transfer shares to any person without consent of anybody.
A private company with share capital may restrict the right to transfer its
shares by its articles. Transfer of shares is less strict in a public company.
Where shares pass by operation of law from one person to another.
For example, by holder‟s insolvency, or lunacy or by death and inheritance.
The person to whom shares are transmitted shall make an application to the
company for transmission of shares in his name.
In case if the company refuses to register transmission, right of appeal arises
in the same manner as in case of transfer.
No instrument of transfer is required
The articles generally give powers to Board of Directors to forfeit shares as
If a member fails to pay any call or installment of a call
Any other circumstance which the articles may provide.
The articles may also provide that the failure by a member to fulfill any
engagement with any other member would forfeit his share.
Power of forfeiture is not inherent in a company and therefore this power
exists only when it is given by the articles.
A dividend is a payment made by a corporation to its shareholders, usually
as a distribution of profits . When a corporation earns a profit or surplus, it
can either re-invest it in the business (called retained earnings), or it can
distribute it to shareholders.
To be paid only out of Profit
Resolution at the AGM
Payment of Dividend in Proportion to paid-up capital
Establishment of Investor Education & Protection Fund
To be paid to Registered Shareholder
Unpaid Dividend to be transferred to Unpaid Dividend Accounts
Penalty for Defaulting Director
“ The Directors are the Brain of a Company”
"A director includes any person occupying the position of director by
whatever name called." [Section 2(13)]
Only individual, and not a body corporate, association or firm, shall
be appointed as director. [Section 253]
"An individual who direct, control, manage, superintend the affairs of
the company in the form of the board of directors.“
Every Public Company shall have at least 3 Directors &
Other Company (Private Company) at least 2 Directors.
A public company having a paid up capital of Rs.5 crore or above may
have a director from amongst small shareholders.
Shareholders not less than 1/10th (or 100) of the total shareholders may
elect suo-moto or upon a notice served at least 14 days before the AGM.
Listed company shall elect small shareholder's director through postal
ballot while an unlisted company on the recommendation of the majority
of small shareholders.
He is treated as director for all purposes but cannot be appointed as MD
or whole-time director.
No individual can hold office of Small Shareholder's Director at the same
time in more than 2 companies.
First Directors - May be named in the Articles or subscriber to the memorandum
shall be first directors.
Rotational Directors - Two third of the total directors are liable to retire by
rotation every year and are eligible for re-appointment in the General Meeting.
Directors By Third Parties.(Financial institutions or Banks)
Directors nominated by the Central Govt. u/s 408 are not liable to retirement.
Directors By Directors – As Additional Directors, In Casual Vacancy & As
Directors By Proportional Representation
Public companies must have at least three directors. [Section 252]
The Act does not lay down any qualification, but it lays down disqualifications.
Directors are the agent of the company.
A single director has no authority to bind the company unless such powers are delegated to him by
To some extent directors are also trustee of the company's properties.
Barring directors in the whole time employment, directors are not in the employment of the company
and are not entitled to any remuneration beyond what is allowed by the Act, i.e. sitting fees.
They are not also required to hold any shares in the company on whose board they serve.
A director can hold an office or place of profit in the company in addition to his usual directorship.
According to Sec 274 a person shall not be capable of being appointed as
Found to be of unsound mind;
An un-discharged insolvent;
Applied to be adjudicated as an insolvent;
Convicted of any offence involving moral turpitude and sentenced for not
less than six months and a period of 5 years has not elapsed.
Disqualified by an the Order Of Court.
Not defined in the Act but reference to be found in Sections 198, 309, 311 and
387 suggesting that director and managerial personnel are entitled to receive
Managerial Remuneration may take the form of monthly payment, say, salary
or a specified percentage of net profits or a commission and /or by way of a fee
for each meeting of the board, besides any or all of the following:
Rent free accommodation;
Any other amenity provided free of charge or at concessional rate; and
Any insurance, annuity, or gratuity.
Payment received for holding an office/place of profit is not managerial
remuneration. [Section 309(1)]
The overall Managerial Remuneration payable not to exceed 11% of the net
profit. [Section 198 (1)]
MD and Whole-time directors may be paid a monthly salary or specified
percentage of net profit. [Section 309 (3)]
General Meetings Of Shareholders :
Statutory Meeting under Section 165;
Annual General Meetings under Section 166;
Extraordinary General Meetings under Sec 169 :
Convened by directors suo moto between two AGMs.
Convened by directors on requisition.
Companies limited by guarantee and share shall, within one month and
not more than six months from the date of commencement of
business, hold a general meeting of the members to be called the
Failure to hold Statutory Meeting renders the company liable to be
wound up u/s 433(b).
This provision is not applicable to a private company. [Section 165(10)]
The board shall, at least 21 days before the day on which the meeting is
held, forward a report to every member of the company called Statutory
Every company must, in each calendar year, hold an annual general
meeting so specified in the notice calling it, provided that not more
than 15 months shall elapse between two AGMs.
First AGM may be held within 18 months from the date its
Subsequent AGM should be held on the earliest of the following:
[Sec 166 & 210]
15 months from the last AGM;
The last day of the calendar year; or
6 months from the close of the financial year.
In case of difficulty in holding meeting the Registrar may extend time
by not more than 3 months.
Application for extension of time should be made before the due date
of holding AGM.
Any delay including extension by RoC, shall make the officer in
default punishable with fine extending up to Rs 50,000 and Rs 2,500
for every day of the default.
Delay in completion of audit or annual accounts do not constitute a
special reason justifying extension of time for holding of AGM.
Every AGM called after giving 21 days notice must be held on a
day other than a public holiday.
Should be held on a working day, during business hours, at the
Registered Office of the company, or
a place within the city, town, or village in which registered office
An adjourned meeting accidentally comes to be held on a public
holiday does not contravenes the provisions of Section 166 (2).
Time of subsequent AGMs may be fixed by the Article or by a
resolution in the AGM.
Ordinary business relating to:
Consideration of accounts, Balance Sheet and report of board
Declaration of dividend;
Appointment of director in place of those retiring; and
Appointment and fixing of remuneration of the auditors.
Every other business is a special business.
Every general meeting of company with exception to Statutory Meeting
and AGM is called an Extraordinary General Meeting.
Every business at an EGM is a special business, which arises between
two AGMs being urgent, and cannot be deferred to the next AGM.
Usually the Articles contain provisions empowering the board for calling
If there are not within India directors capable who are not sufficient in
number to form a quorum any director or two members may call an
The board shall on requisition of members holding 1/10th of the paid
up capital or voting right, forthwith call an EGM.
The requisition shall set the matters for consideration, duly signed
and deposited at the registered office of the company.
If the EGM is not called within 21 days of the requisition the meeting
may be called on a day not later than 45 days from the date of
deposit of requisition:
By requisitionists themselves; or
By 1/10th of the shareholders or members holding 1/10th of
If, for any reason it is impracticable to call an EGM, the CLB may, either
of its own or on an application of any director or the member:
Order a meeting of the company;
and give such ancillary or consequential directions as the CLB thinks
A meeting so called shall be deemed to be a meting of the company duly
called, held and conducted.
The CLB will interfere very sparingly, and only when the application of a
meeting is made bona fide in the larger interest of the company.
A meeting of the Board of directors shall be held at least once in every three
months and at least four such meetings shall be held in one year.
As long as four meetings are held in a calendar year, the interval between
two meetings may be more than three months.
Listed companies are required to hold at least four board meetings in a year
with a maximum time gap of four months between two meetings. (LA Clause 49)
Notice of every meeting of the board shall be given in writing to every
director for the time being in India, and at his usual address in India to
Failure would make the officer in default punishable with a fine
extending up to Rs 1000.
The notice should contain the time date and place of meeting.
There is no provision for minimum days for giving notice. It is
generally prescribed by the Articles.
If the notice of the meeting is not given to even one director the
meeting and any resolution passed thereat would be invalid.
Notice of the adjourned meeting should be given to the directors who
did not attend the original meeting.
Invalid excess of authority or power
exercised by an entity. Since
Within the legal power or authority or a
person or official or body etc.
the powers exercised by any officer of
an organization are limited by the
constituting or vesting
instrument (such as MOA), any act
outside those limitations is ultra
A type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation
of the issuer. Both corporations and governments frequently issue this type of
bond in order to secure capital.
Proper and accurate compilation of financial information of a corporate and its disclosure, in a
manner that is standardized and understood by stakeholders, is central to the credibility of
the corporates and soundness of investment decisions by the investors. The preparation of
financial information and its audit, therefore, needs to be regulated through law with stringent
penalties for non-observance.
The present statute provides for a mechanism for development of Accounting Standards. We
understand that Accounting Standards for the use of Indian corporate sector, taking into
account International Accounting Standards, are being developed through the instrumentality
of the National Advisory.
The Committee took note of the contribution made by the ICAI and the NACAS in development
of proposals for Accounting Standards and took the view that the existing institutional
mechanism for formulating and notifying Accounting Standards under the Companies
Act, 1956 may be retained. Committee on Accounting Standards (NACAS). Holding-Subsidiary
Accounts and Consolidation .
The Committee took the view that consolidation of financial statements of subsidiaries with
those of holding companies should be mandatory. The Committee discussed the question of
the manner of maintenance of accounts of entities other than companies but controlled by
companies registered under the Act.
With consolidation of financial statements by holding companies on mandatory
basis, the provisions requiring attaching the accounts of subsidiary companies with
those of holding companies, for circulation to shareholders in accordance with the
provisions of the present Companies Act should be done away with.
Further, the Committee took the view that the holding companies should be required
to maintain records relating to consolidation of financial statements for specified
periods. Presentation of consolidated financial statements by the holding company
should be in addition to the mandatory presentation of individual financial statements
of that holding company.
At present, Section 209 (4A) of the Act requires companies to preserve the books of
accounts, together with the vouchers relevant to any entry in such books of
account, in good order, relating to a period of not less than 8 years immediately
preceding the current year. The Committee felt that the rules may provide for
preservation of books of account and records of the company for a period of 7 years to
bring it in harmony with Income Tax Act.
In order to bring about more transparency and uniformity in the maintenance of
accounts, the Committee felt that the companies should continue to be mandated to
maintain their books of accounts on accrual basis and double entry method of book
Maintenance of Records Outside the Country :
The companies should have an option to keep records outside the country
provided financial information in compliance with the Companies Act is available
within the country and written notice is given to the Registrar of the place where
the records are kept. However, such a Company should be obligated to produce
the records that are kept outside the country, if and when required to do so as
specified in the Rules.
Cash Flow Statement To Be Made Mandatory :
World over, the importance of Cash Flow Statement is being specifically
recognized. At present, the listed companies are mandated to include a Cash Flow
Statement in the Annual Report and the Standards of Accounting prescribed by
ICAI also requires in specified cases a Cash Flow Statement to be submitted along
with the Balance Sheet and Profit & Loss Account with a view to make Cash Flow
Statement mandatory. The Committee felt that there was a need to include the
definition of the term Financial Statement in the Act, to include Profit & Loss
Account, Balance Sheet, Cash Flow Statement and Notes on Accounts. Financial
The Companies Act at present does not contain any provision relating to the
minimum period of a Financial Year. The Concept Paper has defined the Financial
Year with the minimum period of six months. The Committee dwelt on the subject
and came to the conclusion that the first financial year should begin from the date
of incorporation and end on the immediately succeeding 31st March and the
subsequent Financial Years should also end on 31st March every year.
A company in a broad sense is a group of persons who have come
together or who have contributed money for some common purpose and
have incorporated themselves into distinct legal entity. Company is the
amalgamation of two distinct words- “com” and “pain”, the former
meaning with/together and the later meaning “bread”. The whole scheme
of the Companies Act, 1956 is to ensure proper conduct of the affairs of
the company in public interest and preservation of image of country in
Majority rule is hallmark of democracy. It equally applies to corporate democracy and
is not free from pitfalls and abuse. Corporate democracy is more vulnerable to it
because it is reckoned with the number of shares and not with number of individuals
The rule of majority has been made applicable to the management of the affairs of the
company. The members pass resolution on various subjects either by simple or threefourth majority. Once resolution is passed by majority it is binding on all members. As
a resultant corollary, court will not ordinarily intervene to protect the minority interest
affected by resolution. However there are exceptions to this rule- Prevention of
Oppression and mismanagement being one such ground. The requisite number of
members to make an application before the Tribunal is :
In case of Company having share capital: 100 members or 1/10th of total number of its
members, whichever is less or member/s holding not less that 1/10th issued capital. The
applicants should have paid all calls and other sum due on their shares.
In case of Company not having a share capital: not less than 1/5th of total number of the
members. In case of joint shareholding they will be counted as only one member.
The provisions of the Companies Act regarding a scheme of „Compromise‟ or
„Arrangement‟ are mainly applicable to those companies which are liable to be
wound up under the act [sec.390(a)].It is to be remembered that these
provisions are applicable to foreign company incorporated outside India but
doing business in India and a government company also because they are
liable to be wound up under the act . These provisions would also equally
apply to concern which is in winding up . By providing these provisions , the
law intends to provide a kind of substitute for winding up and There by Save
a company from going in to liquidation .
Section 391 lays down that ;
Where a compromise or arrangement is proposed :
I. Between a company & its creditors .
between a company and its members .
The compromise or Arrangement will then binding on :
I. All the creditors or classes of creditors .
II. All the members or classes of members .
III. The company
IV. In the case of company which is being wound up on the liquidators
The term Reconstruction implies the formation of a new company
to take-over the Assets of an existing company with the idea that
the persons interested and the nature of business substantially
remains the same.(Section – 394)
The term Amalgamation is taken to mean as the union of two or
more companies, so as to form a third entity or one company is
absorbed into another company. (Section – 395)
Winding up or liquidation of a company represents the last stage in its life. It
means a proceeding by which a company is dissolved. The assets of the company
are disposed of, the debts are paid off out of the realised assets and the surplus if
any ,is then distributed among the members in proportion to their holdings in the
The two terms winding up and liquidation are used interchangeably.
Winding up by the court i.e. compulsory winding up (Sections. 433 to 483)
Voluntary winding up (Sections. 484 to 521)
Members voluntary winding up
Creditors voluntary winding up
Winding up subject to Supervision of Court.