Company Law Unit 2 Documents

Company Law Unit 2 Documents, College and University Answer Bank for BA, B.com, B.sc, and Post Graduate Notes and Guide Available here, Company Law Unit 2 Documents to each Unit are provided in the list of UG-CBCS Central University & State University Syllabus so that you can easily browse through different College and University Guide and Notes here. Company Law Unit 2 Documents can be of great value to excel in the examination.

Company Law Unit 2 Documents

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Company Law Unit 2 Documents Notes cover all the exercise questions in UGC Syllabus. Company Law Unit 2 Documents provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.

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COMPANY LAW

1. A company can change its name by passing a ___________ resolution.

Ans: Cpecial.

2. A company can change its registered office from one state to another only with the prior approval of ___________.

Ans: Regional director.

3. Articles of a company can be altered by passing an ordinary resolution. [State true or false].

Ans: False.

4. Management of a company is regulated in ___________.

(a) Memorandum of association.

(b) Articles of association.

(c) Act.

(d) All of the above.

Ans: (d) All of the above.

1. Define memorandum.

Ans: As per Section 2(56) of Companies Act 2013, “memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.” However, this definition does not throw any light on the scope, use and importance of the memorandum of a company. Lord Cairns observed, “The memorandum of association of a company is its charter and defends the limitation of the power of a company.”

2. What are the purposes of a memorandum of association?

Ans: The memorandum of association serves two purposes:

(i) The prospective shareholders shall know the field in, or the purpose for which their money is going to be used by the company and what risk they are undertaking in making the investment.

(ii) The outsiders dealing with the company shall know with certainty as to what the objects of the company are and whether contractual relation, into which they contemplate to enter with the company, is within the objects of the company.

3. Define articles.

Ans: According to Section 2(5) of Companies Act, 2013, “articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act.”

4. Distinguish between memorandum of association and articles of association.

Ans: Following are the differences between memorandum of association and articles of association:

1. Discuss about the various clauses of the memorandum of association.

Ans: According to Section 4, the memorandum of association must contain following clauses:

(I) Name clause: (Publication of name) [Section 12]: Every company: 

(i) Shall paint or affix its name and address of its registered office and keep the same painted or affixed on the outside of every office or place in which its business is carried on.

(ii) Shall have its name engraved in legible characters on its seal, if any. and

(iii) Shall have its name and address of its registered office mentioned in legible characters in all its business letters, in all its bill-heads and letter paper, and in all its notice and also have its name so mentioned in all negotiable instruments and orders for money or goods purporting to be signed by or on behalf of the company; and in all bills of parcels, invoices, receipts and letters of credit of company.

Provided that if a company changes its name during the last two years, it shall display the old name, along with the new name as required in the clause (i) and (iii).

Provided further that ‘one person company’ shall be mentioned below the name of such company, wherever its name is required to be displayed.

(II) Registered Office Clause [Section 12]:

(i) A company shall within thirty days of its incorporation, shall have a registered office to which all communications and notices may be addressed.

(ii) The company shall furnish to the Registrar, verification of its registered office within a period of thirty days of its incorporation.

(III) Object clause [Section 4]: The memorandum of every company shall state:

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

(ii) The states to whose territories the objects extend, in case of a company (other than trading corporations), with objects not confined to one state.

(IV) Capital clause [Section 4]: In case of a company having a share capital:

(i) Unless the company is an unlimited company, the memorandum shall state the amount of share capital with which the company is to be registered and division thereof into shares of a fixed amount.

(ii) No subscriber to the memorandum shall take less than one share. and

(iii) Such subscriber to the memorandum shall write opposite to his name the number of shares he takes.

(V) Liability clause [Section 4]: The memorandum of a company limited by shares or by guarantee shall state that the liability of its members is limited. On the other hand, the memorandum of unlimited companies shall state that the liability of members is unlimited.

2 Discuss the contents of articles of association of a company.

Ans: Articles usually contain provisions relating to the following matters:

(i) Share capital, rights of shareholders, variation of these rights, payment of commissions and share certificates.

(ii) Lien on shares.

(iii) Calls on shares.

(iv) Transfer of shares.

(v) Transmission of shares.

(vi) Forfeiture of shares.

(vii) Conversion of shares into stock.

(viii) Share warrants.

(ix) Alteration of capital.

(x) General meetings and proceedings.

(xi) Voting rights of members, voting by poll and proxies. 

(xii) Directors, their appointment, remuneration, qualifications, powers and proceedings of board of directors.

(xiii) Manager.

(xiv) Secretary.

(xv) Dividends and reserves.

(xvi) Accounts, audit and borrowing powers.

(xvii) Capitalisation of profits.

(xviii) Winding up.

(xix) Entrenchment provisions: According to Section 5(3) of the Companies Act, 2013 the articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in case of a special resolution are met or complied with.

Form of Articles:

(I) The articles of a company shall be in the respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable to such company. 

(II) A company may adopt all or any of the regulations contained in the model articles applicable to such a company.

(III) Form and signature of articles: Articles shall be:

(i) Printed.

(ii) Divided into paragraphs and numbered consecutively. and

(iii) Signed by each subscriber of the memorandum and of association (who shall add his address, description and occupation, if any) in the presence of at least one witness who shall attest signature and shall likewise add his address, description and occupation, if any.

3. Mention some of the general principles regarding the contents of articles. 

Ans: The general principles regarding the contents of articles are (Section 5]:

(i) Articles must contain the regulations for the management of the company.

(ii) A company may adopt all or any of the regulations contained in the model articles.

(iii) If duly registered articles of a company registered after the commencement of the 2013 Act do not exclude or modify the regulations contained in applicable model articles, such regulations shall apply as if they were contained in the duly registered articles of the company.

(iv) The articles shall contain the prescribed matters.

(v) The prescribed matters shall not be deemed to prevent a company from including such additional matters in articles as may be considered necessary for its management.

4. How and to what extent can the articles be altered?

Ans: Procedure of alteration of articles [Section 14]:

(i) 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:

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.

(ii) Any alteration so made shall be as valid as if originally contained in the articles and be subject in like manner to alteration by special resolution.

(iii) A printed copy of the altered articles and a copy of the order of the Tribunal approving the alteration shall be filed with the Registrar within a period of fifteen days.

The limitations upon the powers of a company to alter its articles of association are:

(i) Must not be inconsistent with the Act: The articles cannot be altered beyond the provisions of the Companies Act, i.e. it must not be inconsistent with the Act.

(ii) Must not conflict with the memorandum: The alteration of the articles must not conflict with the provisions of the memorandum, i.e. it must not exceed the powers given by the memorandum. If there is any conflict between the articles and the memorandum, the memorandum shall prevail.

(iii) Must not sanction anything illegal: The articles must not be altered to sanction anything which is illegal.

(iv) Must be for the benefit of the company: The alteration of articles must be made bonafide for the benefit of the company.

(v) Must not increase liability of members: The alteration of articles must not increase liability of existing members to contribute to share capital of, or otherwise to pay money to the company.

(vi) Must be by special special resolution. resolution: The article must be altered by a special resolution.

(vii) Approval of Tribunal required: Where the articles are altered for converting a public company into a private company, such alteration can be made only with the prior approval of the Tribunal.

5. Can the Memorandum of Association and Article of Association be altered?

Ans: Procedure of alteration of Memorandum [Section 13]:

(a) A company may, by a special resolution and after complying with the procedures as specified in this section, alter the provisions of its memorandum.

(b) Any change in the name of a company shall not have effect except with the approval of the Central Government.

(c) The alteration of the memorandum relating to the place of the registered office from one State to another shall not have any effect unless it is approved by the Central Government. 

(d) A company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and-

(i) The details, in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any.

(ii) The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control.

6. Write a short note on constructive notice of memorandum and articles of association.

Ans: The memorandum and articles of association of a company, on registration assume the character of public documents which are open and accessible to every outsider dealing with the company. It is, thus the duty of every person dealing with a company to: 

(i) Inspect the documents. and

(ii) See that it is within the powers of the company to enter into the proposed contract.

This is known as the doctrine of constructive notice of memorandum and articles of association.

Anyone dealing with a company is, thus presumed not only to have read the memorandum and the articles but to have understood them properly. The doctrine of constructive notice of the memorandum and articles is a negative doctrine in the sense that it does not operate against the company. Instead, this doctrine operates against an outsider and prevents him from alleging that he did not know that the memorandum and articles rendered a particular act ultra vires the company.

7. Explain the doctrine of indoor management and state the exception, if any.

Ans: The doctrine of indoor management is an exception of the doctrine of constructive notice. The doctrine of constructive notice protects the company against outsiders but the doctrine of indoor management seeks to protect outsiders against the company. The outsiders dealing with the company are entitled to assume that as far as internal proceedings of the company are concerned, everything has been regularly done. They need not inquire into the regularity of internal proceedings. This rule is also known as Rule in Royal British Bank V. Turquand.

Exceptions to the doctrine of indoor management:

(i) Knowledge of irregularity: A person cannot claim the benefit under the rule of indoor management if he is dealing with a company which has actual or constructive notice of the irregularity regarding internal management.

(ii) Negligence: A person cannot claim benefit of rule of indoor management, where he is dealing with a company:

(a) Which could discover irregularity if he had made proper inquiries.

(b) Where circumstances surrounding the contract are so suspicious as to invite inquiry. and

(c) Outsider dealing with the company does not make proper inquiry.

(iii) Forgery: Where a person relies upon a document that turns out to be forged since nothing can validate forgery, this rule is not available.

(iv) Acts outside the scope of apparent authority: The company is not bound where an officer of a company enters into a contract with a third party and if the act of the officer is beyond scope of his authority.

1. Shelf prospectus shall remain valid for __________ year(s).

Ans: One.

2. A company can change terms of contracts mentioned in prospectus by way of:

(a) OR through postal ballot.

(b) OR.

(c) SR.

(d) SR through postal ballot.

Ans: (d) SR through postal ballot.

3. A private company cannot issue security by ___________.

Ans: Public offer.

1. What is a prospectus?

Ans: Section 2(70) of the Companies Act, 2013 defines a prospectus as, “Any document described or issued as a prospectus and includes a red herring prospectus referred to in or shelf prospectus referred to in Section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

2. What are the features of a prospectus?

Ans: Following important features must be present in a document to be called a prospectus:

(i) It must contain an invitation issued to the public.

(ii) It must be an offer inviting the public to subscribe or purchase. 

(iii) It must be made by or on behalf of a company or an intended company.

(iv) It must be in relation to any securities of the company.

(v) It may be in the form of a document, a notice, a circular, or an advertisement.

3. Define shelf prospectus.

Ans: According to Section 31 of Companies Act, 2013 shelf prospectus means “a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.”

4. Define abridged prospectus.

Ans. “Abridged prospectus” means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations on this behalf. No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus.

5. What is meant by a deemed prospectus?

Ans: Where a company allots or agrees to allot any securities of the company 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 to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company, and all enactments and rules of law as applicable to prospectus, shall apply to the document so issued.

1. List out matters to be stated in the prospectus.

Ans: The matters to be stated in prospectus are [Section 26 (1)]:

(a) Contents: Every prospectus issued by or on behalf of a public company shall be dated and signed. The prospectus shall disclose the names and addresses of CFO and also about sources of promoters’ contribution among other things. The prospectus shall contain such information and reports on financial information as may be specified by SEBI in consultation with CG.

(b) Statement: A declaration shall be included in the prospectus. The declaration shall state that nothing in the prospectus is contrary to the provisions contained in the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956 and SEBI Act, 1992 and the Rules and regulations made thereunder.

(c) Condition to be void: A condition requiring or binding an applicant for shares or debentures of a company to waive compliance or purporting to affect him with notice for any contract document or matter not specifically referred to in the prospectus shall be void.

(d) When prospectus can be issued: The section shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently.

2. Explain the provisions relating to shelf prospectus.

Ans: The provisions relating to filing of shelf prospectus are incorporated in Section 31.

These are:

(i) Who can file: Any class or classes of companies as specified by the SEBI by regulation may file a shelf prospectus with the Registrar of Companies.

(ii) Time of filing: A company filing a shelf prospectus with the Registrar shall not be required to file fresh prospectus at every stage of offer of securities by it within a period of validity of such shelf prospectus.

The 2013 Act prescribes a maximum validity period of one year for shelf prospectus which shall commence from the date of opening of the first offer of securities under that prospectus.

(iii) Information memorandum: A company filing a shelf prospectus shall be required to file an information memorandum on all material facts relating to:

(a) new charges created.

(b) changes in the financial position as have occurred between the first offer of securities. and

(c) previous offer of securities and succeeding offer of securities within such time as may be prescribed by the Registrar, prior to making of a second or subsequent offer of securities under shelf prospectus.

(iv) Validity: An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of first issue of securities under that prospectus.

3. Discuss the provisions related to registration of prospectus.

Ans: The provisions related to registration of prospectus are laid down in Section 26.

These are:

(i) Documents required [Section 26]: 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 registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorised in writing and having endorsed thereon or attached thereto:

(ii) Specification of copies: Every prospectus shall on the face of it, (to which above provision applies):

(a) State that a copy has been delivered for filing to Registrar.

(b) Specify any documents to be endorsed on or attached to the copy to be delivered. or

(c) Refer to statements included in the prospectus which specify those documents.

(iii) Consent required [Section 26(1)(a)]: The Registrar shall not register A prospectus in cases where:

(a) the requirements of Sections 26 have been complied with.

(b) The prospectus includes a statement purporting to be made by an expert and such expert has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for filing.

(iv) Time of registration [Section 26(8)]: No prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration and if a prospectus is so issued, it shall not be valid.

If default is made in complying with the above provisions, the Company and every person who is in default shall be punishable With fine which may not be less than 50,000 but may extend upto ₹ 3,00,000 or imprisonment for a term of three years or both.

(v) The articles of the company shall be in the forms specified in Table F, G, H, I and J of schedule 1 as applicable to the company.

4. State the liability for misstatement in prospectus.

Ans: The remedies available to a subscriber who has taken shares on the basis of a misstatement in a prospectus are:

(i) CIVIL LIABILITY | SECTION 35]:

Under Section 35(1) of Companies Act, 2013 any subscriber who has taken securities of a company on the basis of misleading prospectus and has sustained any loss or damage as a consequence thereof, the company and every person who is a director, promoter, expert or any authorised person at the time of issue of prospectus 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.

Section 35(2) states that no person shall be liable under Section 35(1), if he proves that-

(a) Having consented to become a director of the company, he withdraws his consent before the issue of the prospectus and that it was issued without his authority or consent. or

(b) On becoming aware of the issue, he gives a reasonable public notice that it was issued without his knowledge or consent.

(c) That, as regards every misleading-statement purported to be made by 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 said person had given the consent required by Act to the issue of the prospectus and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant’s knowledge, before allotment thereunder.

Section 35(3) says that if it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company, every person shall be personally liable for all the losses or damages that the subscriber of securities on the basis of misleading prospectus may have suffered.

(ii) CRIMINAL LIABILITY [SECTION 34]:

Where a prospectus issued, after commencement of this Act includes any untrue statement or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under Section 447 unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of issue of prospectus believe, that the statement was true.

5. What are the penalties for misrepresentation in prospectus? 

Ann: Penalty for fraudulently inducing persons to invest money[Section 36]:

Any person who either knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into, or to offer to enter into:

(a) Any agreement for or with a view to acquiring, disposing off, subscribing for, or underwriting securities. or

(b) Any agreement the purpose or 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 of obtaining credit facilities from any bank or financial institutions, shall be liable for action under Section 447.

Section 447:

Any person who is found to be 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 a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Where the fraud involves an amount less than ten lakh rupees or one percent of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to fifty lakh rupees or with both.

6. State the provisions relating to red herring prospectus.

Ans: Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. This means that in this case price is not disclosed, but the number of shares and the upper and lower price bands are disclosed. The issuer can state the issue size but the number of shares are determined later. Thus, a red herring prospectus is a preliminary prospectus in which the issue price is determined on the basis of demand.

Section 32 of the Act deals with red herring prospectus.

It provides that:

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

(2) Timing of issue: A company proposing to issue a red herring prospectus shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer.

(3) Variations: A red herring prospectus shall carry the same obligations as are applicable to a prospectus. Any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

(4) After offer: Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

7. What do you mean by statement in lieu of prospectus? Explain the provisions related to statement in lieu of prospectus. 

Ans: Statement in lieu of prospectus is defined in Section 70(1) of Companies Act, 1956 as, “A company having a share capital, which does not issue a prospectus on or with reference to its formation, or which has issued such a prospectus but has not proceeded to allot any of the shares offered to the public for subscription, shall not allot any of its shares or debentures unless at least three days before the first allotment of either shares or debentures, there has been delivered to the Registrar for registration a statement in lieu of prospectus.”

A statement in lieu of prospectus is a document like a prospectus issued by the promoters to raise requisite capital from private sources. This document may also be issued in place of prospectus when a private company converts itself into a public company.

The important provisions related to statement in lieu of prospectus are laid down in Section 53 of Companies Act, 2013:

(i) Signature: A statement in lieu of prospectus shall be signed by every person who is named therein as director or proposed director of the company or by his agent authorised in writing.

(ii) Form: Such writing shall be in the form and containing the particulars set out in Part I of Schedule III and, in the cases mentioned in Part-II of that Schedule setting out the reports specified therein, and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule.

(iii) Written statement: Every statement in lieu of prospectus shall have endorsed theron or attached thereto a written statement signed by that person, setting out the adjustments and giving the reasons thereof.

(iv) Not applicable: This section shall not apply to a private company.

(v) Penalty: If a company acts in contravention of the provisions, the company and every director of the company who wilfully authorises or permits the contravention, shall be punishable with fine which may extend to ten thousand rupees.

(vi) Untrue statement and penalty thereof [Section 70(5)]: Where a statement in lieu of prospectus delivered to the Registrar includes any untrue statement, any person who authorised the delivery of the statement in lieu of prospectus for registration shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to fifty thousand rupees or with both, unless he proves that the statement was immaterial or that he had reaso able ground to believe that at the time of the delivery for registration of the statement in lieu of prospectus believe, the statement was true.

8. Explain the provisions relating to information memorandum.

Ans: Information memorandum is a document containing material information about an issuer company which is circulated by a public company making an issue of securities to the public prior to filing of a prospectus.

Information Memorandum [Section 60B]:

(i) Circulation [Section 60B (1)]: A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus.

(ii) Red-herring prospectus [Section 60B(2)]: A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to opening of subscription lists and offer, as a red-herring prospectus, at least three days before opening of the offer.

(iii) Obligation [Section 60B(3)]: The information memorandum and red-herring prospectus shall carry the same obligations as are applicable in the case of prospectus.

(iv) Variations [Section 60B(4)]: Any variation between information memorandum and red-herring prospectus shall be highlighted as variations by issuing company.

(v) Intimation [Section 60B(5)]: Every variation shall be individually intimated to persons invited to subscribe to the issue of securities.

(vi) Encashment [Section 60B(6)]: In the event of issuing company or underwriters to issue have invited or received advance subscription by way of:

(a) Cash. or

(b) Post-dated cheque. or

(c) Stock-invest.

The company or such underwriters or bankers to the issue shall not encash above before date of opening of the issue, without having:

(a) Individually intimated the prospective subscribers of variation. and

(b) Offer an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock invest or return of subscription paid.

(vii) Time of withdrawal [Section 60B(7)]: The applicant or proposed subscriber shall exercise his right to withdraw from the application any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and underwriters.

(viii) Void application [Section 60B(8)]:

(a) Any application for subscription, shall be void, which is acted upon by the company or underwriters or bankers to the issue without having given:

(i) Enough information of any variations. or

(ii) The particulars of withdrawing the offer. or

(iii) Opportunity for cancelling post-dated cheques, or stock invest. or

(iv) Stop payments for such payments, [Section 60B(7) (a)].

(b) The applicants shall be entitled to receive a refund or returns of its post-dated cheques or stock-invest or subscription moneys or cancellation of its application, as if the said application had never been made, [Section 60B(7) (b)].

(c) The applicants are entitled to receive back their original per cent from the date of encashment till payment of realisation. [Section 60B(7)(c)].

(ix) Filing of final prospectus [Section 60B(9)]: Upon closing of offer of securities, a final prospectus stating therein,

(i) Total capital raised, whether by way of debt or share capital.

(ii) Closing price of securities. and

(iii) Any other details as were not completed in the red-herring prospectus, shall be filed:

(a) In case of a listed public company, with the Securities and Exchange Board and Registrar.

(b) in any other case, with the Registrar only.

9. What is meant by an untrue statement? What are the remedies available to a subscriber who has taken shares on the basis of misstatement in a prospectus?

Or

What is misstatement in a prospectus?

Or

Discuss the extent of liability for untrue statements in a prospectus.

Or

What are the remedies available to the public in case of misrepresentation in the prospectus?

Ans: According to Section 65(1) of the Companies Act, 1956 misstatement in prospectus or untrue statement means:

(i) A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included [Section 65(1)(a)].

(ii) Where the omission from a prospectus of any matter is calculated to mislead the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included [Section 65(1)(b)].

Remedies: The remedies available to a subscriber who has taken shares on the basis of a mis-statement in a prospectus are:

(a) Civil Liability.

(b) Criminal Liability.

CIVIL LIABILITY:

Any subscriber who has taken shares on the basis of misleading prospectus has remedies against: 

(I) Remedies against the company: A company is responsible for mis-statement in a prospectus only if it is shown that the prospectus was issued by the company or by someone with the authority of the company, for example, the Board of directors. Thus, a person may either rescind the contract to take back them shares or he may claim damages from the company.

(i) Rescind the contract: A person who takes shares on the faith of a prospectus containing false statements, may apply to the court for the contract to be set aside.

Following conditions should be satisfied to exercise the right to rescind by the subscriber:

(a) The statement was an omission of material fact.

(b) The prospectus must have induced shareholder to take shares.

(c) The omission of material fact was misleading.

(d) Those acting on behalf of company acted fraudulently.

(e) Misrepresentation must be of facts and not of law.

(f) That he has taken action promptly to rescind the contract.

(ii) Damages for deceit: The allottee may recover damages from the company for any loss he may have suffered if invitation to take shares originated from the company and persons making it on behalf of the company have fraudulently misrepresented material facts.

(II) Remedies against the directors, promoters and experts |Section62]: Following benefits are available to an aggrieved person who may claim:

(a) Compensation under Section62.

(b) Damages for non-compliance with the requirements of Section 56.

(c) Damages under general law.

Compensation Under Section 62:

(A) Persons who are liable [Section 62(1)]: Where a prospectus invites person to subscribe for shares in or debentures of a company, following persons shall be liable to pay compensation to every person who subscribes for any shares or debentures on the faith of prospectus for any loss or damage, he may have sustained by reason of any untrue statement included therein, that is to say:

(i) Every person who is a director of the company at the time of the issue of prospectus, [Section62(1)(a)].

(ii) Every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time; [Section 62(1)(b)].

(iii) Every person who is a promoter of the company, and [Section 62 (1)(c)].

(iv) Every person who has authorised the issue of the prospectus (expert). [Section 62(1)(d)].

(B) Persons when not liable:

(i) Defence available to the directors and promoters [Section 62 (2)]:

No person shall be liable under Section 62(1), if he proves:

(a) That having consented to become a director of the company, he withdrew his consent before the issue of prospectus, and that it was issued without his authority or consent, [Section 62 (2)(a)].

(b) Prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forth with gave reasonable public notice that it was issued without his knowledge or consent; [Section 62 (2)(b)].

(c) After the issue of prospectus and before allotment thereunder, he on becoming aware of any untrue statement therein, withdrew his consent to prospectus and gave reasonable public notice of the withdrawal and of the reason therefore, or [Section 62(2)(c)].

(d) (i) As regards untrue statement not purporting to be made on the authority or statement, he had reasonable ground to believe, and did up to the time of allotment of shares or debentures, as the case may be, believe, that the statement was true.

(ii) As regards every untrue statement purporting to be a statement by expert, he had reasonable ground to believe, and did up to the time of issue of prospectus believe, that the person making the statement was competent to make it and that person had given the consent required by Section58.

(iii) As regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document it was correct and fair representation of statement, or a correct copy of, or a correct and fair extract from the document. [Section 62(d)].

(ii) Defence available to an expert [Section 62 (3)]:

A person who has authorised the issue of prospectus in respect of an untrue statement purporting to be made by him as an expert, shall not be so liable, if he proves that:

(a) having given his consent under Section 58 to the issue of prospectus, he withdrew it in writing before delivery of a copy of prospectus for registration, Section 62(3)(a)].

(b) After delivery of a copy of prospectus for registration and before allotment hereunder, he, on becoming aware of untrue statement, withdrew his consent in writing and gave reasonable public notice of withdrawal and of reason therefore, or [Section 62(3)(b)].

(c) That he was competent to make the statement and that he had reasonable ground to believe, and did up to the time of allotment of shares or debentures, beleve that the statement was true [Section 52(3)(c)].

(C) Right to indemnify [Section 62(4)]:

(i) The directors of the company excluding those without whose knowledge or consent prospectus was issued, and every other person who authorised the issue thereof, shall be liable to indemnify the person referred below, as the case may be, against all damages, costs and expenses to which he may be made liable by his name, where:

(a) The prospectus specifies the name of a person as a director of company, or as having agreed to become a director thereof, and he has not consented to become a director, or has withdrawn his consent before the issue of prospectus, and has not authorised or consented to the issue thereof, [Section 62(4)(a)].

(b) The consent of a person is required under Section 58 to the issue of prospectus and he either has not given that consent or has withdrawn it before issue of prospectus. [Section 62(4)(b)].

(D) Right to recovery [Section 62(5)]:

Every person who becomes liable to make payment by virtue of his section may recover contribution, as in the cases of contract, from any other person, who if sued separately, would have been liable to make the same payment, unless the former person was, and the later person was not, guilty of fraudulent misrepresentation.

Damages for non-compliance with Section 56:

If the directors fail to comply with the provisions of Section 56(1), which deals with the matters to be stated and reports to be set out in prospectus, the allotee can recover damages from the directors if he proves that he has sustained damages.

Damages under general law:

According to Section 19 of the Indian Contract Act, 1872, an allotee may either:

(a) Rescind the contract. or

(b) Sue for damages.

Against the directors only when:

(i) Right to rescind has been lost as against the company.

(ii) The company has been wound up.

But the allottee may do so, only if following conditions are fulfilled:

(i) If there is a fraudulent misstatement.

(ii) If there is a false representation of some material facts.

(iii) Only original allottees can claim damages.

CRIMINAL LIABILITY [SECTION 63]:

(I) When applicable [Section 63(1)]: Where a prospectus issued, after commencement of this Act includes any untrue statement, every person who authorises the issue of prospectus shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to fifty thousand rupees, or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of issue of prospectus believe, that the statement was true.

(II) Consent required: A person shall not be deemed for the purpose of this section to have authorised the issue of a prospectus by reason only of his having given:

(a) The consent required by Section 58 to the inclusion therein of a statement purporting to be made by him as an expert, or

(b) The consent required Section 60(3).

10. Write a short note on the underwriting commission.

Ans: A company may pay a commission to any person in consideration of:

(a) His subscribing or agreeing to subscribe, whether absolutely or conditionally for any shares in, or debentures of the company. or

(b) His procuring or agreeing to procure subscriptions, whether absolute or conditionals, for any shares, or debentures of the company.

If the following conditions are fulfilled, viz:

(i) Payment of commission must be authorised by articles.

(ii) Commission paid or agreed to be paid does not exceed in the case of shares, five per cent (5%) of price at which shares are issued or amount or rate authorised by articles, whichever is less, and in case of debenture, two and a half per cent (24%) of price at which debentures are issued or the amount or rate authorised by articles, whichever is less.

(iii) Amount or rate per cent of the commission paid or agreed to be paid is:

(a) In the case of shares or debentures offered to public for subscription, disclosed in the prospectus. and

(b) In the case of shares or debentures not offered to public for subscriptions, disclosed in the statement in lieu of prospectus, or in a statement in prescribed form signed in like manner as a statement in lieu of prospectus and filed before payment of commission with the Registrar and where a circular or notice, not being a prospectus inviting subscription for shares or debentures, is issued, also disclosed in that circular notice.

(iv) The number of shares or debentures which persons have agreed for a commission to subscribe absolutely or conditionally is disclosed in the manner aforesaid. and

(v) A copy of contract for payment of, the commission is delivered to the Registrar at the time of delivery of prospectus or statement in lieu of prospectus for registration.

11. State the conditions when underwriting commission is not payable.

Ans: As per Section 76(4A) of companies Act, 2013, no commission shall be paid to any person on shares or debentures which are not offered to the public for subscription.

Exception to this provision: Accordingly, a company may pay commission to underwriter in respect of shares or debentures already subscribed, if following two conditions are simultaneously fulfilled:

(i) Where a person has subscribed or agreed to subscribe for any shares in, or debentures of, the company and before the issue of prospectus or statement in lieu thereof any other person or persons has or have subscribed for any or all of those shares or debentures. and

(ii) That fact together with aggregate amount of commission payable under this section in respect of such subscription is disclosed in such prospectus or statement.

1. Bonus or right shares are issued to ____________.

(a) Preference shareholders.

(b) Equity shareholders.

(c) Both (a) and (b).

(d) Debentureholders.

Ans: (b) Equity shareholders.

2. Share premium is a/an ____________ capital.

Ans: Owned.

3. Share has a ____________ value.

Ans: Nominal.

4. Allotment of shares must be unconditional.

Ans: True.

1. Distinguish between transfer and transmission of share.

Ans: Following are the differences between transfer of shares and transmission of shares:

2. Write a note on GDR.

Ans: According to Section 2(44) of the Companies Act, 2013 “Global Depository Receipt” means any “instrument in the form of a depository receipt, by whatever name called created by a foreign depository outside India and authorised by a company making an issue of such depository receipts. GDR is an instrument created by the overseas depository Bank outside India. These are issued against ordinary shares of FCCB of an Indian company. A special resolution is required to be passed and filed in e-Form MGT-14 to ROC to authorise the issue of depository receipts.

3. Write a note on book building.

Ans: SEBI guidelines defines book building as “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document. Book building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

1. State the provisions of the Companies Act 2013 regarding issue of shares at a premium. For what purpose can the share premium be utilised? 

Ans: The provisions related to issue of shares at a premium are [Section 52].

(I) Transfer to securities premium account [Section 52(1)]:

(i) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to aggregate amount or value of premiums on those shares shall be transferred to an account, to be called “securities premium account”. and

(ii) The provisions of this Act related to reduction of securities capital of a company shall, except as provided in this section apply as if securities premium accounts were paid-up securities capital of the company.

(II) Utilisation of premium amount [Section 52(2)]: The share premium account may, notwithstanding anything in Section 52(1), be applied by the company:

(a) In paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

(b) In writing off preliminary expenses of the company.

(c) In writing off expenses of, or commission paid or discount allowed on, any issue of shares or debentures of the company.

(d) In providing for premium payable on redemption of any redeemable preference shares or of any debentures of the company. or

(e) For the purchase of its own shares or other securities under section 68.

2. Explain the provisions related to issue of shares at a discount. 

Or

State the rules regarding issue of shares at a discount.

Ans: The provisions related to issue of shares at a discount are [Section 79]: 

(I) Applicability [Section 79(1)]: A company shall not issue shares at a discount except as provided in this section.

(II) Conditions Section 79(2)]: A company may issue shares at a discount in the company of a class already issued, if following conditions are fulfilled, viz.

(i) Issue of shares at a discount is authorised by a resolution passed by the company in general meeting, and sanctioned by the Central Government.

(ii) The resolution specifies maximum rate of discount at which shares should be issued, provided that no such resolution shall be sanctioned by central government if maximum rate of discount specified in the resolution exceeds ten per cent, unless central government is of opinion that a higher percentage of discount may be allowed in the special circumstances of the case.

(iii) Not less than one year has, at the date of such issue, elapsed since the date on which the company was entitled to commence business. and

(iv) Shares to be issued at a discount are issued within two months after the date on which the issue is sanctioned by the central government or within such extended time as the central government may allow.

(III) Application to central government. [Section 79(3)]: Where a company has passed a resolution authorising issue of shares at a discount it may apply to central government for an order sanctioning the issue, and on any such application, central government if, having regard to all the circumstances of the case, it thinks proper to do so, may make an order sanctioning issue on such terms and conditions as it thinks fit.

(IV) Information in prospectus [Section 79(4)]: Every prospectus relating to issue of shares shall contain particulars of discount allowed on issue of shares or of so much of that discount as has not been written off at the date of issue of prospectus.

3. What is meant by ‘allotment of shares’? Discuss the rules regarding allotment of shares in a company.

Ans: Application of shares: An application of shares is an offer by a prospective investor to subscribe for a specified number of shares in a company as stated in the application form which is available with the prospectus. Following points are relevant for application of shares:

(i) The application form must be properly filled in and forwarded to the company or to bankers to the issue.

(ii) The application money may be in the form of cash/cheque/bank draft/ stock investment.

(iii) The number of shares applied by an applicant must be in multiple of the number of shares (tradable/marketable lots).

(iv) The application must be submitted before closing of subscription.

Allotment of shares: The application of shares is treated as an offer of public which must be accepted by the company. After the minimum subscription amount is received and required legal formalities are over, directors of the company proceed to make allotment of shares. Shares are allotted within 120 days of issue of prospectus. Allotment of shares create a contract between the company and applicants, who now become allottees, get the status of shareholders or members.

Provisions related to allotment of shares:

(A) General provisions:

(i) Proper authority: Allotment of shares must be made at a Board meeting by the directors or a committee of the Board.

(ii) Absolute and unconditional: Allotment of shares must be absolute and unconditional.

(iii) Reasonable time: Allotment of shares must be made within the specified reasonable time. 

(iv) Communicated: Allotment must be communicated to the applicant of shares.

(v) Revocation of offer: Before acceptance is communicated, application of shares may be revoked at any time.

(B) Special provisions:

(I) When no public offer is made (private allotment of shares) [Section 70(1)]: A company having a share capital, which does not issue a prospectus on or with reference to its formation, or which has issued such a prospectus but has not proceeded to allot any of its shares offered to the public for subscription, shall not allot any of its shares or debentures:

(i) Unless at least three days before first allotment of either shares or debentures, there has been delivered to the Registrar for registration, a statement in lieu of prospectus [Section 70(1)(a)].

(ii) Such statement shall be signed by every person who is named therein as a director or proposed director of the company or by his agent [Section 70(1)(b)].

(iii) Authorised in writing in the form and containing particulars set out in Part I and Part II of Schedule III and the said Part 1 at Part II shall have effect subject to the provisions contained in Part III of that Schedule |Section 70(1)(c)].

This section does not apply to a private company [Section 70(3)].

(II) When public offer is made:

(i) First allotment of shares: Allotment of shares refers to the process of allocating shares to the shareholders who have applied for them. When a company issues new shares, it invites applications from the public or existing shareholders. Once the company receives the applications, it processes them and decides on the allotment of shares.

(ii) Subsequent allotment of shares: All the statutory provisions applicable to first allotment of shares are applicable except:

(a) Minimum subscription [Section 69(1)].

(b) Application money must be deposited in a scheduled bank. [Section 69(4)]

(iii) Allotment of debentures: All the statutory provisions applicable to first allotment of shares are applicable except:

(a) Minimum subscription [Section 69(1)].

(b) Amount payable on application [Section 69(3)].

(c) Application money must be deposited in a scheduled bank [Section 69(4)].

4. What are the restrictions on the first allotment of shares?

Ans: Restrictions/Prohibition of allotment unless minimum subscription received [Section 69]:

(I) When allotment to be made [Section 69(1)]: No allotment shall be made of any securities of a company offered to the public for subscription, unless amount stated in the prospectus as the minimum amount which in the opinion of Board of directors, must be raised by the issue of share capital in order to provide for matters specified in clause 5 of Schedule II has been subscribed, and sum payable on application for amount stated has been paid to and received by the company, whether in case or by a cheque or other instrument which has been paid. 

(II) Minimum subscription [Section 69(2)]: The amount so stated in the prospectus shall be reckoned exclusively of any amount payable otherwise than in money and is in this Act referred to as “the minimum subscription.” 

(III) Amount payable [Section 69(3)]: The amount payable on application on each share shall not be less than five percent of nominal amount of share.

(IV) Amount to be deposited and return thereon [Section 69(4)]:

(i) Scheduled Bank [Section 69(4)(a)]: All moneys received form applicants for shares shall be deposited and kept deposited in a Scheduled Bank:

(a) Until the certificate to commence business is obtained under Section 149.

(b) Where such certificate has already been obtained, until the entire amount payable on applications for shars in respect of minimum subscription has been received by the company.

(ii) Return of amount [Section 69(4) (b)]: Where such amount has not been received by the company within the time or expiry of which moneys received from applications for shares are required to be repaid without interest under Section 69(5), all moneys received from applicants for shares shall be returned in accordance with the provisions of that sub-section.

(iii) Penalty [Section 69(4) (c)]: In the event of any contravention of the provisions of this subsection, every prometer, director or other person who is knowingly responsible for such contravention shall be punishable with fine which may extend to fifty thousand rupees.

(V) Repayment [Section 69(5)]: 

(i) Provisions not complied within 120 days [Section 69(5)(a)]: If the conditions aforesaid have not been complied with on the expiry of one hundred and twenty days after first issue of prospectus, all moneys received from applicants for shares shall be forthwith repaid to them without interest. and

(ii) Repayment with interest not within 130 days [Section 69(5)(b)]: If any such money is not so repaid within one hundred and thirty days after the issue of prospectus, directors of the company shall be jointly and severally liable to repay that money with interest at the rate of six per cent per annum from the expiry of one hundred and thirtieth day.

Provided that a director shall not be so liable if he proves that default in repayment of money was not due to any misconduct or negligence on his part:

(VI) Conditions to be void (Section 69 (6)]: Any condition purporting to require or bind any applicant for shares to waive compliance with any requirement of this section shall be void.

(VII) Exception [Section 69(7)]: This section except Section 69(3), shall not apply in relation to any allotment of shares subsequent to the first allotment of shares offered to the public for subscription.

5. What do you mean by irregular allotment? Discuss the effects of irregular allotment.

Or

Write a short note on irregular allotment of shares.

Ans: According to Section 71, an allotment made by a company to an applicant in contravention of Section 69 or 70 shall be treated as irregular allotment. In the following cases, an allotment is treated as irregular where,

(i) Minimum subscription has not been received.

(ii) A copy of statement in lieu of prospectus has not been delivered to the Registrar at least three days before allotment.

(iii) A copy of prospectus has not been filed with the Registrar

(iv) A minimum of five per cent of nominal value of shares has not been received by way of application money.

(v) Application money has not been kept in a scheduled bank;

(vi) Stock exchange has either not listed shares within ten weeks or has refused permission.

(vii) Subscription list is opened before the beginning of the fifth day from the date of issue of prospectus.

Effects of irregular allotment [Section 711:

(i) Voidable at the option of allottee [Section 71(1)]: An allotment made by a company to an applicant in contravention of provisions of Section 69 or 70 shall be voidable at the instance of applicant:

(a) Within two months after the holding of the statutory meeting of the company, and not later [Section 71 (1) (a)]. or

(b) In any case where the company is not required to hold a statutory meeting or where allotment is made after holding of a statutory meeting, within two months after the date of Company Po allotment, and not later [Section 71 (1)(b)]. 

(ii) Winding-up [Section 71(2)]: The allotment shall be voidable aforesaid, notwithstanding that the company is in course of being wound up.

(iii) Director’s liability [Section 71(3)]: If any director of a company knowingly contravenes, or wilfully authorises or permits the contravention of any of the provisions of Section 69 or 70 with respect to allotment, he shall be liable to compensate the company and allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby:

Provided that, proceedings to recover such loss, damages or costs shall not be commenced after expiration of two years from the date of allotment.

6. Define call in respect of a share. State the usual conditions to be followed in connection with making a call.

Ans: A company’s demand upon its shareholders to pay the whole or part of the balance remaining unpaid on each share is referred to as a call. It is made in pursuance of a resolution of the Board of directors and in accordance with terms of the Articles. It may be made at any time during the lifetime of the company or during its winding-up.

Following are the usual conditions observed in connection with making of a call:

(i) Compliance with provisions of the Act: The provisions of the Companies Act, 1956 mentioned in Regulation 13 of Table A and articles of the company are to be followed before making a call.

(ii) Resolution of the Board: According to Section 179(1) of 2013 Act, the Board of directors of a company shall exercise the power to make calls on shareholders in respect of money unpaid on their shares on behalf of the company and it shall do so only by means of resolutions passed at meetings of the Board.

(iii) Amount, place and time of payment: The resolution of making the call must specify:

(a) Amount of call.

(b) Time and place of payment. and.

(c) To whom the call is to be paid.

(iv) Notice of call: A notice of payment of call must be served to members in accordance with provisions of the Companies Act.

(v) Bonafide and for the benefit of the company: The call must be made bonafide and exercised in the interest of the company.

(vi) Uniform basis: Where after the commencement of this Act, any calls for further share capital are made on shares, such calls shall be made on a uniform basis on all shares falling under the same class [Section 91].

(vii) Calls in advance: A company may, if so authorised by its articles, accept from any member whole or a part of the amount remaining unpaid on any shares held by him, although no part of that amount has been called up [Section 92].

7. What do you mean by forfeiture of shares?

Ans: Forfeiture of shares means cancellation of shares held by a defaulting member. If a shareholder fails to pay the amount due on allotment or on any call within a specified period, directors may cancel his shares. This is called forfeiture of shares.

Following are the legal provisions as per Companies Act, 2013 regarding forfeiture of shares:

(i) Power of company: The company must be empowered by its Articles of Association to forfeit its shares or it may adopt Table ‘A’ for this purpose.

(ii) Issue of notice: The company must serve a notice to defaulting shareholders asking them to pay outstanding call money together with interest on outstanding calls, if any.

(iii) Period of notice: The notice must mention a date on or before which payment must be made by defaulting shareholders. The date must not be earlier than fourteen days from the date of serving the notice.

(iv) Contents of notice: The notice must state that the Board will forfeit shares if payment is not made within such prescribed date.

(v) Resolution of the board: If shareholders fail to pay arrear money within prescribed time, a resolution affecting forfeiture of shares must be passed in the meeting of Board of Directors.

8. What are the effects of forfeiture of shares?

Ans: Following are the effects of forfeiture of shares:

(i) Cessation of membership: A person whose shares have been forfeited ceases to be a member in respect of forfeited shares. But notwithstanding forfeiture he remains liable to pay to company all monies which at the date of forfeiture, were payable by him to company in respect of shares.

(ii) Cessation of liability: The liability of a person whose shares have been forfeited ceases if and when the company receives payment in full of all such money in respect of shares. Forfeited shares become property of the company. These may be reissued or otherwise disposed off on such terms and in such a manner as the Board may think fit.

9. What is transmission of shares?

Ans: Transmission of shares is a process by operation of law where the Shares registered in a Company in the name of deceased person or an insolvent person are registered in the name of his legal heirs by the Company on proof of death or insolvency as the case may be.

Transmission of shares takes place when a registered member dies or is adjudicated insolvent or lunatic by a competent court.

Articles of the Company usually provide for the provisions of Transmission of shares. In absence of such provisions, the Company will follow Regulations 23 to 27 of Table F to govern the provision of Transmission of shares.

As per the above regulations, legal representatives are entitled to the shares held by the deceased person and the company must accept the evidence of succession.

What is Evidence of Succession?

(i) Succession Certificate.

(ii) Letter of Administrations.

(iii) Probate.

(iv) Evidence acquired by the Board of Directors.

Important documents required for transmission of shares:

(i) Certified Copy of death certificate.

(ii) Succession Certificate.

(iii) Probate.

(iv) Specimen Signature of successor.

Transmission in case of small shareholding:

Transfer may be considered and affected by the Company without obtaining a succession certificate. The Board of Directors shall ensure that sufficient evidence has been produced by the legal heirs.

Following documents shall be submitted to the Company:

(i) Certified copy of death certificate. 

(ii) Particulars and signature of all legal heirs.

(iii) Affidavit on non-judicial stamp paper certified by a first class magistrate or notary public.

(iv) Deed of Disclaimer.

(v) Indemnity bond on non-judicial stamp páper.

(vi) Pan of legal heir.

10. What do you mean by buy-back of shares? Discuss the important provisions relating to buy-back of shares.

Ans: Power of company to purchase its own securities (buy-back of shares) [Section 77 (A)]:

(I) Meaning of “buy-back” [Section 77A(1)]: Notwithstanding anything contained in this Act, but subject to the provisions of Section 77A(2) and Section 77B, a company may purchase its own shares or other specified securities, i.e. “buy-back” its shares out of:

(i) Its free reserves. or

(ii) Securities premium account. or.

(iii) Proceeds of any shares or other specified securities.

Provided that no buy-back of any kind of shares or other specified securities shall be made out of proceeds of an earlier issue of same kind of shares or same kind of other specified securities. 

(II) Sources of buy-back [Section 77A(5)]: The buy-back may be:

(i) From existing securityholders on a proportionate basis, or [Section 77A(5)(a)].

(ii) From the open market, or [Section 77A(5)(b)].

(iii) From odd lots, that is to say, where lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange, or [Section 77A(5)(c)]. 

(iv) by purchasing securities, issued to employees of the company pursuant to a scheme of stock option or sweat equity. [Section 77A(5)(d)]. 

(III) Procedure for buy-back [Section 68A(2)]: No company shall purchase its own shares or other specified securities, unless:

(i) Buy-back is authorised by its articles.

(ii) A special resolution has been passed in the general meeting of the company authorising buy-back.

(IV) Notice of meeting [Section 77A(3)]: The notice of meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating:

(i) A full and complete disclosure of all material facts.

(ii) Necessity for buy-back.

(iii) Class of security intended to be purchased under buy-back.

(iv) Amount to be invested under buy-back.

(v) Time limit for completion of buy-back.

(V) Time of completion of buy-back [Section 77A(4)]: Every buy-back shall be completed within twelve months from the date of passing special resolution or a resolution passed by the Board under Section 77A(2)(b).

(VI)  Declaration of solvency [Section 77A(6))]: The company shall before making such buy-back, file with the Regatear and Securities and exchange Board of India (SEBI) a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that:

(i) The Board has made a full enquiry into affairs of the company as a result of which they have formed an opinion that:

(a) It is capable of meeting its liabilities. and

(b) Will not be rendered insolvent within a period of any year of the date of declaration adopted by the Board.

(ii) Such declaration shall be signed by at least two directors of the company, one of whom shall be managing director, if any: 

Provided that no declaration of solvency shall be filed with Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange.

11. What are the restrictions on buy-back of shares?

Ans: (A) Prohibition for buy-back [Section 77B]:

(i) No company shall directly or indirectly purchase its own shares or other specified securities:

(a) Through any subsidiary company including its own subsidiary companies. or

(b) Through any investment company or group of investment companies. or

(c) If a default is made by the company in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, is subsisting [Section 77B(1)].

(ii) No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with the provisions of Sections 159, 207 and 211. [Section 77B(2)].

(B) Restrictions on purchase by company, or loans by company for purchase of its own or its holding company’s shares [Section 77]:

No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of Section 100 to 104 or of Section 102.

12. What are the conditions to be fulfilled by a company after buy-back?

Ans: Following conditions must be fulfilled by a company after buy-back:

(i) Cancellation of shares [Section 77A(7)]: Where a company buys-back its own securities, it shall extinguish and physically destroy securities bought-back within seven days of the last date of completion of buy-back.

(ii) Further issue [Section 77B(8)]: Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make further issue of same kind of shares or other specified securities within a period of six months except by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

(iii) Register of bought-back securities [Section 77B (9)]: Where a company buy-back its securities under this section, it shall maintain a register of:

(a) Securities so bought.

(b) Consideration paid for the shares or securities bought-back.

(c) Date of cancellation of share or securities.

(d) Date of extinguishing and physically destroying of share or securities. and

(e) Such other particulars as may be prescribed.

(iv) Filing of return [Section 77(A)(10)]: A company shall after completion of buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to buy-back within thirty days of such completion, as may be prescribed.

(v) Transfer to Capital Redemption Reserve Account | Section 77AA]: Where a company purchases its own shares out of free reserves, or securities premium account then a sum equal to nominal value of share so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

(vi) Penalty [Section 77A(ID)]: If a company makes default in complying with the provisions of this section or any rules made thereunder, or any regulations made under Section 77A(2)(1), the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.

13. What do you mean by issue of bonus shares or capitalisation of profits/reserves?

Ans: When undistributed profits and reserves are converted into capital, the company divides the capital among members, by issuing fully paid equity shares in proportion to their existing equity shareholding. The shares so issued are called bonus shares as shareholders are not required to pay anything for this. A company can capitalise its profits and reserves, only if it is empowered by its Articles of Association.

14. What are the provisions of the Companies Act, 2013 for capitalisation of profits/reserves?

Ans: The provisions of the Companies Act, 2013 for capitalisation of profits/reserves under different sections are:

(i) Section 123: It provides that a company whether listed or unlisted cannot capitalise its profits or reserves for the purpose of issuing fully paid bonus shares or making partly paid shares into fully paid.

(ii) Section 52(3): It provides that share premium cannot be applied in paying up unissued shares of company to be issued to members as fully paid bonus shares.

(iii) Section 55(4): It provides that the Capital Redemption Reserve Account may be applied by the company in paying up unissued shares of company to be issued to members of company as fully paid bonus shares.

15. What are the objectives of issuing bonus shares?

Ans: The objectives of issuing bonus shares are:

(i) To increase the permanent capital of the company.

(ii) To help the company to maintain cash reserves.

(iii) To enhance goodwill of the company.

(iv) To reduce undistributed profits of a company and thus it reduces demand for higher dividends.

(v) To reflect actual capital employed by the company.

16. What are the advantages and disadvantages of bonus issues?

Ans: The advantages of bonus issue accrue both to company and to shareholders:

(A) To the company:

(i) Conservation of cash: Issue of bonus shares does not involve cash outflow. The company can retain earnings as well.

(ii) Increasing creditworthiness: Issue of bonus shares enables a company to convert its profit into permanent capital and increase creditworthiness of the company.

(iii) Reflection of real capital and earning capacity: By issuing bonus shares, the balance sheet of the company will reveal a more realistic picture of capital structure and earning capacity of the company, as it represents actual capital employed in the company.

(iv) Retention of managerial control: Any new issue of shares has a danger of dilution of managerial control over the company. Since bonus shares are issued to existing shareholders in proportion to their current holdings, there is no threat of dilution of managerial control over the company.

(B)To the shareholders:

(i) Additional dividend: The shareholders get a share of undistributed profits through issue of bonus shares in addition to usual cash dividend.

(ii) No tax liability: By issuing bonus shares, no dividend is paid in the form of cash, so shareholders are not required to pay any income tax on the value of bonus shares issued.

(iii) Saving of cash: When partly paid shares are fully paid, shareholders need not pay cash on final call.

The disadvantages of bonus issue are:

(i) Decline in the rate of dividend: The rate of dividend per share decreases as whole amount of dividend is distributed among large number of shares.

(ii) Lengthy procedure: The issue of bonus shares involves a lengthy procedure.

(iii) Speculative dealing in shares: Issue of bonus shares leads to speculation in dealings of shares of a company in stock market.

17. What are the conditions to be fulfilled for the issue of bonus shares?

Ans: The conditions to be fulfilled for issue of bonus shares are:

(i) Undistributed profit: Sufficient amount of undistributed profits and reserves either capital or revenue in nature must be available.

(ii) Authorised by AOA: Issue of bonus shares must be permitted by Articles of Association.

(iii) Adequate unissued share capital: Adequate unissued share capital covered by authorised share capital must be present. If it is not present then before issue of bonus shares, a resolution must be passed by shareholders in general meeting to increase authorised share capital.

(iv) Passed in general meeting: The Board of Directors and shareholders must recommend such issue in general meeting.

(v) Compliance with provisions: The issue of bonus shares must be in compliance with provisions of Companies Act, 2013 under Section 123(5), Section 52(2) and Section 55(4).

(vi) Compliance with SEBI: The SEBI guidelines for issue of bonus shares must be complied with.

18. Enumerate guidelines issued by SEBI for issues of bonus shares.

Ans: Issue of bonus shares is an important financial decision and it should be in conformity with guidelines issued by Securities and Exchange Board of India (SEBI). The guidelines prescribed in SEBI Guidelines, 2000 for issue of bonus shares are:

(i) Applicable to listed companies: These guidelines are applicable to all listed companies.

(ii) No bonus issue, pending conversion of FCDs/PCDs: No company shall, pending conversion of Fully Convertible Debentures (FCDs) or Partly Convertible Debentures (PCDs) issue any shares by way of bonus issue, unless similar benefit is extended to holders of such FCDs/PCDs through reservation of shares in proportion to such convertible part of FCDS or PCDs. The shares so reserved may be issued at the time of conversion(s) of such debentures on the same terms, on which bonus issues were made.

(iii) Bonus issue from free reserves: Bonus issue shall be made out of free reserves built out of genuine profits or share premium collected in cash only.

(iv) Revaluation reserve cannot be capitalised: Reserves created by revaluation of fixed assets cannot be capitalised.

(v) No issue in lieu of dividend: Declaration of bonus issue cannot be made in lieu of dividend.

(vi) Partly paid shares to be made fully paid-up: Bonus issue is not made unless partly paid shares (if any existing) are converted into fully paid-up.

(vii) No default in payment of principal or interest: The company must have not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof.

(viii) No default in payment of statutory dues: The company must have not defaulted in payment of statutory dues of employees, such as contribution to Provident Fund, Gratuity, Bonus, etc.

(ix) Implementation within six months: A company which announces its bonus issue after approval of Board of Directors must implement proposal within a period of six months, from date of such proposal and shall not have the option of changing the decision.

(x) Provision of Articles of Association: There should be provision in Articles of Association of company for capitalisation of reserves, etc. and if not, company shall pass a resolution at its general meeting, making provision in Articles of Association for capitalisation.