concept of securities in a company

8/10/2019 Concept of Securities in a Company

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CONCEPT OF SECURITIES IN A COMPANY

Guided by: Dr. Qazi Usman

SUBMITTED BY:

MD. ABID HUSSAIN ANSARIB.A. LL.B. (HONS.) 6

THSEMESTER


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Acknowledgement

Firstly, I would like to express my profound sense of gratitude towards the almighty

ALLAH for providing me with the authentic circumstances which were mandatory for the

completion of my project.

Secondly, I am highly indebted to Prof. Dr. Qazi Usman at Faculty of Law, Jamia Millia

Islamia University, New Delhi for providing me with constant encouragement and guidance

throughout the preparation of this project.

Thirdly, I thank the Law library staff who liaised with us in searching material relating to the

project.

My cardinal thanks are also for my parents, friends and all teachers of law department in our

college who have always been the source of my inspiration and motivation without which I

would have never been able to unabridged my project.

My father, a lawyer with large access to books of value has been of great help to me.

Without the contribution of the above said people I could have never completed this project.

Mohd. Abid Hussain Ansari

B.A.LL.B (Hons) 6thSemester

3rdYear


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Table of Contents

1. Introduction to Corporate Law 3

2. Brief History of Company Law in India and England 4

3. Background of English Company Law 4

4. Development of Indian Company Law 6

5. Company as a Business Medium - Meaning of a Company 8

6.

Nature and Characteristics of a Company 10

7.

Concept of Security (s) in a Company 19

8.

Share Capital of a Company 19

9. Debentures 24

10.Sweat Equity Shares 26

11.Derivatives 26

12.Government Security 28

13.

Bonds 28

14.Bibliography 37


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Introduction to Corporate Law

What is the common structure of the law of business corporationsor, as it would be put in

some jurisdictions, company lawacross different national jurisdictions? Although this

question is rarely asked by corporate law scholars, it is critically important for the

comparative investigation of corporate law. Recent scholarship often emphasizes the

divergence among European, American, and Japanese corporations in corporate governance,

share ownership, capital markets, and business culture.1But, notwithstanding the very real

differences across jurisdictions along these dimensions, the underlying uniformity of the

corporate form is at least as impressive. Business corporations have a fundamentally similar

set of legal characteristicsand face a fundamentally similar set of legal problemsin all

jurisdictions.

Consider, in this regard, the basic legal characteristics of the business corporation. To

anticipate our discussion below, there are five of these characteristics, most of which will be

easily recognizable to anyone familiar with business affairs. They are: legal personality,

limited liability, transferable shares, delegated management under a board structure, and

investor ownership. These characteristics respondin ways I will try to exploreto the

economic exigencies of the large modern business enterprise. Thus, corporate law

everywhere must, of necessity, provide for them. To be sure, there are other forms of

business enterprise that lack one or more of these characteristics. But the remarkable fact

and the fact that we wish to stressis that, in market economies, almost all large-scale

business firms adopt a legal form that possesses all five of the basic characteristics of the

business corporation. Indeed, most small jointly-owned firms adopt this corporate form as

well, although sometimes with deviations from one or more of the five basic characteristics to

fit their special needs.

It follows that a principal function of corporate law is to provide business enterprises with a

legal form that possesses these five core attributes. By making this form widely available and

user-friendly, corporate law enables entrepreneurs to transact easily through the medium of

1 Ronald J. Gilson and Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between Corporation

Governance and Industrial Organization, 102 YALE LAW JOURNAL 871 (1993); Mark J. Roe, Some Differences in

Corporation Structure in Germany, Japan, and the United States, 102 YALE LAW JOURNAL 1927 (1993);

Bernard S. Black and John C. Coffee, Hail Britannia? Institutional Investor Behavior under Limited Regulation,

92 MICHIGAN LAW REVIEW 1997 (1994); COMPARATIVE CORPORATE GOVERNANCE: ESSAYS AND MATERIALS(Klaus J. Hopt and Eddy Wymeersch (eds.), 1997); and Mark J. Roe, POLITICAL DETERMINANTS OF CORPORATE

GOVERNANCE (2003).


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the corporate entity, and thus lowers the costs of conducting business. Of course, the number

of provisions that the typical corporation statute2devotes to defining the corporate form is

likely to be only a small part of the statute as a whole. Nevertheless, these are the provisions

that comprise the legal core of corporate law that is shared by every jurisdiction.

Brief History of Company Law in India and England

The history and development of Company Law in India is closely linked with that of England

and for that reason it becomes essential to have a brief account of the history of English

Company law for proper appreciation of our law.

Background of English Company Law

The history of modern company law in England began in 1844 when the Joint Stock

Companies Act was passed. The Act provided for the first time that a company could be

incorporated by registration without obtaining a Royal Charter or sanction by a special Act of

Parliament. The office of the Registrar of Joint Stock Companies was also created. But the

Act denied to the members the facility of limited liability. The English Parliament in 1855

passed the Limited Liability Act providing for limited liability to the members of a registered

company. The Act of 1844 was superseded by a comprehensive Act of 1856 which marked

the beginning of a new era in company law in England. This Act introduced the modern

mode of creating companies by means of Memorandum and Articles of Associations.

The first enactment to bear the title "Companies Act" was the Companies Act, 1862. By these

Acts some of the modern provisions of a company were clearly laid down. Firstly, two

documents, namely,

a.

the Memorandum of association, and

b.

The Articles of association formed the integral part for the formation of a limited

liability company. Secondly, a company could be formed with liability limited by

guarantee.

c. Thirdly, any alteration in the object clause of the memorandum of association was

prohibited. Provisions for winding-up were also introduced. Thus, the basic structure

2 Corporation statute to refer to the general law that governs corporations, and not to a corporations

individual charter (or articles of incorporation, as that document is sometimes also called).


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of the company as we know had taken shape. Sir Francis Palmerdescribed this Act

as the magna carta of co-operative enterpr ises.

The Companies (Memorandum and Association) Act, 1890 made relaxation with regard to

change in the object clause under the leave of the Court obtained on the basis of special

resolution passed by the members in general meeting. Then the liability of the directors of a

company was introduced by the Directors Liability Act, 1890, and the compulsory audit of

the companys accounts was enforced under the Companies Act, 1900.

The concept of private company was introduced for the first time in the Companies Act,

1908. The earlier ones were called public companies. Two subsequent Acts were passed in

1908 and in 1929 to consolidate the earlier Acts. The Companies Act, 1948 which was the

Principal Act in force in England then was based on the report of a Committee under Lord

Cohen. The Act introduced inter alia another new form of company known as exempt private

company.

Another outstanding feature of the 1948 Act was the emphasis on the public accountability of

the company. Generally recognised principles of accountancy were given statutory force and

had to be applied in the preparation of the balance sheet and profit and loss account. Further,

the 1948 legislation extended the protection of the minority (Section 210) and the powers ofthe Board of Trade to order an investigation of the companys affairs (Sections 164175);

and for the first time the shareholders in general meeting were given power to remove a

director before the expiration of his period of office. The independence of auditors vis-a-vis

the directors was strengthened.

The 1948 Act was amended by the Companies (Amendment) Act, 1967. The Amending Act

was based upon the report and recommendations of the Jenkins Committee presented in 1962.

The 1967 Act adopted and considerably extended in some respects, the recommendations of

the Committee as to disclosure. The Act abolished the exempt private company, and required

all limited companies to file accounts. More stringent provisions were imposed in relation to

directors interests in the company and disclosure thereof. The Companies Act, 1976

attempted to remedy a variety of defects which had become evident in the application of the

Acts of 1948 and 1967. The 1976 Act strengthened the requirements of public accountability

and those relating to the disclosure of interests in the shares of the company. The Companies

Act, 1980 was a major measure of company law reform in England. Insider dealing was madea criminal offence. The shareholders were given a right of pre-emption in the case of new


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issues of shares in specified circumstances. Dealings between the directors and their

companies became greatly restricted and maximum financial limits were introduced for such

dealings. The protection to the minority shareholders was extended by enabling them to

petition for relief if their position was unfairly prejudiced.

The Companies Act, 1981 introduced other important changes. For the purposes of

accounting and disclosure, companies were divided into small, medium-sized and other

companies and their disclosure requirements were differentiated accordingly. The Law

relating to the names of companies was simplified by the abolition, in principle, of the

approval of the name by the Department of Trade. The company was authorised, subject to

certain conditions, to issue redeemable equity shares and to purchase its own shares. The

1981 Act further abolished the register of business names which had to be kept under the

Registration of Business Names Act, 1916.

Active steps were taken to prepare consolidating measures relating to the Companies Acts

1948 to 1981. In November, 1981, the Department of Trade published a consultative

document entitled Consolidation of Companies Acts. In this document the various methods

of consolidation and their relative advantages for the practice were discussed.

The whole of the existing statute relating exclusively to companies was consolidated in theCompanies Act, 1985, and the Companies Acts 1948 and 1983 repealed by the Companies

Consolidation (Consequential Provisions) Act, 1985. At the same time two minor

consolidating enactments, the Business Names Act, 1985 and the Company Securities

(Insider Dealing) Act, 1985, were passed to consolidate certain provisions of the Companies

Acts 1980 and 1981, which affected sole traders and partnerships and persons other than

companies as well as companies regulated by the Companies Act, 1985. The whole of the

present statute, therefore, was contained in the Companies Act, 1985 and the two minor

consolidating enactments together with the temporary and transitional provisions of the

Companies Consolidation (Consequential Provisions) Act, 1985, all of which have come into

force from 1st July, 1985. The U.K. company law has further been amended and has been

substituted by U.K. Companies Act, 2006 (which received Royal Assent on November 8,

2006). The Act has been brought into force in stages and circumscribes enhanced duties of

directors, simpler regime for private companies, increased use of e-communication, enhanced

auditor liabilities etc.


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Development of Indian Company Law

Company Law in India, as indicated earlier, is the cherished child of the English parents. Our

various Companies Acts have been modeled on the English Acts. Following the enactment of

the Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in India

in 1850. It provided for the registration of the companies and transferability of shares. The

Amending Act of 1857 conferred the right of registration with or without limited liability.

Subsequently this right was granted to banking and insurance companies by an Act of 1860

following the similar principle in Britain. The Companies Act of 1856 repealed all the

previous Acts. That Act provided inter alia for incorporation, regulation and winding up of

companies and other associations. This Act was recast in 1882, embodying the amendments

which were made in the Company Law in England up to that time. In 1913 a consolidating

Act was passed, and major amendments were made to the consolidated Act in 1936.

In the meantime England passed a comprehensive Companies Act in 1948. In 1951, the

Indian Government promulgated the Indian Companies (Amendment) Ordinance under

which the Central Government and the Court assumed extensive powers to intervene directly

in the affairs of the company and to take necessary action in the interest of the company. The

ordinance was replaced by an Amending Act of 1951. The Companies Act, 1956 was enacted

with a view to consolidate and amend the earlier laws relating to companies and certain other

associations. The Act came into force on 1st April, 1956. The present Companies Act is

based largely on the recommendations of the Company Law Committee (Bhabha

Committee) which submitted its report in March, 1952. This Act is the longest piece of

legislation ever passed by our Parliament. Amendments have been made in this Act

periodically. The Companies Act consists of 658 Sections and 15 Schedules.

Full and fair disclosure of various matters in prospectus; detailed information of the financialaffairs of company to be disclosed in its account; provision for intervention and investigation

by the Government into the affairs of a company; restrictions on the powers of managerial

personnel; enforcement of proper performance of their duties by company management; and

protection of minority shareholders were some of the main features of the Companies Act,

1956. The Companies Act, 1956 has undergone changes by amendments in 1960, 1962, 1963,

1964, 1965, 1966, 1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999, 2000, 2002

(Amendment), 2002 (Second Amendment), 2006 and in 2013.


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Company as a Business Medium - Meaning of a Company

The word company is derived from the Latin word (Com - with or together; panis- bread),

and it originally referred to an association of persons who took their meals together. In the

leisurely past, merchants took advantage of festive gatherings, to discuss business matters.

Now a day, the business matters have become more complicated and cannot be discussed at

length at festive gatherings. Therefore, the word company has assumed greater importance. It

denotes a joint stock enterprise in which the capital is contributed by a large number of

people. Thus, in popular parlance, a company denotes an association of like-minded persons

formed for the purpose of carrying on some business or undertaking. A company is a

corporate body and a legal person having status and personality distinct and separate from

that of the members constituting it.

It is called a body corporate because the persons composing it are made into one body by

incorporating it according to the law and clothing it with legal personality. The word

corporation is derived from the Latin term corpus which means body. Accordingly,

corporation is a legal person created by the process other than natural birth. It is, for this

reason, sometimes called artificial legal person. As a legal person, a corporate is capable of

enjoying many of the rights and incurring many of the liabilities of a natural person.

The five core structural characteristics of the business corporation are:

1. Legal personality,

2. limited liability,

3. transferable shares,

4. centralized management under a board structure, and

5.

Shared ownership by contributors of capital. In virtually all economically important

jurisdictions, there is a basic statute that provides for the formation of firms with all of

these characteristics.

As this pattern suggests, these characteristics have strongly complementary qualities for

many firms. Together, they make the corporation uniquely attractive for organizing

productive activity. But these characteristics also generate tensions and tradeoffs that lend a

distinctively corporate character to the agency problems that corporate law must address.


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The incorporated company owes its existence either to a special Act of Parliament or to

company legislation. The public corporations like L if e I nsurance Corporation of I ndiaand

Damodar Valley Corporation have been brought into existence through special Acts of

Parliament, whereas companies like Tata Iron and Steel Co. Ltd., Reliance Industries Limited

have been formed under the Companys Legislation i.e. Companies Act, 1956. The trading

partnership which is governed by Partnership Act is the most apt example of an

unincorporated association. In the legal sense, a company is an association of both natural

and artificial persons incorporated under the existing law of a country. In terms of the

Companies Act, 1956 (Act No. 1 of 1956) a company means a company formed and

registered under the Companies Act, 1956 or under the previous laws relating to companies"

[Section 3(1)(ii)]. In common law, a company is a - legal person or legal entityseparate

from, and capable of surviving beyond the lives of its members. However, an association

formed not for profit acquires a corporate life and falls within the meaning of a company by

reason of a licence under Section 25(1) of the Act.

But a company is not merely a legal institution. It is rather a legal device for the attainment of

any social or economic end. It is, therefore, a combined political, social, economic and

legal institution. Thus, the term company has been described in many ways. It is a means

of cooperation and organisation in the conduct of an enterprise. It is an intricate,centralised, economic and administrative structure run by professional managers who hire

capital from the investor(s). Lord Justice James has defined a company as an

association of many persons who contribute money or moneys worth to a common stock and

employ it in some trade or business and who share the profit and loss arising therefrom. The

common stock so contributed is denoted in money and is the capital of the company. The

persons who form it, or to whom it belongs, are members. The proportion of capital to which

each member is entitled is his share. From the foregoing discussion it is clear that a

company has its own corporate and legal personality distinct and separate from that of its

members. A brief description of the various attributes is given here to explain the nature and

characteristics of the company as a corporate body.


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Nature and Characteristics of a Company

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an

artificial person (i.e. created by law); it is clothed with many rights, obligations, powers and

duties prescribed by law; it is called a person. Being the creation of law, it possesses only the

properties conferred upon it by its Memorandum of Association. Within the limits of powers

conferred by the charter, it can do all acts as a natural person may do.

The most striking characteristics of a company are:

1. Corporate personality

By incorporation under the Act, the company is vested with a corporate personality quitedistinct from individuals who are its members. Being a separate legal entity it bears its own

name and acts under a corporate name. It has a seal of its own. Its assets are separate and

distinct from those of its members. It is also a different person from the members who

compose it. As such it is capable of owning property, incurring debts, borrowing money,

having a bank account, employing people, entering into contracts and suing or being sued in

the same manner as an individual. Its members are its owners but they can be its creditors

simultaneously as it has a separate legal entity. A shareholder cannot be held liable for the

acts of the company even if he holds virtually the entire share capital. The shareholders are

not the agents of the company and so they cannot bind it by their acts. The company does not

hold its property as an agent or trustee for its members and they cannot sue to enforce its

rights, nor can they be sued in respect of its liabilities. Thus, incorporation is the act of

forming a legal corporation as a juristic person. A juristic person is in law also conferred with

rights and obligations and is dealt with in accordance with law. In other words, the entity acts

like a natural person but only through a designated person, whose acts are processed within

the ambit of law.3

In case of Salomonv.Salomon and Co. L td.4, The above case has clearly established the

principle that once a company has been validly constituted under Companies Act, it becomes

a legal person distinct from its members and for this purpose it is immaterial whether any

member has a large or small proportion of the shares, and whether he holds those shares

beneficially or as a mere trustee.

3Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139

4 (1897) A.C. 22


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In the case, Salomon had, for some years, carried on a prosperous business as leather

merchant and boot manufacturer. He formed a limited company consisting of himself, his

wife, his daughter and his four sons as the shareholders, all of whom subscribed for 1 share

each so that the actual cash paid as capital was 7. Salomon sold his business (which was

perfectly solvent at that time), to the Company for the sum of 38,782. The companys

nominal capital was 40,000 in 1 shares. In part payment of the purchase money for the

business sold to the company, debentures of the amount of 10,000 secured by a floating

charge on the companys assets were issued to Salomon, who also applied for and received an

allotment of 20,000 1 fully paid shares. The remaining amount of 8,782 was paid to

Salomon in cash. Salomon was the managing director and two of his sons were other

directors.

The company soon ran into difficulties and the debenture holders appointed a receiver and the

company went into liquidation. The total assets of the company amounted to 6050, its

liabilities were 10,000 secured by debentures, 8,000 owning to unsecured trade creditors,

who claimed the whole of the companys assets, viz., 6,050, on the ground that, as the

company was a mere alias or agent for Salomon, they were entitled to payment of their

debts in priority to debentures. They further pleaded that Salomon, as principal beneficiary,

was ultimately responsible for the debts incurred by his agent or trustee on his behalf. It washeld that When the memorandum is duly signed and registered, though there be only seven

shares taken, the subscribers are a body corporate capable forthwith of exercising all the

functions of an incorporated company. It is difficult to understand how a body corporate thus

created by statute can lose its individuality by issuing the bulk of its capital to one person.

The company is at law a different person altogether from the subscribers of the

memorandum; and though it may be that after incorporation the business is precisely the

same as before, the same persons are managers, and the same hands receive the profits, the

company is not in law their agent or trustee. The statute enacts nothing as to the extent or

degree of interest which may be held by each of the seven or as to the proportion of interest,

or influence possessed by one or majority of the shareholders over others. There is nothing in

the Act requiring that the subscribers to the memorandum should be independent or

unconnected, or that they or any of them should take a substantial interest in the

undertakings, or that they should have a mind or will of their own, or that there should be

anything like a balance of power in the constitution of company.


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In case of Lee v.Lees Air Farming Ltd.5, The above case illustrates the application of the

principles established in Salomons case (supra). In this case, a company was formed for the

purpose of aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the

company. He voted himself the managing director and got himself appointed by the articles

as chief pilot at a salary. He was killed in an air crash while working for the company. His

widow claimed compensation for the death of her husband in the course of his employment.

The company opposed the claim on the ground that Lee was not a worker as the same person

could not be the employer and the employee. The Privy Council held that Lee and his

company were distinct legal persons which had entered into contractual relationships under

which he became the chief pilot, a servant of the company. In his capacity of managing

director he could, on behalf of the company, give himself orders in his other capacity of pilot,

and the relationship between himself, as pilot and the company, was that of servant and

master. Lee was a separate person from the company he formed and his widow was held

entitled to get the compensation. In effect the magic of corporate personality enabled him

(Lee) to be the master and servant at the same time and enjoy the advantages of both.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd.6 recognised the

principle of separate legal entity even much earlier than the decision in Salomon v. Salomon

& Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimedexemptions from ad valorem duty on the ground that since they themselves were also the

shareholders in the company and, therefore, it was nothing but a transfer from them in one

name to themselves under another name. While rejecting this Calcutta High Court observed:

The Company was a separate person, a separate body altogether from the shareholders and

the transfer was as much a conveyance, a transfer of the property, as if the shareholders had

been totally different persons.

In case of New Hor izons Ltd. v. Union of India,7 The experience of a shareholder of a

company can be regarded as experience of a company. The tender of the company, New

Horizons Ltd., for publication of telephone directory was not accepted by the Tender

Evaluation Committee on the ground that the company had nothing on record to show that it

had the technical experience required to be possessed to qualify for tender. On appeal the

rejection of tender was upheld by the Delhi High Court.

5

(1961) A.C. 12 (P.C.)6(1886) ILR 13 Cal. 43

7AIR 1994, Delhi 126


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The judgement of the Delhi High Court was reversed by the Supreme Court which observed

as under:

Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the

tender, the experience of its various constituents namely, TPI (Thomson Press India Ltd.),

LMI (Living Media India Ltd.) and WML (World Media Ltd.) as well as IIPL (Integrated

Information Pvt. Ltd.) had to be taken into consideration, if the Tender Evaluation

Committee had adopted the approach of a prudent business man.

Seeing through the veil covering the face of NHL, it will be found that as a result of re-

organisation in 1992 the company is functioning as a joint venture wherein the Indian

group (TPI, LMI and WML) and Mr. Aroon Purie hold 60% shares and the Singapore

based company (IIPL) hold 40% shares. Both the groups have contributed towards the

resources of the joint venture in the form of machines, equipment and expertise in the

field. The company is in the nature of partnership between the Indian group of companies

and Singapore based company who has jointly undertaken this commercial enterprise

wherein they will contribute to the assets and share the risk. In respect of such a joint

venture company, the experience of the company can only mean the experience of the

constituents of the joint venture i.e. the Indian group of companies (TPI, LMI and WML)

and the Singapore based company (IIPL)8.

2. Limited Liability

The privilege of limited liability for business debts is one of the principal advantages of doing

business under the corporate form of organisation. The company, being a separate person, is

the owner of its assets and bound by its liabilities. The liability of a member as shareholder

extends to contribution to the assets of the company up to the nominal value of the shares

held and not paid by him. Members, even as a whole, are neither the owners of the

companysundertakings, nor liable for its debts. In other words, a shareholder is liable to pay

the balance, if any, due on the shares held by him, when called upon to pay and nothing more,

even if the liabilities of the company far exceed its assets. This means that the liability of a

member is limited. For example, if A holds shares of the total nominal value of Rs. 1,000 and

has already paid Rs. 500/- (or 50% of the value) as part payment at the time of allotment, he

cannot be called upon to pay more than Rs. 500/-, the amount remaining unpaid on his shares.

8New Horizons Ltd. and another v. Union of India; (1995) 1 Comp. LJ 100 SC


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If he holds fully-paid shares, he has no further liability to pay even if the company is declared

insolvent. In the case of a company limited by guarantee, the liability of members is limited

to a specified amount mentioned in the memorandum.

Buckley, J. in Re. London and Globe F inance Corporation,9 has observed: The statutes

relating to limited liability have probably done more than any legislation of the last fifty

years to further the commercial prosperity of the country. They have, to the advantage of the

investor as well as of the public, allowed and encouraged aggregation of small sums into

large capitals which have been employed in undertakings of great public utility largely

increasing the wealth of the country.

There are, however, some statutory exceptions to the principle of limited liability. As

provided by Section 45 of the Companies Act, 1956, the members become personally liable if

the membership falls below prescribed minimum and the business is carried on for more than

six months thereafter. It is also provided in the Act vide Section 323 that a limited company

may, if so authorised by its articles, alter its memorandum by special resolution so as to

render the liability of its directors or of any of its director or manager as unlimited. Further,

where in the course of winding up it appears that any business of the company has been

carried on with intent to defraud creditors, the Court may declare the persons who were

knowingly parties to the transaction as personally liable without limitation of liability for all

or any of the debts/liabilities of the company.

3.

Perpetual Succession

An incorporated company never dies except when it is wound up as per law. A company,

being a separate legal person is unaffected by death or departure of any member and remains

the same entity, despite total change in the membership. A companys life is determined by

the terms of its Memorandum of Association. It may be perpetual or it may continue for a

specified time to carry on a task or object as laid down in the Memorandum of Association.

Perpetual succession, therefore, means that the membership of a company may keep changing

from time to time, but that does not affect its continuity.

The membership of an incorporated company may change either because one shareholder has

transferred his shares to another or his shares devolve on his legal representatives on his

death or he ceases to be a member under some other provisions of the Companies Act. Thus,

9(1903) 1 Ch.D. 728 at 731


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perpetual succession denotes the ability of a company to maintain its existence by the

constant succession of new individuals who step into the shoes of those who cease to be

members of the company. Professor L.C.B. Gowerrightly mentions, Members may come

and go, but the company can go on forever. During the war all the members of one private

company, while in general meeting, were killed by a bomb, but the company survived not

even a hydrogen bomb could have destroyed it.

4. Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning,

enjoying and disposing of property in its own name. The company is the real person in which

all its property is vested, and by which it is controlled, managed and disposed of. Their

Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin,10 held that no

member can claim himself to be the owner of the companys property during its existence or

in its winding-up. A member does not even have an insurable interest in the property of the

company.

Also in case of Mrs. Bacha F. Guzdar v. The Commissioner of I ncome Tax, Bombay11,

The Supreme Court in this case held that, though the income of a tea company is entitled to

be exempted from Income-tax up to 60% being partly agricultural, the same income when

received by a shareholder in the form of dividend cannot be regarded as agricultural income

for the assessment of income-tax. It was also observed by the Supreme Court that a

shareholder does not, as is erroneously believed by some people, become the part owner of

the company or its property; he is only given certain rights by law, e.g., to receive or to attend

or vote at the meetings of the shareholders. The court refused to identify the shareholders

with the company and reiterated the distinct personality of the company.

5.

Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be

movable property and, subject to certain conditions, freely transferable, so that no

shareholder is permanently or necessarily wedded to a company. When the joint stock

companies were established, the object was that their shares should be capable of being easily

10A.I.R. 1960 Mad 43

11AIR1955 S.C. 74


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transferred,12Section 82 of the Companies Act, 1956 enunciates the principle by providing

that the shares held by the members are movable property and can be transferred from one

person to another in the manner provided by the articles. If the articles do not provide

anything for the transfer of shares and the Regulations contained in Table A in Schedule I

to the Companies Act, 1956, are also expressly excluded, the transfer of shares will be

governed by the general law relating to transfer of movable property.

A member may sell his shares in the open market and realise the money invested by him.

This provides liquidity to a member (as he can freely sell his shares) and ensures stability to

the company (as the member is not withdrawing his money from the company). The Stock

Exchanges provide adequate facilities for the sale and purchase of shares.

Further, as of now, in most of the listed companies, the shares are also transferable through

Electronic mode i.e. through Depository Participants instead of physical transfers.

6. Common Seal

On incorporation, a company acquires legal entity with perpetual succession and a common

seal. Since the company has no physical existence, it must act through its agents and all such

contracts entered into by its agents must be under the seal of the company. The Common Seal

acts as the official signature of a company. The name of the company must be engraved on its

common seal. A rubber stamp does not serve the purpose. A document not bearing common

seal of the company is not authentic and has no legal force behind it.

The person authorised to use the seal should ensure that it is kept under his personal custody

and is used very carefully because any deed, instrument or a document to which seal is

improperly or fraudulently affixed will involve the company in legal action and litigation.

7.

Capacity to Sue and Be Sued

A company being a body corporate can sue and be sued in its own name. To sue, means to

institute legal proceedings against (a person) or to bring a suit in a court of law. All legal

proceedings against the company are to be instituted in its own name. Similarly, the company

may bring an action against anyone in its own name. A companys right to sue arises when

some loss is caused to the company, i.e. to the property of the personality of the company.

12[In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588]


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Hence, the company is entitled to sue for damages in libel or slander as the case may be 13. A

company, as a person separate from its members, may even sue one of its own members for

libel.

A company has a right to seek damages where a defamatory material published about it,

affects its business. Where video cassettes were prepared by the workmen of a company

showing, their struggle against the companys management, it was held to be not actionable

unless shown that the cassette would be defamatory. The court did not restrain the exhibition

of the cassette14

. The company is not held liable for contempt committed by its officer.15

8.

Contractual Rights

A company, being a separate legal entity different from its members, can enter into contracts

for the conduct of the business in its own name. A shareholder cannot enforce a contract

made by his company; he is neither a party to the contract nor entitled to the benefit of it, as a

company is not a trustee for its shareholders.

Likewise, a shareholder cannot be sued on contracts made by his company. The distinction

between a company and its members is not confined to the rules of privity, however, it

permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties

to his company, and in consequence a shareholder is induced to enter into a contract with the

director which he would not have entered into had there been disclosure, the shareholder

cannot rescind the contract. Similarly, a member of a company cannot sue in respect of torts

committed against the company, nor can he be sued for torts committed by the company16.

Therefore, the company as a legal person can take action to enforce its legal rights or be sued

for breach of its legal duties. Its rights and duties are distinct from those of its constituent

members.

9. Limitation of Action

A company cannot go beyond the power stated in the Memorandum of Association. The

Memorandum of Association of the company regulates the powers and fixes the objects of

the company and provides the edifice upon which the entire structure of the company rests.

13Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)

14

TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 3715Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Comp Cas 192 Mad

16British Thomson-Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33


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The actions and objects of the company are limited within the scope of its Memorandum of

Association. In order to enable it to carry out its actions without such restrictions and

limitations in most cases, sufficient powers are granted in the Memorandum of Association.

But once the powers have been laid down, it cannot go beyond these powers unless the

Memorandum of Association is itself altered prior to doing so.

10.

Separate Management

As already noted, the members may derive profits without being burdened with the

management of the company. They do not have effective and intimate control over its

working and elect their representatives to conduct corporate functioning. In other words, the

company is administered and managed by its managerial personnel.

11.Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some

public goals and whatsoever profit is gained is divided among its shareholders or restored for

the future expansion of the company. Only a Section 25 company can be formed with no

profit motive.

12.

Termination of Existence

A company, being an abstract and artificial person, does not die a natural death. It is created

by law, carries on its affairs according to law throughout its life and ultimately is effaced by

law. Generally, the existence of a company is terminated by means of winding up. However,

to avoid winding up sometimes companies change their form by means of re-organisation,

reconstruction and amalgamation. To sum up, a company is a voluntary association for profit

with capital divisible into transferable shares with limited liability, having corporate entity

and a common seal with perpetual succession.


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Concept of Security (s) in a Company

'Securities'include:

1.

shares, scrips stocks, bonds, debentures, debenture stock or other marketablesecurities of a like nature in or of any incorporated company or other body corporate;

[(I a) derivative;

(I b) units or any other instrument issued by any collective investment scheme

to the investors in such schemes]

[(I c) security receipt as defined in clause (z g) of section 2 of the

Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002;] [(id) units or any other such instrument issued to the investors under any

mutual fund scheme;]

[(ie) any certificate or instrument (by whatever name called), issued to an

investor by any issuer being a special purpose distinct entity which possesses

any debt or receivable, including mortgage debt, assigned to such entity, and

acknowledging beneficial interest of such investor in such debt or receiveable

including mortgage debt, as the case may be;]

2.

Government securities; and (ii a) such other instruments as may be declared by the

Central Government to be securities; and

3. rights or interests in securities;

Share Capital of a Company:

A share is a share in the share capital of a Company.

In Boreland Trusteesv. Steel Bros. & Co. Ltd., it was decided by the court of law that A

share represents the interest of a shareholder in the capital of the Company & this interest is

measured by the number of shares he is holding & the amount paid by him to the Company

on shares.

Thus, the amount of capital to be raised by a Company is always divided into small parts or

units of equal value & these units are called SHARES.

The different kinds of shares which can be raised by Companies are:


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1.

Equity Shares:

The equity shares or ordinary shares are those shares on which the dividend is paid after the

dividend on fixed rate has been paid on preference shares.

Equity shares, commonly referred to as ordinary share also represents the form of fractional

ownership in which a shareholder, as a fractional owner, undertakes the maximum

entrepreneurial risk associated with a business venture. The holder of such shares are member

of the company and have voting rights. A company may issue shares with differential rights

as to voting, payment of dividend etc.

Equity capital and further issues of equity capital by a company are generally based on the

condition that they will rank pari passu along with the earlier issued share capital in all

respects. However, as regards dividend declared by the company such additional capital shall

be entitled to dividend ratably for the period commencing from the date of issue to the last

day of the accounting year, unless otherwise specified in the articles or in the terms of the

issue.

Important characteristics of equity shares are given below:

1.

Equity shares, other than non-voting shares, have voting rights at all general meetings ofthe company. These votes have the effect of the controlling the management of the

company.

2. Equity shares have the right to share the profits of the company in the form of dividend

(cash) and bonus shares. However even equity shareholders cannot demand declaration of

dividend by the company which is left to the discretion of the Board of Directors.

3. When the company is wound up, payment towards the equity share capital will be made

to the respective shareholders only after payment of the claims of all the creditors and the

preference share capital.

4. Equity share holders enjoy different rights as members such as:

a.

right of pre-emption in the matter of fresh issue of capital (Section 81)

b. right to apply to the court to set aside variations of their rights to their detriment

(Section 107)

c. right to receive a copy of the statutory report before the holding of the statutory

meeting by public companies (Section 165)


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d. right to apply to Central Government to call for the Annual General Meeting, if

the company fails to call such a meeting (Section 167)

e.

right to apply to Company Law Board for calling for an extra-ordinary general

meeting of the company (Section 186)

f. right to receive annual accounts along with the auditors report, directors report

and other information (Section 210, 217 & 219).

[The rights mentioned at 4(b), 4(c), 4(d), 4(e) and 4(f) are also available to the preference

shareholders. The right of pre-emption in the matter of fresh issue of capital is available only

to the equity shareholders vide Section 81(1)(a)]. Equity shareholders, other than non-voting

shares are entitled to voting rights in all matters, whereas preference shareholders are entitled

to voting rights if the assured dividend to which they are entitled has been in arrears for a

specified period.

In the normal course where there is no dividend in arrears to be paid to them they have no

voting rights except in a class meeting convened for preference shareholders for specific

purposes.

Characteristics:

No fixed rate of dividend.

Dividend is paid after dividend at a fixed rate is paid on preference shares.

At the time of liquidation, capital on equity is paid after preference shares have been

paid back in full.

Non-redeemable.

Equity shareholders have voting rights & thus, control the working of the Company.

Equity shareholders are the virtual owners of the Company.

5.

Preference Shares:

Preference shares are those shares which carry with them preferential rights for their holders,

i.e, and preferential right as to fixed rate of dividend & as to repayment of capital at the time

of winding up of the Company. Owners of this kind of shares are entitled to a fixed dividend

or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in

respect of equity shares. They also enjoy privity over the equity shareholders in payment of

surplus. But in the event of liquidation their claims rank below the claims of companys

creditors, bondholders/debenture holders.


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Characteristics:

Fixed rate of dividend.

Priority as to payment of dividend.

Preference as to repayment of capital during liquidation of the Company.

Generally preference shareholders do not have voting rights.

According to The Companies (Amendment) Act, 1988, the preference shares are

redeemable & the maximum period for which they can be issued is 10 years.

Kinds of Preference Shares:

On the basis of cumulation of dividend:

Cumulative Preference Shares: They are those shares on which the dividend at a fixed

rate goes on cumulating till it is all paid.

Non-Cumulative Preference Shares: These are those shares on which the dividend

does not cumulate.

On the basis of participation:

Participating Preference shares: This type of shares is allowed to participate in

surplus profits during the lifetime of the company & surplus assets during winding

up.

Non-Participating Shares: These shares are not entitled to participate in surplus

profit. Dividend at fixed rate is given.

On the basis of conversion:

Convertible preference shares: The owners of these shares have the option to convert

their preference shares into equity shares as per the terms of issue.

Non-convertible preference shares: The owners of these shares do not have any right

of converting their shares into equity shares.

On the basis of redemption:

Redeemable preference shares: These are to be purchased back by the company after

a certain period as per the terms of issue.

Irredeemable preference shares: These are not to be purchased back by the company

during its lifetime.

Status of Preference Shares, if Articles of Association are silent: Preference shares will be

presumed to be:


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Cumulative

Non-Participating

Irredeemable and

Non-Convertible6. Deferred Shares:

Deferred shares are those shares on which the payment of dividend and capital (at the time of

winding up of a company) is made after money is paid in full on preference shares and equity

shares. As per the provisions of the COMPANIES ACT, 1956, no public company can issue

deferred shares.

Characteristics:

Rate of dividend is not fixed. It depends upon the availability of profits & the

discretion of the Board of the Directors.

Dividend is paid after payment of dividend on equity & preference shares.

At the time of liquidation, capital on these shares is returned after capital is repaid on

both preference & equity shares.

Share Capital refers to the amount that a company can raise or has raised by issue of shares.

From accounting point of view, share capital can be classified as follows:

1. Authorized share Capital is stated in the Memorandum of association and is the

maximum share capital that a company can issue.

2. Issued share Capital is a part of share capital that is issued for subscription by the

company. It cannot exceed companys authorized share capital.

3. Subscribed share Capital is a part of issued share capital, which is applied for

subscription.4. Called-up share capitalis the amount of nominal value of share that has been called

up by the company for payment by the subscribers towards the shares.

5. Paid up Capital is a part of called up capital that the members of the company

have paid.

Calls-in- arrears are that part of the calledup capital that remains unpaid by the subscribers.


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Calls-in-advance- a company, if its articles of association permit, may receive the unpaid

amount from the shareholders even when the amount has not been called. The amount so

received is known as Calls-in-advance.

Shares Issued For Consideration Other Than Cash

Sometimes companies also issue shares for consideration other than cash such as against

purchase of land and buildings, plant and machinery or purchase of business, etc. The

purchases of an asset against the issue of shares are two distinct transactions.

Forfeiture of Shares

Forfeiture of shares means canceling the shares for non-payment of calls due as a final action

against the defaulting shareholders. The company must give a clear 14 days notice to the

defaulting shareholder that unless he pays the amount due together with interest, if any, by

the specified date, the shares are liable to be forfeited. If the shareholder still does not pay,

the company may forfeit them by passing an appropriate resolution. On forfeiture, the shares

are cancelled; to that extent the share capital is reduced but the amount already paid by the

shareholders is not returned to him it is forfeited. Of course, the account showing the

unpaid call is also cancelled by a credit.

Hybrid instruments: Hybrid instruments are those which are created by combining the

features of equity with bond, preference and equity etc. Examples of Hybrid instruments are:

Convertible preference shares, Cumulative convertible preference shares, non-convertible

debentures with equity warrants, partly convertible debentures, partly convertible debentures

with Khokha (buy-back arrangement), Optionally convertible debenture, warrants convertible

into debentures or shares, secured premium notes with warrants etc.

Debentures

Section 2(12) of the Companies Act, 1956 defines debentures as follows:

Debenture includes debenture stock, bonds and any other securities of a company, whether

constituting a charge on the assets of the company or not.

Debenture is a document evidencing a debt or acknowledging it and any document which

fulfills either of these conditions is a debenture. The important features of a debenture are:

1. It is issued by a company as a certificate of indebtedness.


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2. It usually indicates the date of redemption and also provides for the repayment of

principal and payment of interest at specified date or dates.

3.

It usually creates a charge on the undertaking or the assets of the company.

In such a case the lenders of money to the company enjoy better protection as secured

creditors, i.e. if the company does not pay interest or repay principal amount, the lenders may

either directly or through the debenture trustees bring action against the company to realise

their dues by sale of the assets/undertaking earmarked as security for the debt.

Their features are as follows:

a. Naked or unsecured debentures: Debentures of this kind do not carry any charge on

the assets of the company. The holders of such debentures do not therefore have the

right to attach particular property by way of security as to repayment of principal or

interest.

b. Secured debentures: Debentures that are secured by a mortgage of the whole or part of

the assets of the company are called mortgage debentures or secured debentures. The

mortgage may be one duly registered in the formal way or one which is secured by the

deposit of title deeds in case of urgency.

c.

Redeemable debentures: Debentures that are redeemable on expiry of certain periodare called redeemable debentures. Such debentures after redemption can be reissued

in accordance with the provisions of Section 121 of the Companies Act, 1956.

d.

Perpetual debentures: If the debentures are issued subject to redemption on the

happening of specified events which may not happen for an indefinite period, e.g.

winding up, they are called perpetual debentures.

e. Bearer debentures: Such debentures are payable to bearer and are transferable by mere

delivery. The name of the debenture holder is not registered in the books of the

company, but the holder is entitled to claim interest and principal as and when due. A

bonafide transferee for value is not affected by the defect in the title of the transferor.

f. Registered debentures: Such debentures are payable to the registered holders whose

name appears on the debenture certificate/letter of allotment and is registered on the

companies register of debenture holders maintained as per Section 152 of the

Companies Act, 1956.


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Based on convertibility, debentures can be classified under three categories:

1. Fully Convertible Debentures (FCDs): These are converted into equity shares of the

company with or without premium as per the terms of the issue, on the expiry of specified

period or periods. If the conversion is to take place at or after eighteen months from the date

of allotment but before 36 months, the conversion is optional on the part of the debenture

holders in terms of SEBI ICDR Regulations. Interest will be payable on these debentures

upto the date of conversion as per transfer issue.

2. Non-Convertible Debentures (NCDs): These debentures do not carry the option of

conversion into equity shares and are therefore redeemed on the expiry of the specified period

or periods.

3. Partly Convertible Debentures (PCDs): These may consist of two kinds namely convertible

and non-convertible. The convertible portion is to be converted into equity shares at the

expiry of specified period. However, the non-convertible portion. is redeemed at the expiry of

the stipulated period. If the conversion takes place at or after 18 months, the conversion is

optional at the discretion of the debenture holder.

Sweat Equity Shares

Sweat equity share is a instrument permitted to be issued by specified Indian companies,

under Section 79A of Companies Act, 1956 inserted by Companies (Amendment) Act, 1999

w.e.f. 31st October, 1998. According to this section a public company may issue sweat equity

shares of a class of shares already issued if the following conditions are fulfilled:

a. The issue of sweat equity share is authorised by a special resolution passed by the

company in the general meeting.

b.

The resolution specifies the number of shares, current market price, consideration if

any and the class or classes of directors or employees to whom such equity shares are

to be issued.

c. Not less than one year has elapsed at the date of the issue, since the date on which the

company was entitled to commence business.

d.

The sweat equity shares of a company whose equity shares are listed on a recognised

stock exchange are issued in accordance with the regulations made by SEBI in this

regard.


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However, in the case of a company whose equity shares are not listed on any recognised

stock exchange, the sweat equity shares are to be issued in accordance with the guidelines as

may be prescribed. The expression company means company incorporated, formed and

registered under the Companies Act, 1956, and includes its subsidiary company incorporated

in a Country outside India.

All the limitations, restrictions and provisions relating to equity shares are also applicable to

such sweat equity shares issued under the new Section 79A.

Derivatives

Derivatives are contracts which derive their values from the value of one or more of other

assets (known as underlying assets). Some of the most commonly traded derivatives are

futures, forward, options and swaps. A brief detail of futures and options are given as under:

Futures

Futures is contract to buy or sell an underlying financial instrument at a specified future date

at a price when the contract is entered. Underlying assets for the purpose include equities,

foreign exchange, interest bearing securities and commodities. The idea behind financial

futures contract is to transfer future changes in security prices from one party in the contractto the other. It offers a means to manage risk in participating financial market. Futures

basically transfer value rather than create it. It is a means for reducing risk or assuming risk in

the hope of profit. Every futures contract entered into has two side willing buyer and a

willing seller. If one side of contract makes a profit, the other side must make a loss. All

futures market participants taken together can neither lose nor gain, the futures market is a

zero sum game.

For successful futures, two types of participants i.e. hedgers and speculators are essential.

Financial futures contracts may be of various types such as: -

Interest Rate Futures

Treasury Bill Futures

Euro-Dollar Futures

Treasury Bond Futures


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Stock Index Futures

Currency Futures.

However, future prices reflect demand and supply conditions in future market. As in other

markets, an increase or decrease in supply lowers or increases the prices of instruments for

future delivery.

Government Security: The debt market in India comprises mainly of two segments viz., the

Government securities market consisting of Central and State Governments securities, Zero

Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and the corporate securities

market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government

securities form the major part of the market in terms of outstanding issues, market

capitalization and trading value. The trading of government securities on the Stock exchanges

is currently through negotiated dealing using members of Bombay Stock Exchange (BSE) /

National Stock Exchange (NSE) and these trades are required to be reported to the exchange.

The bulk of the corporate bonds, being privately placed, were, however, not listed on the

stock exchanges. Two Depositories, National Securities Depository Limited (NSDL) and

Central Depository Services (India) Limited (CDSL) maintain records of holding of securities

in a dematerialised form. Records of holding of government securities for wholesale dealerslike banks/Primary Dealers (PDs) and other financial institutions are maintained by the RBI.

In Sudhir Shantilal Mehtav. Central Bureau of I nvestigation17

, commenting on the scope

of securities encompassed by the definition of the term in Section 2(h) of the Securities

Contracts (Regulation) Act, 1956, the Honble Supreme Court of India, at paragraphs 41 and

42, observed as follows:

"41. The definition of `securities'is an inclusive one. It is not exhaustive. It takes within its

purview not only the matters specified therein but also all other types of securities as

commonly understood. The term `securities', thus, should be given an expansive meaning.

42. in State of Bombayv. The Hospital Mazdoor Sabha18

, this Court while interpreting the

definition of "industry" as contained in Section 2(j) of the Industrial Disputes Act, 1947 held

as under:

17[2010] 155 Comp Cas 339 (SC)

18AIR 1960 SC 610


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It is obvious that the words used in an inclusive definition denote extension and cannot be

treated as restricted in any sense.19Where we are dealing with an inclusive definition it would

be inappropriate to put a restrictive interpretation upon terms of wider denotation also in

Regional Director, Employees' State I nsurance Corporationv. H igh L and Coffee Works of

P.F.X. Saldanha and Sons.20"

The Hon'ble Supreme Court of India in Naresh K. Aggarwala and Co. v. Canbank

F inancial Services Limited21, while referring to the definition of the term securities

defined under the SCR Act and the applicability of a circular issued by the Delhi Stock

Exchange Limited, observed the following:

20. The contention that the circular did not apply to unlisted securities was duly considered

and rejected by the Special Court. The Special Court thoroughly considered the term

`securities'as defined in Section 2(h) of the Act. It reads as under:-

2(h) Securities include

1. shares, scrips stocks, bonds, debentures, debenture stock or other marketable

securities of a like nature in or of any incorporated company or other body corporate;

A technical reading of the aforesaid definition of securities may lead to an interpretation thatthe definition of securities would be limited to marketable securities. This is because the

words other marketable securities of a like nature are of a general nature and hence, it may

apply to all preceding words, namely, shares, scrips, stocks, bonds, debentures and debenture

stock. The definition of securities may, therefore, possibly exclude fromits purview shares

in a private limited company.

If the aforesaid interpretation is adopted as per SCRA itself, it would lead to an inadvertent

consequence of limiting the benefit of concessional rate of ten per cent under section 112(1)

(c) of the Act to long term capital gains which arise on transfer of only marketable securities

i.e. of unlisted company being public company and not private company. However, we

believe that restricting the scope of the section only to securities held by non-residents in

public companies cannot be the intention of the legislature.

19

(Vide: "Stroud's Judicial Dictionary", 5th Edition, and Vol. 3 at 1263)20AIR 1992 SC 129

21AIR 2010 SC 2722


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As mentioned above, PE funds including VC funds in India primarily invest in private limited

companies. Such investments by PE and VC funds not only provides much needed long term

capital but add value for the investee companies by way of access to technical / financial /

business expertise. VC funds promote new and innovative business models and processes by

providing financial backing to innovative ideas.

[(I a) derivative;

(I b) units or any other instrument issued by any collective investment scheme

to the investors in such schemes]

[(I c) security receipt as defined in clause (z g) of section 2 of the

Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002;]

[(id) units or any other such instrument issued to the investors under any

mutual fund scheme;]

[(ie) any certificate or instrument (by whatever name called), issued to an

investor by any issuer being a special purpose distinct entity which possesses

any debt or receivable, including mortgage debt, assigned to such entity, and

acknowledging beneficial interest of such investor in such debt or receiveable

including mortgage debt, as the case may be;]

2. Government securities; and (ii a) such other instruments as may be declared by the

Central Government to be securities; and

3. rights or interests in securities;

Perusal of the above quoted definition shows that it does not make any distinction between

listed securities and unlisted securities and therefore it is clear that the Circular will apply to

the securities which are not listed on the Stock Exchange.

In Dahiben Umedbhai Patelv. Norman James Hamil ton22, the Division Bench of Bombay

High Court while interpreting the above definition of Securities held as follows:

Now, it is difficult for us to accept the argument of the appellants that the definition of

" securi ties"must be so read that the words " other marketable securi ties of a li ke nature"

were not in tended to indicate an element of marketabil ity in so far as the preceding

categories were concerned. A reading of the inclusive part of the def in i tion shows that the

22(1985) 57 Comp Cas 700 (Bom)


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Legislatur e has enumerated dif ferent kinds of secur it ies and by way of a residuary clause

used the words " or other marketable secur i ties of a l ike nature". The use of these words

was clearly intended to mean that the earlier categories of securities had to be marketable

and any other securities of " like nature", that is to say, like those which were categorized or

enumerated earlier were also to be marketable before they could be held to fall within the

definition of " securi ties".

The Division Bench further held that, the definition of " securi ties"will only take in shares

of a public limited company notwithstanding the use of the words "any incorporated company

or other body corporate" in the definition.

In Mathalonev. Bombay Li fe Assur ance Co. Ltd.23

, dealing with the rights of a transferee of

shares of a public company, the Supreme Court has pointed out the top on the transfer of

shares, the transferee becomes the sole beneficial owner of those shares sold by the

transferor, the legal title to which is vested in him and the transferor holds the shares for the

benefit of the transferee to the extent necessary to satisfy the elements of s. 94 of the India

trusts Act 1882. It was held that the transferor becomes a trustee of dividends as the

transferee holds the beneficial interest and the transferor is also a trustee of the right to vote

because the right to vote is a right to property annexed to the shares and, as such, the

beneficiary has a right to control the exercise by the trustee of the right to vote. It is pointed

out that the relationship of trustee and cestui que trust arises by reason of the circumstance

that till the name of the transferee is brought on the register of shareholders in order to bring

about a fair dealing between the transferor and the transferee, equity clothes the transferor

with the status of a constructive trustee and this obliges him to transfer all the benefits of

property rights annexed to the sold shares of the cestui que trust.

In B.K. Holdings (P) Ltd. v. Prem Chand Jute M il ls24, the learned Single Judge while

interpreting the expression marketable securities held as follows: I see no warrant

whatsoever for limiting the expression marketable securities only to those securities which

are quoted in the stock exchange.

23[1954] 24 Comp Cas 1(SC)

24(1983) 53 Comp Cas 367 (Cal)


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In Mysore Fru it Products L td.v. The Custodian25

, the learned Single Judge observed and

held as follows:

If one goes through the provisions of the Act, the scheme of the Act makes it clear that no

restrictive interpretation can be placed on the terms used in the Act. If the provisions of the

Act are looked at, it is clear that it relates not merely to securities which are listed but it also

relates to securities which may not be listed in any stock exchange. All that is required is that

there must be marketability. In my view, it cannot be said that any security which is not

listed on any recognized stock exchange is not marketable."

As laid down by the Single Judge and the Division Bench26, marketabilityimplies ease of

selling and includes any security which is capable of being sold in the market. This does not

mean that it must be sold in the market. In view of the above decisions, the legal position as

on date is that the provisions of the Securities Contracts (Regulation) Act, 1956 are

applicable to the Unlisted Public Companies as well.

The Supreme Court in the case of Mannalal Khetan v. Kedar Nath Khetan27, in that

decision, in considering Section 108 of the Companies Act, 1956, it was held that negative,

prohibitory and exclusive words are indicative of the legislative intent when the statute is

mandatory. Negative words are clearly prohibitory and are ordinarily used as a legislativedevice to make a statutory provision imperative. The words shall not register are mandatory

in character. The mandatory character is strengthened by the negative form of the language. It

cannot be said that the provisions contained in Section 108 are directory because non-

compliance with the section is not declared an offence. Section 629A of the Act prescribes

the penalty where no specific penalty is provided elsewhere in the Act. It is a question of

construction in each case whether the Legislature intended to prohibit the doing of the act,

altogether, or merely to make the person who did it liable to pay the penalty. The provisions

contained in Section 108 are mandatory.

The Court in the case of BOI F inance v. Custodian28 and A.K. Menon v. Fairgrowth

F inancial Services L td. and Anr.,29. On the contrary the learned Counsel appearing for the

petitioners contended that the forward sale of the shares of F.F.S.L. was not prohibited

25(2005) 107 BOMLR 955

26Ibid

27

1977 AIR 536, 1977 SCR (2) 19028on 19 March, 1997

292002 (1) All M. R. 180, dated 14th December, 1993


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because shares were not listed on the stock exchange. In support of this submission the

learned Counsel appearing for the petitioners relied on a judgment of the learned Single

Judge of this Court in the case of Norman J. Hamil ton and Anr. v. Umedbhai S. Patel and

Ors,.30The judgment of the Division Bench of this Court in the case of Dahiben Umedbhai

Patel and Ors.v. Norman James Hamilton and Ors.31, the judgment of the learned Single

Judge in the case of Brooke Bond India L td. v. UB L imi ted and Ors.32,to contend that the

provisions of the Securities Act applies only to those shares which are listed on the stock

exchange. It was also submitted on behalf of the petitioners that though the actual sale of the

shares took place on 30th September, 1993, on 8th April, 1992 equitable charge in favour of

the petitioners was created on the amount of Rs. 4,00,10,000/- and therefore even if it is

assumed that the amount on the date of notification of the notified party under the Special

Court Act was the property of the notified party and therefore it gets attached, the attachment

will be subject to the charge of the petitioners. In support of this submission, the learned

Counsel for the petitioners relied on a judgment of the Supreme Court in the case of Bharat

Nidhi L td.v. Takhatmal (Dead) by his Legal Representatives and Anr .33

In Sahara I ndia Real Estate Corporation L imi ted and Othersv. SEBI and another34, The

SUPREME COURT Sahara India Real Estate Corporation Limited (SIRECL) and Sahara

Housing Investment Corporation Limited (SHICL) are the companies controlled by SaharaGroup. Both companies, with the approval of the Board of the respective companies, issued

Optionally Fully Convertible Debentures (OFCD) by way of private placement to friends,

associates, group companies, workers/employees and other individuals associated/affiliated

or connected in any manner with the group of companies without giving any advertisement to

general public. Both companies authorized their Board of Directors to decide the terms and

conditions and revision thereof, namely, face value of each OFCD, minimum application

size, tenure, conversion and interest rate. They did not intend to get their securities listed on

any recognized stock exchange. The funds raised by the company would be utilised for the

purpose of financing the acquisition of townships, residential apartments, shopping

complexes etc., SIRCEL: floated the issue of the OFCDs as an open ended scheme and

collected an amount of Rs. 19400, 86, 64,200 from 25.04.2008 to 13.04.2011 from 2, 21,

30Ibid 22; (1979) 49 Com. Cas. 1 (Bora.) : 1979-(CC2)-GJX-0087-Bom

31Ibid 30; 1985 (57) Com. Cas. 700 (Bom.)

32

1999 (2) Bom. C.R. 42933AIR 1969 SC 313 : 1969 (1) S.C.R. 595

342012 (9) TMI 559


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07,271 investors. Likewise SHICL floated the issue of OFCDs and collected a huge amount

from huge investors. SEBI initiated action against the companies on a complaint received

from investors that the debentures were issued without complying with SEBI Rules etc., the

companies contended that SEBI is having no jurisdiction to entertain any complaint on

unlisted securities and it was not a public issue.

The issue whether derivatives are commodity or not have been subject matter of numerous

decisions rendered by ITAT and High Court. For e.g., in Comfund Financial Services (I )

Ltd.v. Deputy Commissioner of I ncome Tax35

, it was held that shares and securities and also

units of UTI should also be considered as commodity are they are not only useful things but

also articles of trade in as much as they can be purchased and sold quite easily. They are also

material things which can be given and taken physical delivery of. In this case the argument

given was English judgment in the case of Imper ial Tobacco Co. (of Great Br itain and

I reland) Ltd., passed by the High Court of Justice (King's Bench Division) dated 22 and 25th

January, 1943 and by the Court of Appeal dated 8 June, 1943 as reported at 25 T.C. 292. In

the said judgment, Lord Greene, M.R. observed as below:

"That being so, what is the true analysis of the position? A manufacturer has provided him

with a commodity, namely, dollars. I call dollars a 'commodity' not for the reason that they

are not currency in this country, but because they have a characteristic which is common to

other commodities, and is not shared by sterling namely, that their value from day to day

varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do."

In Paramount Bio-Tech Industri esv. Union of I ndia,36 the court of law decided that 2(h)

includes bonds within the definition of the word 'security'.

In Gramercy Emerging Market Fund vs Essar Steel L imited37Since it is only now that it is

being held that though the petitioners are creditors and, therefore, the petitions would be

maintainable, but the trustee is a necessary party and that in the absence of the trustee the

petitions could be dismissed, the petitioners are required to be given an opportunity to rectify

this defect and, therefore, sometime is required to be given to join the trustee as a party. After

the trustee is joined as a party respondent in these petitions, the court will on the next date of

hearing consider the question of applicability of condition No. 13 (enforceability) in light of

35[1997] 67 ITD304

36

on 25 November, 2003: 2004 120 Comp Cas 18 All, (2004) 2 Comp L J 446 All, 2004 49 SCL 77 All37

on 20 March, 2002: 2002 111 CompCas 1 Guj


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the stand which may be taken up by the trustee and/or depending on the petitioners' holding

in the value of the notes outstanding as indicated above.

In Timken F rance Sas v. Director Of I ncome-Tax38, that in respect of the long-term capital

gain arising from the sale of original and bonus shares of NRB Ltd. the applicant is entitled to

the benefit of the first proviso to Section 112(1) and, therefore, the quantum of tax payable

shall not exceed 10 per cent of the amount of capital gain. Accordingly, the ruling is

pronounced.

In Sahara I ndia Commercial Corp. v. Department Of I ncome Tax39, when the issue as to

whether or not the OFCDs of the assessee are 'loans' covered u/s 269SS of the IT Act has

been decided in favour of the assessee as above, the question of the assessee having been

prevented by reasonable cause within the meaning of Section 273B of the IT Act for not

complying with the provisions of Section 269SS of the Act, no longer survives. For the

preceding discussion, the grievance sought to be raised by the department by way of its

Ground No.2, is rejected. Accordingly, the action of the Ld. CIT (A) in deleting the penalty

imposed on the assessee under Section 271D of the IT Act is confirmed.

In Shr i Mahesh J . Patel vs The Asstt. Commissioner Of I ncome Tax40,There is no dispute

that period of holding required for share is 12 months or more whereas in case of other thanshare i.e. for 'right to do business' along with tenancy right, furniture and telephones, the

period of holding required is 36 months or more. In this case, the holding period of the

assessee is less than 36 months. Hence, it was rightly treated by the CIT (A) in the impugned

order as a short term capita! Asset, and profits therefrom would be assessable under the head

"short term capital profits"

In H irenbhai K.Patel, Ahmedabad vs Assessee41, In this case from the statement of income it

has been found that the assessee has claimed the interest exp and the service charges against

the LTCG. But the same cannot be claimed since these claims are not available against the

capital gain as per the Act. And from the careful analysis of the balance sheet and the P & L

a/c, it is clear that the assessee has invested the funds on the securities. In the assessment

order, the income from the other sources arising from these securities have been added in the

hands of the assessee therefore these claims have not been disallowed since against such

38on 1 October, 2007: 2008 BusLR 60, (2007) 212 CTR AAR 347

39

on 30 September, 2010; ITA No.5772/Del/201040on 18 July, 2007: 2007 109 ITD 35 Mum, 2008 297 ITR 74 Mum, (2007) 111 TTJ Mum 468

41on 5 December, 2012, ITA No. 1252/Ahd/2006


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income these exp can be claimed. However, if any view is taken otherwise than the additions

made as interest income in the head income from other sources, then this exp cannot be

allowed to the assessee. The reason of this is that in that case, it will be the finding of the

undersigned that the assessee has invested its interest bearing funds in earning such income

which is exempt from the tax, because the same is in the form of dividends; or the income

from these funds is capital gain against which such claims are not available to the assessee,

then such exp cannot be allowed in the light of sec.14A of I.T. Act. Total such interest exp

are Rs.20, 72,915/- and the service charges are Rs.3, 15,000/-"


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Bibliography

1. A Comparative Study of Companies Act 2013 and Companies Act 1956 Institute of

Companies Secretaries of India (ICSI), 2013

2. A Journey of Companies Act, 1956 to The New Company Law - An Understanding,

V.S. Vadivel 2013

3. A Textbook of Company Law (Corporate Law), P.P.S.Gogna, 9th edition, 2013

4. http://www.doc-live.com/what-is-a-share-as-per-company-law

5. http://www.doc-live.com/share-as-per-company-law?p=2

6. http://corporatelawreporter.com/2013/09/18/companies-act-2013-important-

provisions-become-effective-12th-september-2013/

7. https://www.icsi.edu/WebModules/LinksOfWeeks/Companies%20Bill%202012backg

rounder.pdf
http://www.doc-live.com/what-is-a-share-as-per-company-lawhttp://www.doc-live.com/what-is-a-share-as-per-company-lawhttp://www.doc-live.com/share-as-per-company-law?p=2http://www.doc-live.com/share-as-per-company-law?p

concept of securities in a company

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