Chapter 1:Meaning, Nature & Characteristics of a Company

Definition of a Company : As per the Company's Act 1956, a company is defined as 'a company means a company formed and registered under this Act or an existing company as defined in section 3 of this act'. A company is voluntary association of persons formed for some common purpose. The persons contribute money and sum total of such contribution is called capital of the company. The proportion of capital to which each member is entitled is his share. Another definition of company may be 'a company is an association of persons incorporated as artificial person created by law having a separate identity with a perpetual succession and common seal.Characteristics of a Company :The salient features or characteristics of a company are as follows :

1. Registered Association or Incorporated Association : A company is registered or incorporated under Company's Act 1956. The certificate of incorporation is the birth certificate of company. It is an artificial person created by law, it is just as human being but it has no physical existence.

2. Separate entity : It has a different and distinct identity and existence. Its legal status is separate and is not affected by its members and shareholders. It can cease to exist only by a process of law.

3. Artificial Person : Since a company has no physical existence, it needs help of other persons to carry out its activities and manage its affairs.

4. Perpetual succession : As per law, the company is distinct and different from all its members, shareholders, employees or any other entity. This says that the company remains the same and is not affected by change in its members etc. This aspect of continuous existence irrespective of its members etc. gives it what is known as perpetual succession. The company is a legal person created by a process of law and it can be wound up by a process of law. The company remains in existence till it is finished by applying a process of law.

5. Capital : The company is incorporated with an authorized share capital which is the maximum amount of share capital which can be raise by it in its life time unless it is changed subsequently. The amount of capital is divided into small parts which are called shares.

6. Transferability of shares : The shares of a company are freely transferable in case of a public limited company. The shares are available in the stock exchanges which can be purchased at market price.

7. Limited Liability : The liability of members of company is limited to the extent of face value of shares held by him. If the member has already paid such amount, he is no longer liable to any of the liabilities of the company. This principle of limited liability has made the form of company very popular and acceptable.

8. The shareholders are owners of the company but the property of the company is not the property of its members. Company is distinct and different from its members. As owners the shareholders are given certain

rights e.g. to receive dividend or to vote in meeting etc. Company is the real person in which all its property is vested.

9. Company can sue and be sued : A company is artificial person created by law and capable of doing all activities as human being. Therefore, it has a capacity to sue for any offence committed against it and likewise it can also be sued by any person aggrieved by its actions.

Distinction between a private limited company and a public limited company :

Particulars Private company Public company Minimum number of members / Directors

2 / 2 7 / 3

Maximum number of members

50 No limit

Minimum paid up capital Rs. 100,000 Rs. 500,000Subscription from public Restricted Not restrictedShare transfer Restricted as per AOA Freely transferable Certificate for commencement of business

Not required. Required to commence business

Offer of shares Need not offer its further shares to its existing shareholders.

Section 81 of Company's Act 1956 requires that the company must offer its further shares to existing shareholders first.

Difference between a company and a partnership firm :Applicable Act Indian Partnership Act

1932Company's Act 1956

Administrative status Partners are owners and are fully authorised to manage, control and govern the firm.

Shareholders are owners but not authorised to manage, control or govern the company. The company is managed by Board of Directors.

Activity As per agreement among the partners.

As per Memorandum of Association

Agency Partners are agents of the firm.

Shareholders are not agents of the company.

Liability Liability for partners unlimited

Liability for shareholders limited to face value of their shares

Legal Status Firm is not separate from partners.

Company is separate from its members and

shareholders

Minimum number required

2 Pvt. Ltd − 2, Public Ltd. 7

Maximum number 20 Pvt. Ltd. − 50, Public Ltd. No limit

Transferability of shares Partner cannot transfer shares without consent of all other partners.

Shares are freely transferable.

Insolvency Insolvency means insolvency of all the partners.

Insolvency of company does not mean insolvency of its shareholders.

Succession No perpetual succession. It is dissolved due to insolvency, retirement or death of any partner.

It has perpetual succession and remains as it is in case of insolvency, retirement or death of any member or shareholder.

Chapter 2 : Formation of Company

Promotion of Company :A company is an artificial person created by law and comes into existence only after completing specified legal formalities for its formation. The formation of company runs through four stages namely (i) promotion (ii) incorporation (iii) Floatation (iv) commencement of business.Promoters and Promotion: Promotion means preliminary work or ground work undertaken to bring the company into existence and persons who take such responsibility are known as promoters. The promoters go through all the procedures required for formation of company and do the basic work as selecting the name of the proposed company, preparing the memorandum and articles of association, nominating directors, auditors, secretaries etc. of the proposed company, arranging finances for fess to be paid for registration.The word promoter has not been defined in the Company's Act 1956. Promoter is neither the agent nor a trustee of the company because such company is not in existence but he maintains fiduciary relationship with the company. Fiduciary relationship means relationship with utmost faith specially in monetary matters. This also means that a promoter should not make any profits which belong to company. It he makes any profit at the expense of the company, the company can compel his to return or refund the same.It is also expected from a promoter that he should give benefits of any negotiations to the company. If the promoter fails to disclose the amount of profit made by him, company can take legal action against him and recover damages from him.Incorporation of a Company :Incorporation of a company is said to be done when certificate of incorporation is given by the Registrar of Companies. The following documents along with the required fees are to be filed with the ROC for obtaining the certificate of incorporation.

1. The MOA duly signed by the subscribers. (minimum 7 for public limited companies and minimum 2 for private ltd. companies)

2. The AOA duly signed by the subscribers.3. Copy of agreement made between the subscribers and persons proposed to be

appointed as Managing Director or Whole time director.4. List of persons who have agreed to be directors of the proposed company along with

their consent letter.

5. A declaration stating that all the formalities under the Company's Act 1956 are fulfilled signed by competent person (i) an advocate practicing in High court or Supreme Court (ii) An attorney eligible to appear before High Court (iii) A company secretary or a chartered accountant having a valid certificate of practice (iv) a person named as director, manager or secretary of the proposed company.

Certificate of incorporation (coi) is birth certificate of the company. For formation of company, the promoters need to file certain documents with the ROC. After filing the necessary documents and payment of required fees the ROC examines all these documents. The ROC requires clarification and explanation from the promoters regarding any points found unsatisfactory to him. After he has satisfied himself, he issues a certificate of incorporation to the company certifying the company has satisfied all conditions of incorporation. This is most important document for the company.Importance of Certificate of Incorporation :

1. It is the conclusive evidence about the birth of the company. The date of birth is the date on which coi has been issued by the ROC.

2. This is conclusive evidence that all the formalities laid down in the Company's Act 1956 have been duly complied with.

3. The certificate can not be challenged on any grounds whatsoever. The company becomes a legal person with perpetual succession and a common seal as soon as this certificate is issued.

4. This certificate grants the company a separate existence. It becomes an artificial person in the eyes of law which is distinct and different from its members. It means the assets and liabilities of a company are not the assets and liabilities of its members.

5. After getting the coi, a private can commence business immediately but a public ltd. company has to obtain a certificate of commencement of business for starting business.

6. It should be noted that the coi does not endorse the objectives given with MOA. It does not legalize the objectives. It is only for the purpose of incorporation.

Certificate of Commencement of business (COCOB)(i) A private company and a public company having no share capital, can

commence business immediately after getting certificate of incorporation.(ii) A public company limited by shares can commence business only after

getting the certificate of commencement of business from the ROC. It can not exercise borrowing power before obtaining cocob from ROC. This is as per section 149 of Company's Act 1956.

Pre-Incorporation Contracts :Preliminary Contracts : The certificate of incorporation is the birth certificate of company. Before incorporation, the company does not exist and has no capacity to contract and nobody can contract on behalf of company before the date of its incorporation. Therefore any contract by the promoters of the company before its date of birth cannot bind the company because it has no legal existence on the date of such contract. If the company wishes to abide by the pre-incorporation contracts, it has to enter into fresh contract with fresh terms and conditions.The preliminary contracts are those contracts which the promoters of the company make with other parties before the date of incorporation of the company. Even if the company takes some benefit from a contract made before its formation, the contract is not binding on the company and the promoters remain liable for those contracts.Provisional Contracts : These are the contracts which are made after the date of certificate of incorporation of the company but before the date of certificate of commencement of business. These are also ultra vires (beyond the powers) to the

company and the company is not binding on them as it was not entitled to enter into those contracts. When the certificate to commence business is obtained, such contracts automatically become binding to the company.Difference between Certificate of Incorporation and Certificate of commencement of business :Certificate of Incorporation Certificate of Commencement of business It is birth certificate of company. It is birth certificate of business of

company.It is must for every company. A private company or a public company

without share capital, can commence business with getting this certificate.

Before this, the contracts are called preliminary contracts.

Before this, the contracts are called provisional contracts.Company can raise share capital only after obtaining Cocob.

Floatation of a Company : Floatation of company means the company can now float. After getting the certificate of incorporation, it is said that the company is floated. A floated company can raise funds from the public. Only after floatation of a company, that the company can seek funds from the public to commence business. To raise funds, it can issue a prospectus or a statement in lieu of prospectus.

Question from Examinations :2007 Dec [4](a) Distinguish between the following :(iii) Preliminary contracts and provisional contracts 2000 Dec [1](C) : A preliminary or pre-incorporation contract cannot be ratified by the company but the company can enter into a fresh contract after incorporation for this purpose.2008 June [1](C) (i) A company cannot ratify its pre-incorporation contracts.2008 June [8] (iii) Certificate of incorporation (Coi) and certificate of commencement of business (Cocob):

Chapter 3 : Memorandum of Association Definition of MOA :The memorandum of association is defined as a document, which contains the basic rules about the constitution and operation of the company. This is the basic document which shows the manner in which the activities of the company are to be performed. The MOA contains all important matters relating to the company. The MOA is a document, which contains the fundamental rules regarding the constitution and activities of the company. It defines and confines the powers of the company and any alteration to the MOA is possible only after certain formalities are completed. As per section 13 of the Company's Act 1956, the MOA shall contain the following particulars :1. Name Clause ; 2. Registered Office Clause ; 3. Objectives Clause ; 4. Capital Clause ; 5. Liability Clause and 6. Association Clause.

Importance of MOA :The MOA presents in writing how the company is going to be constituted and what activities the company is going to undertake. The purpose and importance of MOA is to enable the members of the company, its creditors and the public at large to know what are the powers, limits and range of activities of the company. It is the foundation on which the building of the company will be erected.Forms and contents of the MOA:

As per section 13 of the Company's Act 1956, the MOA shall contain the following particulars :1. Name Clause ; 2. Registered Office Clause ; 3. Objectives Clause ; 4. Capital Clause ; 5. Liability Clause and 6. Association Clause.

Short Notes : 2008 June [4] Write short notes on (ii) Doctrine of ultra vires.Answer :Doctrine of Ultra Vires : Ultra means beyond and Vires mean powers. Ultra Vires means beyond powers. Any action of the company is Ultra Vires if such action is not authorised in the MOA. The MOA defines and confines the powers of the company and company can operate only within the scope of the authority given to it by its MOA and Company's Act 1956. Any action beyond the scope of MOA or Company's Act 1956 is Ultra Vires of the company. It is also clear that the company can not ratify such action or make such action valid, even if every member assents to it. Whatever was ultra vires the company will remain ultra vires. Any action which is ultra vires but intra vires to the company, can be ratified by the company. If any act is ultra vires to the directors the body of shareholders can ratify it.

Descriptive Questions :1999 Dec [2](a) : Define 'memorandum' as per Company's Act 1956.1999 June [2b]Can the state government oppose such shifting of the registered office of a company contending that the government would be deprived of the revenue?2004 Dec [1](C) :(d) What is the procedure for shifting of registered office of a company from one state to another?2005 June [5a] What is registered office of a company? Within what period a company must have a registered office?2006 Dec [3b] Whether the state government can object to the transfer of registered office on the ground of loss of revenue to or of employment for citizen of state?2008 June[1c] Registered office of a company can be shifted from one state to another without the approval of the state government. Comment.Answer : A comprehensive answer to the above questions is given below.Section 17 of Company's Act 1956, empowers a company to change its MOA by special resolution and after approval of the CG. The registered office of the company is a place to which all communication to the company is to be made. It is the place where all notices to the company are to be sent. The company must have a registered office within 30 days of the date of its incorporation and secondly the company must have a registered office on the date of commencement of business whichever is earlier. The notice of situation and address of registered office of the company must be sent to ROC within 30 days of its incorporation. If any change in RO is done, notice of such change should be communicated to ROC within 30 days of such change.

Change of Registered Office can be made under the following provisions:1. Change of RO (registered office) from one place to another in the same city: Give notice

(information) to ROC within 30 days of such change.2. Change of RO from one city to another city in the same state: A special resolution is to

be passed in a general meeting and copy of resolution should be given to ROC within

30 days of date of passing. When office is so changed, the notice of change of office should be given to ROC within 30 days of such change.

3. Change of RO from one state to another: A special resolution is to be passed in a general meeting and confirmation from National Company Law Board (Tribunal) should be obtained. The Tribunal shall give notice to every person whose interests will be affected by such shifting. The Tribunal shall also give notice to ROC and ask for his comments. The consent of creditors is to be obtained. After listing to all these parties, the Tribunal may confirm the shifting. The company will file within 3 months of such shifting (i) A certified copy of the order of the Tribunal and (ii) Revised MOA; with the ROC. The ROC shall register the same and certify the registration of new office within one month from the date of filing of such documents. It should be noted here that the state govt. can not object to the change of registered office from one state to other state.

Powers of state government to oppose the change of registered office of the company :In case of Bharat Commerce it was decided by the Supreme court that a state government can not oppose the change of one state to an other on the ground of loss of future revenue or employment. Moreover, it is for the members and not for the state government, to decide where the RO should be.However, if there are some revenues outstanding to be paid to the state government, the state government becomes creditor of the company, if it thinks that its interests will be adversely affected by such shifting, the SG can oppose it.2005 Dec [1](C) : Mention the provisions relating to change in the name of a company.Answer : The provisions are as follows :

1. A company may change its name by special resolution and with the approval of Central Government.

2. The removal or addition of word 'private' from the name of company, does not require the approval of the Central Govt.

3. The change of name is to be made as per the guidelines issued by the CG in this behalf.

4. The change of name must be communicated to the ROC within 30 days of such change.

Chapter 4 : Articles of AssociationMeaning and Importance of Articles of Association :The AOA contain various rules regarding day to day administration and internal management of the company. These rules will be followed by everyone working in the company. The principal objective of AOA is set rules to achieve the objectives of the company as shown by the MOA. Thus the AOA are subordinate to MOA, it implies that the rules and regulations framed in the AOA should not go beyond the powers given to the company by Company Law and by MOA.Contents of AOA : The AOA usually have the following contents :

1. Share capital, types of shares. Alteration of share capital, bonus shares.2. Issue of shares at discount or premium.3. Qualifications shares for directors,4. Provisions regarding transmission and transfer of shares.5. Provisions regarding accounts and audits.6. Procedure for forfeiture and surrender of shares.7. Directors, their appointment and removal.8. Managerial remuneration;9. Dividends and share warrants10. Winding up of company.

2000 Dec [8b] Repeat 2005 June [4] and 2007 June [1C]: A company does not have unlimited powers to alter its articles of association. Comment.Answer : Amendments to the AOA :

All amendments to AOA must be made by passing special resolution in a general meeting. A copy of amendments should be filed with ROC within 30 days from passing of such an amendment. The power to amend the Articles has the following limitations :

1. The AOA is subordinate to MOA and the Company Law. All amendments in AOA should be in accordance with the MOA and Company law otherwise the amendment will be treated as invalid.

2. In general the amendment should not increase the liability of members. Such increase in liability can only be done when all members agree to it in writing. Increase in subscription fees or membership fees can be amended in AOA.

3. Any amendment to give power to the BOD to expel any member is not valid as it is against the rights of members given to them by law.

4. If because of any amendment, any contract with third party is broken or breached, such amendment is valid. The aggrieved party may claim damages.

5. The courts do not have any power to amend the Articles. The court can only declare some of the clauses as ultra vires but it can not amend them.

Distinguish Between:2006 June [1](C) : Distinguish between Memorandum of association and Articles of associationAnswer :Difference between MOA and AOA :Memorandum of Association Articles of AssociationIt contains details of company like name, objects, capital, liability etc.

It contains details of regulations for the internal management of the company.

It defines and confines the powers of the company.

It defines the rules and regulations for the attainment of objectives of MOA.

It is supreme document of the company. It is subordinate to MOA.Every company must have a MOA. Not necessary. Table A of Company's Act

1956 can be used and accepted as AOA.Alternation in MOA is not easy. It can be done only after the completion of formalities as laid down in the Act.

It is comparatively easy. Special resolution is enough for alternation subject to some limitations.

Any act beyond the MOA can not be ratified by shareholders.

Any act beyond the AOA can be ratified by shareholders.

Descriptive Questions 2003 Dec [2b] What is the doctrine of constructive notice?

Doctrine of Constructive Notice :Answer : The MOA and AOA are extremely important documents for a company. Any body who is willing to do any business with the company is supposed to have gone through these documents before dealing with the company, worded differently, he should take constructive notice of moa and aoa before doing any business with the company. He should also ensure that the contract he is making with the company is within the scope and power of the company as shown in the MOA. This notion is called doctrine of constructive notice which says that an outsider should have adequate knowledge about the MOA and AOA of the company and satisfy himself before making any business with the company. By this doctrine the company is protected against outsider who may allege that they did not know the MOA and AOA of the company.

Doctrine of Indoor Management :1998 Dec [1](C) comment on the following statement (iii) the benefit of 'doctrine of indoor management' is not available under certain circumstances.2000 Dec [8b] Enumerate the exception to the doctrine of indoor management.2001 June [5] : How does 'doctrine of …………………….. relevant case laws.2006 Dec [4] (a) : In the line with the ……………… against the company ?

1998 Dec [1](C) Comment on the following ………………………… certain circumstances.Answer : A comprehensive answer accommodating the above questions is given below:Doctrine of Indoor Management : Doctrine of constructive notice is to protect the company from outsider. The doctrine of indoor management (doim) is to protect the outsider from the irregularity and mis-management on the part of company. These two doctrines viz. docn and doim are opposite in nature and operation. Docn says that an outsider is supposed to have knowledge of Moa and Aoa of the company, but as far as the internal management is concerned, he is entitled to assume that everything is in order inside the company and there is no irregularityThe Doim is not available in certain cases as enumerated below :

1. Knowledge of irregularity : if the person dealing with the company has prior knowledge of some irregularity, he cannot take the shelter of doim. Suppose A Ltd. lent some money to B Ltd. on mortgage of its assets. The procedure as detailed in Aoa was not followed. The directors in both the companies were same. In this case the irregularity was in the knowledge of lender before lending, therefore the mortgage is not binding. Doim is not available in such cases.

2. Negligence : If the person has not observed due diligence on his part. If he has enough facility to find out the irregularity or flaw in the process or document by observing little care, caution or concern, he is assumed to have neglected the responsibility on his part. In such cases of negligence doim is not available.

3. Forgery : The doim is not applicable where a person relies upon a document that turns out to be fake, false or forged. A company is not liable for the forgeries or falsification on the part of its officers or employees.

4. Acting beyond the authority : If the officer of a company does something beyond his powers and authority with some third party, the company is not bound. This also comes under the negligence on the part of third party, it should have seen and verified whether the officer is acting within his limits.

Chapter 8 : Prospectus :General Notes :

Prospectus : It is an invitation to the public to take shares or debentures in the company. It is a document which gives information about the prospects of the company. The Company's Act 1956 mentions various contents of the prospectus. The company is required to issue a prospectus when it appeals to the public for investing money in the company. The main objective of prospectus is to give information about the overall affairs of the company.Following are the features of prospectus :1. It is a document in writing. Its contents are described in the Company's Act 1956.2. It is an invitation to the public to make investment in the company in the form of shares,

debentures and deposits.3. Date of publication is treated as date of issue unless otherwise specified.4. It can only be issued after registration of its copy with the ROC.Statement in lieu of Prospectus : If a company arranges to get money from private sources and not from general public, it need not issue a prospectus, Instead, it can issue a 'statement in lieu of prospectus'.Kinds of offer document : An offer document means a 'prospectus' in case of public issue and 'letter of offer' in case of rights issue. An offer document covers all the relevant information to help the investor in making appropriate investment decision.Draft Prospectus : It is initial draft of prospectus which is submitted to SEBI at least 21 days before the date of filing the prospectus with ROC. If any changes are suggested by SEBI, the issuer company shall carry out such changes in the draft prospectus before submitting the prospectus to ROC.Draft letter of Offer : A listed company before making any rights issue for an amount exceeding Rs. 50 lakhs (including premium) shall file a draft letter of offer with SEBI, at least 21 days before filing this to ROC. If any changes are suggested by SEBI, such changes will be incorporated by the issuer company before submitting the draft letter of offer to ROC.Abridged Prospectus : The main prospectus is large in size. The abridged prospectus is summary of main prospectus which contains all the salient features of a prospectus.

Shelf Prospectus : Some times the shares (securities) are issued at different stages over a period of time. In such cases filing of prospectus each time will be very expensive and unnecessary. In such cases Section 60A of Company's Act 1956, allows a prospectus called 'Shelf prospectus' to be filed with ROC which will be valid for a period of one year from the date of opening of first issue of shares under the prospectus. For subsequent issue of shares (within one year) same prospectus will be applicable and only Information memorandum is required to be filed. The Information memorandum will contain all salient features which have developed between the time of first issue and subsequent issue.

Red-Herring prospectus : A prospectus is said to be Red-Herring prospectus which contains all information as per prospectus requirements but does not contain information on price of shares (securities) offered and number of securities offered. This is used in book building issues only.

Contents of Prospectus :The contents of prospectus should be as per Part I and Part II of the Schedule Ii of the Company's Act 1956. The details are as follows :As per Part I of Schedule II:1. General Information :a) Name and address of the registered office of the company b) Consent of Central Govt.c) Declaration of CG that the CG is not responsible to the correctness of financial statements;d) Declaration of the company that money will be refunded if minimum of 90% of issue size is

not received;e) Date of opening, closing and earliest closing of issue;f) Names and addresses of underwriters and the amount underwritten by themg) Provisions of punishment for false applications;2. Information about the capital structure of the company :a) Authorized, issued, subscribed and paid up capital;b) Size of present issue and paid up capital after the present issue;c) Reservation of shares for promoters and others.

3. Terms and particulars of the present issue;4. Information about directors of company ;5. Information about the project, costs and financing6. Particulars about other companies under the same management :7. Outstanding court cases against the company.8. Risks associated with the issue.As per Part II of Schedule II :A. General Information :1. Consent of directors, auditors, advocates, managers, registrar and bankers to the issue;2. Experts opinion obtained if any:3. Changes in the directors and auditors during last 3 years and reasons thereof.4. Authority for the issue and details of resolution passed in this regard;5. Procedure and time schedule for allotment and issue of certificates;6. Names and addresses of Company Secretary, Auditors, Bankers and Brokers;

B. Financial Information :

Report by Auditors : A report by auditors of the company with respect to profits and losses, assets and liabilities and dividends paid for the past five years of the company and of its subsidiaries.Report by Accountants : If the proceeds of the issue are to be used directly for the purchase of an existing business then it is necessary to attach a report of qualified accountants on the profits and losses of the business and its assets and liabilities for the five preceding years.C. Statutory and Other Information :a) Minimum subscription b) Expenses for the issue : Fees payable to advisors, registrar and managers to the issue.

c) Underwriting commission and brokeraged) Details of previous issue if any during last five years : Issue details, commission and

brokerage, issue for cash and otherwise than cash,e) Details of purchase of property;f) Details of directors, proposed directors, whole-time directors, managing directors their

remuneration, appointment and qualification shares g) Restriction if any on transfer and transmission of shares and debentures;h) Revaluation of assets in last five years.

1999 June [4a] When a prospectus is not required to be issued?2002 June [1], 2005 June [4] In certain cases , prospectus need not be issued. Comment.Answer : A prospectus need not be issued in the following cases:

(i) When the securities are offered to existing shareholders;(ii) When the securities are not offered to general public;(iii) When the securities are same in all respects with existing securities that are quoted

in stock exchange.(iv) With regard to underwriting agreements.(v) When the invitation to the public is in the form of advertisement called 'prospectus

announcement'.1998 Dec [3]: Explain the consequences off false and misleading statements in prospectus.Answer :Civil liability for misstatement in prospectus :A person who purchases shares (or subscribes for shares) on the faith of any false statement in the prospectus may claim from directors and promoters :

1. damages for false representation : The person may file suit against the directors for the fraudulent misrepresentation in prospectus. But the directors will not be liable for damages for misstatements if they believe them to be true.

2. compensation under section 62 of the Act.3. damages for non-compliance with the section 56 of the Act.

Criminal liability for mis-statement in prospectus : Every person who has authorised the issue of prospectus having a misstatement, will be punishable with (i) imprisonment for a term which may extend to two years(ii) or a fine which may extend to Rs. 5,000 and (iii) with both. However, if a person establishes that such misstatement was immaterial and not intentional or he has a reasonable ground to believe the statement to be true, he may be given relief. Chapter 9 : SHARE CAPITAL & SHARES:General Notes relating to Share capital, Accounts and Audits

Share Capital : It is the capital which a public limited company can raise by appealing to public to subscribe to its shares. Various types of share capital are :Authorised : It is the maximum share capital which the company can raise during its life time. It is mentioned in the MOA and can be increased only after completing formalities as mentioned in the Act. Issued : It is part of authorised share capital which is issued to the public for subscription.Called up : The company does not require the entire issued capital in one installment. The amount called up on each share is called up capital.Paid up : The entire called up amount may or may not be received by the company. The amount actually received against the called up capital is known as paid up capital.Uncalled Capital : This is the amount which remains to be called. The company may call this amount in future depending upon its requirements.Reserve Capital : (It is different from Capital Reserve) This is also uncalled capital but with a difference that this is reserved only for the event of winding up of the company. Alteration of Share capital : (Section 94) A company may alter its share capital by various methods (if so authorised by its AOA) as follows :1. Increase the Share capital : The company can issue more shares. Offer must first be

made to existing shareholders in proportion to their holding. If authorised share capital is exceeded, special resolution must be passed and notice should be sent to the ROC within 30 days of passing such resolution.

2. Decrease the Share capital : The company can cancel the shares which have not been accepted so far. The company however, can not cancel the unpaid amount on issued shares without the sanction of the Court.

3. Consolidation of Shares : A company can consolidate the shares of smaller value into shares of larger values and vice versa.

4. Conversion into stock : A company can convert shares into stock. If A has 200 shares of Rs. 10, after conversion A will have Rs. 2,000 stock.

Note : The company can alter its share capital by any of the above methods by passing ordinary resolution in general meeting. Notice of alteration should be given to ROC within 30 days of passing such resolution.

Reduction of Share Capital : (Section 100) :Special resolution and permission of Court, is required to approve reduction of share capital. Ways of reducing the share capital are as follows : (i) extinguish (finish) or reduce the liability on any of its shares not paid up (ii) cancel any paid up share capital (iii) pay the shareholders to receive back the shares.Distinction between Shares and Stock :

1. Stock is the aggregate of fully paid up shares. 2. Shares are in units but stock is in lump.3. Shares can be issued directly but stock cannot be issued directly.4. Shares must be numbered but stock is never numbered.5. Shares can be partly paid up while stock can not be partly paid up.6. Shares can not be transferred in fractions while stocks can be in fractions.

Issue of shares at premium : Securities Premium Account : (Section 78):Section 78(2) of the Company's Act 1956 provides that The Securities Premium account may, not withstanding anything in subsection (1) of Section 78, be applied by the company(a) in paying up un-issued shares of the company to be issued to members of the company as fully paid bonus shares;(b) in writing off the preliminary expenses of the company;(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.Issue of shares at discount (Section 79):Following conditions should be satisfied for issue of shares at discount :

(i) Issue must be sanctioned by the Central Govt.(ii) Discount rate must not be more than 10% unless permitted by CG.(iii) Issue can be made only after a period of one year from the date of certificate of

commencement of business.(iv) Issue must be made within 2 months from the date of sanction of CG.

Difference between the transfer and transmission of shares :Transfer is done for a value or consideration. Transmission is without value or consideration. Transmission takes place when title of shares is transferred to nominee on the death of original owner of shares.

.Section 224 (1) : Restriction on number of audits : An auditor can not accept the appointment over a specified number. Specified number means :(i) 20 companies out of which not more than 10 companies having a paid up capital of Rs. 25 lacs or more. Number shall be counted for every partner of the firm who is not in whole time employment elsewhere.(iii) audit of private companies would not be counted for this purpose.

Section 224 (3) and Section 224 (4) : The CG may appoint a person to the casual vacancy in the office of the auditor.

Section 224(5) :the first auditor of the company should be appointed by the BOD within one month from the date of registration of the company; Section 224(6) : the BOD can fill the vacancy caused by any reason other than resignation.

Sec 225 : Removal of auditor. Sec 224 also deals with it.Sec 226 : Qualification and Disqualification of Auditors :

1. The auditor must be a chartered accountant holding a valid certificate of practice.

2. He should not be otherwise disqualified for being appointed as auditor.3. He should not be in whole time employment.4. Following persons are not qualified for being appointed as auditor :(i) A body corporate (ii) an officer or employee of the company (iii) a person who a partner of any officer or employee of the company (iv) a person who is in the employment of any officer or employee of the company (v) person who owes over Rs. 1,000 to the company (vi) a person who has given any guarantee or security to any person who is owing more than Rs. 1,000 to the company.

Sec 227 : Rights and Duties of Auditors : The auditor shall have all rights to access at all times to the books and accounts and vouchers of the company. He is also entitled to obtain any information or explanation from any officer of the company for performance of his duties as auditor.

Section 228 :Audit of Branch Office : Where a company has a branch office, the accounts of that office shall be audited either by the company's auditor as appointed u/s 224 or by any other auditor possessing qualification prescribed u/s 226.

Sec 229 : Signature of Audit Report : Only the person or partner of the firm of Chartered Accountants appointed as Auditor may sign the auditor's report or any other document of the company required by law to be signed by the auditor.

Sec 230 : The auditor's report shall be read before the company in GM. Sec 231 : Right of Auditor to attend GM. Section 232 : Non-compliance of section 225 to 231 shall attract a fine which may extend to Rs.

5,000. Section 233 : Penalty to auditor for non compliance of section 227 and 229 : If the auditor does not

follow section 227 and 229, he can be imposed with penalty which can extend to Rs. 10,000. Section 233A : The CG has powers to conduct special audit of accounts of any company. Section 233 B : Audit of cost records : The CG has powers to conduct cost audit of cost records

maintained u/s 209 (1)(d).Difference between Shareholder and Member : A shareholder is a member of the company but a member may or may not be a shareholder because the company may not have share capital at all. An insolvent can be a member as long as his name appears in the register of members, though he may not be having his share certificates. Those who sign the MOA automatically become member of the company. Director : The designation as director does not mean that he indeed is a director. A person who has control over direction, conduct or management of the business of the company is a director. Company's Act 1956 provides that only individuals can be director hence a firm, company, association of persons, body of individuals or company can not function as director of a company.Appointment of first directors : (section 254)

1. Normally AOA contains the names of first directors.2. If AOA does not contain first directors then those who sign the MOA shall decide the names of

first directors.3. If first directors are not decided in this manner, the subscribers (signatories) to MOA will be

deemed as first directors of the company. Appointment of subsequent directors : (section 255) : 2/3rd of the total number of directors shall retire by rotation every year.Casual vacancy of Directors : Section 262. The BOD has powers to appoint directors in vacant place of director who was appointed in general meeting. The BOD has powers to fill the casual vacancy.Number of directorship : Section 275: Any person can not be director in more than 15 (fifteen) companies. Following companies would not be considered for this purpose.

1. A private company, which is not a subsidiary company of a public company.2. A private company which is not a holding company of a public company.3. An association for not for profit business where dividend is not paid.4. A company in which such person is only acting as alternate director.

Company Meetings : There are three types of meetings (i) statutory (ii) Annual General (iii) Extra-ordinary

Statutory Meetings : Not less than one month and not more than six month from the date of commencement of business.Annual General Meeting : (section 166) :

First AGM must be held within 18 months from the date of certificate of incorporation. It is not necessary that the first AGM must be held in the year of incorporation or in the following

year. All other AGM must be held every year but the interval between two AGMs must not be more than

15 months. The ROC is allowed to extend the time by 3 months. The AGM can only be held in the city where Registered office of the company is located. It must be held during business hours and must not be held on a public holiday.Extra Ordinary General Meeting : EOGM :Every general meeting other than statutory and AGM is EOGM. It is usually called by directors to conduct some special business which has to be done before next AGM.Resolutions : There are three types (i) Ordinary (ii) Special (iii) Resolution requiring special notice.Ordinary resolution is passed with a majority vote. Votes in favour are more than votes against it. Some cases where ordinary resolution is enough :

Passing of annual accounts, balance sheet and director's report; Issue of shares at discount; (no resolution is necessary for issuing shares at a premium) Alternation of share capital ; Declaration of dividend Appointing auditors and fixing his/her remuneration

Special resolution is passed with 3/4th majority i.e. if the votes in favour are three times and more than the votes against it. Some cases where special resolution is required :

Change of name of company ; Changing the place of registered office of the company; Changing the AOA Payment of interest out of capital ; Application for winding up of company. Any other transaction where AOA require special resolution. Appointment of auditors under section 224-A.

Resolution requiring special notice is passed with simple majority or by three-fourth majority according to the provision of the Company's Act 1956. Some cases are :

Appointment of auditor other than the outgoing auditor; Appointment of director in place of one who is removed ; Provision that a retiring auditor will not re-appointed; Removal of director before the expiry of his period;

1999 Dec [4](Distinguish between : (i) Share certificate and Share Warrant

Share Certificate Share WarrantHolder is member of company Holder is not a member of company Issue does not require sanction of CG Issue requires sanction of CG.Can also be issued by Pvt. Ltd. company Pvt.ltd can not issue it.Can also be issued partly paid Can be issued fully paid only.It is not a negotiable instrument It is.Holder can file a petition for winding up of company

Not possible.

Stamp duty is must for transfer. No stamp duty for transferIssue does not require permission of RBI required.Holder is qualified for directorship. Not qualified.

(ii) Transfer and Transmission of shares :

Transfer of shares Transmission of shares.Voluntary action of member Action by operation of lawIt requires sale of shares. It is not sale.This is transfer of property after sale. It is transfer of property after death of member

Transfer deed has to be executed by member Member is dead.Stamp duty as per law is to be paid. Stamp duty is not to be paid.

2004 Dec [8](b) Preference Shares and Equity shares :

Preference shares Equity sharesFixed rate of dividend No fixed rate of dividend.Priority on payment of dividend Dividend can be paid only after dividend

payment of pref. shares.Priority on winding up of company Last priority on winding up of company.Dividend accrues on cumulative shares No accrual of dividend Restricted voting right General voting rights for all matters related to

company No rights issue possible Rights issue possible u/s 81No bonus shares possible Bonus shares possible

2007 Dec [4](a) Distinguish between Forfeiture of shares and Surrender of shares:Forfeiture of shares Surrender of sharesIt is initiated by the company. It is initiated by the shareholder.It is due to non payment of call money. It may be due to non payment of calls but It may

be due to other reasons e.g. for exchange to new shares.

Rules and regulations are to be strictly followed. No special provision is made in this regard.

2007 Dec [5](i) Distinguish between Reserve capital and Capital reserve.Reserve Capital Capital ReserveIt is that part of capital which can be called only in the event of winding up of company.

It is created out of capital profits.

It is not mandatory to create reserve capital It is mandatory to create in case of capital profit.2008 June [8] Distinguish between the following :(i) Shares in physical form and shares in dematerialization form;

Shares in physical form Shares in dematerialization form1. Certificates are issued in physical form. 1. Shares are issued in electronic form.2. For share transform form 78 is executed. 2. No form is necessary. Can be transferred by

a click of mouse of computer.3. Not necessary to open accounts with any bank

3. it is necessary to open bank account with DP.

4. Transfer may take days because of physical transfer of securities.

4. Transfer is in seconds.

5. Chances of theft, forgery, spoilage etc. 5. No such chance exists.6. Chance of bad delivery 6. No bad delivery.

2001 June [8](b) repeat 2005 June [8](b)What are the modes of reduction of share capital? Specify the cases of diminution of share capital which are not regarded as reduction of share capital.

2005 Dec [6](a) repeat 2008 June [7](C) Whether the buyback of shares amounts to reduction of share capital.2007June [1](C) :Can a company reduce its share capital without sanction of court?

Answer : A comprehensive answer for above questions is given below:Reduction of Share capital :

Share capital is the foundation on which the financial structure is built. Any reduction in share capital will naturally be treated as shrinking of base. It is for this reason that the reduction of share capital is permitted in exceptional circumstances such as :

(i) Forfeiture of shares under statutory authority and (ii) Reduction as per the procedure in AOA of company.

Provisions and procedure for reduction of share capital :(Section 100)a) According to section 100, a company can reduce its share capital if it is authorised by its AOA and

by passing special resolution in this regard. The reduction has to be approved by the Tribunal. The reduction can be done in the following ways (i) Reducing or finishing the liability on any shares which are not paid up;(ii) Canceling any paid up shares, which are not represented by assets of the company;(iii) Payment of shares which are in excess for the needs of company;

Such reduction can be done only after obtaining approval or confirmation from the competent Tribunal. Following provisions also apply to reduction of share capital :

a) Every creditor of the company shall be entitled to object the reduction.b) The Tribunal shall prepare a list of creditors who are entitled to object the reduction and make

arrangement for hearing their objections. After hearing the Tribunal will give its verdict regarding various matters. The terms and conditions applicable to reduction of capital may also be specified by the Tribunal.

c) The Tribunal may pass an order to company to add the word 'and reduced' after the name of the company for a specified length of time. It may also direct the company to give information to the public regarding the reduction by way of publishing or any other suitable way.

d) The Roc shall registrar shall register the order given by Tribunal.

The following are the cases of diminution (decrease, reduction) of share capital which are not regarded as reduction of share capital.:(in these cases the sanction of court is not required)1. where the company cancels shares which have not been taken or agreed to be taken by

any person.2. where the pref. shares have been redeemed as per schedule.3. where any shares are forfeited for non-payment of calls.4. where any shares are bought back as per section 77A.5. purchase of shares of a company by a company under section 402

2000 June [1](C) repeat 2005 June [4] Comment of the following statement :'' In a further issue of capital by a public company, shares must always be issued to its existing

shareholders.''Answer : Futher issue of Capital :Section 81 deals with further issue of share capital either by issuing new shares to existing

shareholders or conversion of debentures into shares or converting loans into shares.Issuing shares to existing shareholders (Rights issue) The provisions are as follows :

1. Time of issue :(i) after the expiry of two years from the formation of company (ii) after the expiry of one year from the first allotment of shares, Whichever is earlier, further shares can be issued.

2. such shares should be first offered to existing shareholders ;3. 15 days time should be given for acceptance. If acceptance does not come in 15 days

time, it will be deemed that shareholder is not interested in offer.4. The offer should also contain the option of transfer of shares to third party.

Section 81(1) deals with issue of shares to persons other than existing shareholders and provides that company can issue further shares to persons other than existing shareholders in any manner provided a special resolution is passed in general meeting. If special resolution is

not passed, the BOD may apply to CG and if CG gives its approval, the company can issue further shares to persons other than existing shareholders.2002 June [8] repeat 2004 Dec [8] Distinguish between : Preference shares and equity sharesAnswer :Particulars Equity shares Preference sharesDividend Rate is not fixed, Depends on

profit made by the company.Depends on profit made by the company but rate is fixed.

Arrears of dividend Not possible. Possible in some casesPayment of dividend After preference shares payment Before equity shares.Conversion Not possible Possible to be converted intoVoting rights Have voting rights in all matters Restricted voting rights in matters

related to them only.Redemption Not possible Possible depending upon terms.

Descriptive Questions :Allotment of shares :2002 Dec (2)What are the legal provision for allotment of shares in a public issue? Explain in detail.2006 Dec (2a) : What is the effect of irregular allotment?2005 June : Explain the legal provisions relating to returns to be filed on allotment.2001 Dec [7d] : Is a company required to file a return of allotment for re-issue of forfeited shares ?Answer : A comprehensive answer to all the above questions is given below :Legal provisions relating to allotment of shares as per Company's Act 1956 are as follows:

1. allotment can be made only after (i) minimum subscription has been obtained and (ii) application money for minimum subscription has been obtained.

2. the amount payable on application shall not be less than five percent of the nominal value of share.

3. allotment can be made only after (i) obtaining certificate of business u/s 149 (ii) receiving applications for minimum subscription and (iii) fifth day from date of issue of prospectus.

4. if the above conditions have not been satisfied upto the expiry of 120 days from the date of issue of prospectus, all application money will be refunded.

5. the company shall make an application to stock exchange for permission of listing of shares and debentures intended to be offered. The allotment becomes void or cancelled if such permission is not obtained and the company shall refund the money so received against those allotments within eight days from the day on which company becomes liable to refund. Any delay in refund would be paid with interest rate between 4% and 15%.

6. all moneys received against subscription would be kept in a separate bank account.7. amount standing to the credit of the bank account shall be used for following purposes:

(a) adjustment against allotment of shares (b) repayment of application money Effect of Irregular Allotment :An allotment made in contravention to the provisions, would become void at the option of applicant (allottee) within two months of holding statutory meeting or within two months from the date of allotment.Any director of company, who contravenes any of the provisions regarding allotment, shall be liable to compensate the company and the allottee for any loss, damages or costs which the company or the allottee may have suffered.Returns to be filed regarding allotment :

1. Company should file a return within 30 days of allotment to the ROC. The return should contain (i) number and nominal value of shares allotted (ii) the names, addresses and occupations of the allottees (iii) amount paid and payable on those shares.

2. If shares are issued for consideration other than cash, the copy of contract containing name, addresses and occupations of the allottees and nominal value of shares and the amount of consideration other than cash, should be filed. If the

contract is not in writing, the company shall file the particulars of contract with proper stamp duty within thirty days after the allotment to the ROC.

3. If bonus shares are issued, the return shall state the number and nominal value of shares together with names, addresses and occupations of the allottees and a copy of the resolution sanctioning the bonus issue.

4. If the shares are issued at discount, a copy of tribunal sanctioning the issue, with copy of resolution sanctioning the discount should be filed along with names, addresses and occupations of allottees. If the discount is more than ten percent, the sanction of the CG should be attached with the return,

Returns for reissue of bought back shares : Reissue of forfeited shares is not allotment but a sale. When shares are re-issued, return of the forfeited shares need not be filed under section 75 of Company's Act 1956.

Issue of shares at a premium (Sec 78):2001 Dec [1] : Money received as share premium by a company can be applied for limited purposes only. Comment.2007 June [6a] : State the provisions of the Company's Act 1956 regarding the issue of shares at a premium. For what purposes the share premium account may be applied ?Answer :According to section 78 of Company's Act 1956, the provisions of the issue of securities at premium are as follows :

1. the securities premium amount will be transferred to 'securities premium a/c' All provisions of reduction of share capital will be applicable to this account. It means securities premium will be treated as share capital for the purpose of reduction of share capital.

2. The securities premium shall be applied by the company : For the issue of bonus shares ; For writing off the preliminary expenses of the company; For writing off discount allowed on issue of shares, For writing off expenses of issue of shares. For providing the premium part of redemption of pref. shares or debentures at

premium.

Issue of shares at discount (Sec 79):

2001 June [8c] Explain the provisions relating to '' issue of shares at a discount'.2001 Dec [8b] : State the conditions for issue of shares at a discount.Answer : According to section 79 of Company's Act 1956, the provisions of the issue of securities at discount are as follows :

1. A company shall issue shares at discount as per the provisions of the section 79.2. Issue should be authorized by AOA and resolution passed in general meeting. Sanction

of CG is essential for shares to be issued at discount. Discount should not exceed 10% of the face value. Under special circumstances, the CG may sanction higher rate of discount.

3. Issue on discount can be offered only after one year for the date of certificate of commencement of business.

4. Shares should be issued within two months from the date of sanction of CG on discount. The CG may extend this period.

5. Particulars of discount should be disclosed in prospectus.

Bonus shares

2001 Dec [6](a) What are the guidelines issued by the SEBI for issue of bonus shares? 2003 Dec [7b] Enumerate the steps involved in issue of bonus shares by a listed company.

2006 June [7c] : What do you understand by bonus shares and what are the advantages of issuing bonus shares?Answer :(c) Requirements to be complied with while making a Bonus issue are as follows :1. Bonus shares are free of cost shares issued to existing shareholders . The bonus issue shall be made out of free reserves built out of the profits and / or out of Securities Premium a/c collected in cash only.

2. Reserves created out of revaluation of fixed assets are not allowed to be used for issuing bonus shares. In other words, the revaluation reserves are not capitalised.3. Capital redemption reserve can be used for issuing bonus shares.4. The bonus issue is not made unless the partly paid shares are made fully paid.5. Proportional shares should be kept reserved for convertible part of FCDs and PCDs on same terms.6. The company has not defaulted in payment of interest or principal in respect of fixed deposits, debentures etc. It has made all the statutory dues fully and timely.

7. The company must implement the proposal within 6 months from the date of such approval. The company shall not have option of changing the decision.

8.The AOA shall contain a provision for capitalization of reserves. If not, the company should pass a resolution in GM for making such provision.

9. After issue of bonus shares, if the share capital exceeds the authorised capital, a resolution shall be passed in the GM for increasing the authorised capital.10. Bonus shares can be issued only after the expiry of 12 months from the date of public issue or rights issue.

The advantages of bonus shares are as follows :1. Fund does not flow. No cash payment or receipt is involved. 2. Market value of the shares comes down.3. Shareholders get additional shares free of cost.4. Bonus shares are not treated as income in Income Tax Act , hence not taxable.5. It is an indication that the company has complied with statutory requirements fully. It is

indication of good performance and management on the part of company.6. Paid up capital increases with bonus shares.

Buy back of Shares :1999 Dec [4] Discuss the provisions of the Company's Act 1956 relating to buy-back of shares by a company.2004 Dec [6b] Can a company purchase its own securities and, if so, how? What are the prohibitions, if any, for buy-back of securities?2005 Dec [6](a) Explain the provisions relating to buy back of shares. (c) Whether the buy-back of shares amounts to reduction of share capital?2007 June [4c] What is forfeiture of shares ? State the procedure of forfeiture of shares.Answer : Buy Back of Shares : Section 77 : Company can not buy back its own shares (except under a scheme of reduction of capital as permitted by Law)Section 77A (1) : Power of company to purchase its own shares :Notwithstanding anything contained in the Act, The company can buy back its own shares out of (i) its free reserves or (ii) the securities premium account (iii) the proceeds of any shares or specified securities.Section 77 A (2) : The following conditions should be satisfied for buy back :

(i) The buy back should be authorised by AOA;(ii) The buy back should be approved by Special resolution

(iii) The buy back should be completed within 12 months of passing special resolution;(iv) The buy back is or less than 25% of the paid up capital plus free reserves of the

company;(v) The buy back in any financial year should not be more than 25% of the total paid up

share capital of the company;(vi) The debt equity ratio after buy back should not be more than 2 (equity means paid

up share capital plus free reserves);(vii) The buy back should be for fully paid up shares only;(viii) For listed shares, buy back should follow the guidelines issued by SEBI.(ix) For unlisted shares, buy back should follow the guidelines of Central Govt.

Section 77 AA : Transfer of certain sum to Capital Redemption Reserve :Where a company purchases its own shares out of free reserves then a sum equal to the nominal value of the shares so purchased, shall be transferred to Capital Redemption Reserve account.Section 77 B : Prohibition of Buy back under certain circumstances :Buy back is prohibited (i) through any subsidiary company (ii) through any investment company or group of investment companies (iii) if there is any default existing in respect of payment of statutory dues to any shareholder or any financial institutions (iv) if the company has not followed the provisions of section 159 section 207 and section 211.Buy back does not amount to reduction of capital as per section 100 of Company's Act 1956.

Sweat Equity Shares, Green Shoe Option and Employees Stock Purchase Scheme2000 Dec 4a : What are '' sweat equity shares''? Explain the provisions relating to issue of sweat equity shares.2005 Dec [2b] 'Green Shoe Option is a mechanism for stabilizing the post issue price of the shares.'' Comment.2006 June [4](b) (i) Explain : Sweat Equity Shares (ii) ESOS

Answer : Sweat Equity Shares (section 79A) Meaning : Worded simply, Sweat equity shares are the shares which are issued as rewards to employees of the company either free of cost or for a price which is much below the current market price. As per section 79A of the Company's Act 1956, equity shares may be issued to directors or employees for providing (i) technical knowledge (ii) intellectual property rights (iii) any value addition. These may be issued at a discount or for consideration other than cash. Rewards are meant to encourage them to continue their better performance in the best interest of the company. These shares are also used as a tool for retaining the employee at senior level. The concept of sweat equity shares is gaining popularity these days.Conditions : Section 79A of the Company's Act 1956 gives the following conditions for the issue of Sweat Equity shares :

1. The issue should be authorised by Special resolution.2. The resolution should specify (i) the number of shares (ii) the market price (iii)

consideration, if any (iv) class of directors and employees to whom these shares are to be issued.

3. The issue should be at least one year after the date of commencement of business.

4. The issue should comply with guidelines of SEBI.5. All provisions in respect of equity shares will be applicable to sweat equity

shares also.2001 Dec 4a : Define the term 'employee stock option scheme' (ESOS) and 'employee stock options scheme (ESPS).

Answer : The term Employee Stock Option Scheme ESOS means a scheme which gives option to its directors, officers or employees the option to purchase shares of the company at a future date at a predetermined price. Dividend :

1999 June [5](a) : What is dividend ? (b) What provisions and rules have to be observed by a company before declaring dividend ? (c) State the legal provisions relating to disposal of unpaid and unclaimed dividends (d) State the legal provisions if the dividend is not paid by the company within the stipulated time.2002 June [2b] : Can the decision to pay interim dividend be revoked?2003 Dec [1](iii) Explain : Interim Dividend 2004 Dec [6a] : '' Dividends once declared become debts''. Explain.2005 Dec [1C] Explain the provisions for transfer of unclaimed dividend.2006 Dec [5b] Outline the provisions with regard to compulsory transfer of profits to reserves which should be borne in mind at the time of declaration of dividend by a company.2006 Dec [6b] State the provisions relating to unclaimed dividend.2006 June [7](c) What steps would you take to revoke the payment of interim dividend?2008 June 7c When is dividend payable ? When may dividend be paid out of capital profits ?Answer : Dividend is a part of profit, which is distributed among the shareholders in proportion to the number of shares held by them. The Company's Act 1956 does not make it compulsory for the company to pay dividends to shareholders. Sources of Dividend : According to section 205 of Companies Act 1956, dividends can be paid out of the following sources :a) Profit from the current year after providing depreciation as per the provisions of law. Profit

here means net profit after charging relevant expenses, depreciation and provisions and after transfer of prescribed percentage to reserves.

b) Undistributed profits of the previous year.c) Money provided by state govt. and central govt in a scheme of guarantee. d) Out of capital profit subject to provisions of law.

Dividend : (Section 205 to 207) : Salient provisions are as follows :1. Dividend can be paid only out of current year profits (excluding certain exceptions) and

only after adequate provisions for depreciation.2. The BOD recommends the rate of dividend and shareholders approve it in general

meeting. The AGM can suggest reduction in rate of dividend as recommended by BOD but it can not increase the recommended rate.

3. Interim dividend does not require sanction or approval of general meeting.4. Dividend is payable only in cash. 5. Dividend shall be paid within 30 days from the date of declaration. This will not apply in

the following circumstances (i) when dividend could not be paid by reason of any operation of law (ii) when the shareholder has given certain directions to the company for payment of dividend and such directions could not be complied with by the company (iii) when there is a dispute regarding the right to receive the dividend (iv) when the dividend is lawfully adjusted against any dues of the shareholder (v) when delay is not at the fault of the company.

6. According to section 205 of the Companies Amendment Act 1975 which states that minimum amount of profits should be transferred to the reserves of the company at the rates prescribed by the government. These rates have been prescribed in Companies (transfer of profits to reserve) Rules 1975. The company can however, transfer higher rates to reserve. Following table is relevant

Dividend as % of paid up capital Minimum transfer to reserveLess than 10% 2.5% of current year profit

10% to 15% 5% …………. do……….15% to 20% 7.5% …………. do……..Above 20% 10% …………. do……….

7. Dividend will be paid only in cash and within 30 days from the date of declaration.8. Dividend will be paid only to the registered shareholder or as per his instructions. Share

warrants can be issued to the holder of the warrant.9. The unclaimed or unpaid dividend will be transferred to a special account called ''

unpaid dividend account''. 10. Any amount transferred to Unpaid dividend a/c and remaining unpaid or unclaimed for

a period of seven years from the date of such transfer shall be transferred an account established for the benefit of the investors.

11. If the company declares dividend but does not pay the same within 30 days from the date of declaration to every shareholder, every director shall be punishable with a simple imprisonment of a term, which may extend to 3 years and shall be liable to a fine of Rs. 1000 per day for every day during which such default continues. The company shall also be liable to pay simple interest of 18% per annum during the period for which such default continues.

12. Under the following circumstances, there shall be no offence under the above section : Where the dividend could not be paid by reason of operation of law. Where shareholder has given directions to the company about the payment of dividend and

such directions could not be complied with. Where there is a dispute about the right to receive the dividend. Where the dividend has been lawfully adjusted by the company against any sum

outstanding from shareholder. When the failure to pay or delay in payment was not due to any fault of the company.

Interim Dividend :Interim dividend is a dividend paid between two AGMs. It is part of profit which is distributed before the final accounts are prepared and passed in AGM. Section 205 provides as follows:

The Board may declare interim dividend and the amount of interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend.

The amount so deposited shall be used for payment of dividend. Interim dividend stands similar to final dividend in all respects. Dividend becomes a debt

after its declaration and become payable within 30 days (earlier it was 42 days) of declaration.

Before declaring interim dividend, the Board should ensure the final profits of the company would be enough to accommodate the interim dividend after providing for depreciation, creation of requisite reserve and meeting the tax liability.

Dividends once declared become debts :Once a dividend is declared, a shareholder has the right to claim dividend against the company. Under section 207, the dividend has to be paid within 30 days from date of declaration.Ordinarily, a dividend once declared, cannot be revoked. Declared dividend is a debt from shareholders and only shareholders can give consent whether it should be revoked. Same is true with interim dividend which cannot be revoked except under certain circumstances like (i) it has been illegally declared (ii) event like war, fire, imposition of fresh taxes, etc have take place after the declaration of interim dividend and it is advisable to conserve the remaining assets, the BOD can revoke the declaration of dividend.Procedure for transfer of unclaimed dividend :The dividend should be paid within 30 days of its declaration. If it is not paid within this period, it should be transferred to another account within seven days after the expiry of 30 days period. The unclaimed or unpaid dividend will be transferred to a special account called '' unpaid dividend account''. Any amount transferred to Unpaid dividend a/c and remaining unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred an account established for the benefit of the investors.

If the company declares dividend but does not pay the same within 30 days from the date of declaration to every shareholder, every director shall be punishable with a simple imprisonment of a term, which may extend to 3 years and shall be liable to a fine of Rs. 1000 per day for every day during which such default continues. The company shall also be liable to pay simple interest of 18% per annum during the period for which such default continues.

Payment of Interest out of capital (Section 208)

2000 Dec 6b : '' Interest can be paid out of capital'' Elucidate.2007 Dec 7b : What are the provisions for payment of interest out of capital?Answer : Section 208 contains provisions regarding payment of interest out of capital of the company in certain cases as given below :When shares are issued to raise funds for a project which can take many years to complete and commence generation of revenues. In such cases, the company may pay interest on paid up capital on certain conditions and restrictions. The amount of such interest can be charged to cost of construction of the work. The conditions and restrictions are as given below :

1. Provision should exist for such payment in AOA. If it does not exist, it should be authorised by special resolution.

2. There should be a prior sanction of the CG for such payment. Before granting such sanction, the CG may make necessary inquiry by a competent person at the cost of the company.

3. The period for which the payment is to be made will be determined by the CG. CG will also specify the rate of interest which will be paid subject to upper limit of 12%. (Earlier it was 4%).

4. Paid up value of share will not be reduced on account of such payment.

Chapter 10 : Accounts and Audit Legal provisions regarding accounts :2000 June [4b] : List out ten statutory books and registers to be maintained under Company's Act 1956.2004 Dec [5] (a) (b) What are the statutory books to be maintained by a company under Company's Act 1956?Answer : tSlk gS oSlk gh Nki nhft;sA2004 Dec [5] (a) Who are responsible for keeping the books of accounts of a company? What are the liabilities imposed on them for their failure in this regard?

2006 Dec [4d] Write a short note on 'right' to inspection of books of company by a director or his duly appointed attorney.Answer : A comprehensive for the above questions is given below :Section 209 of Company's Act 1956, requires every company to maintain proper books of account at its registered office with regard to :(i) All receipts and payments (ii) All incomes and expenses (iii) All sales and purchases (iv) All assets and liabilities (v) All books for ascertainment of cost of product under section 209(1)(d) apart from financial books of accounts.

Inspection of books of accounts ; Section 209 also grants powers for inspection of books of accounts during the office hours to (i) any director (ii) The ROC (iii) Authorised officer of CG (iv) Authorised officer of SEBI .It should be noted that a shareholder of the company has no right to inspect books of accounts. Persons responsible for keeping proper books of accounts : Section 209 specifies the following persons who have been made responsible for the safe keeping of books of account :(i) Managing director of the company (ii) manager of company (iii) every director of company (iv) all officers and employees of the company in addition to above persons.Non-compliance to this, the person shall be punishable with imprisonment upto 6 months or with a fine which may extend to Rs. 10,000 or with both.Legal provisions regarding the Accounts :

1999 Dec [3b](c) Advise the company on the steps to be taken mentioning the relevant provision of Company's Act 1956, if the company fails to appoint first auditors within stipulated time.

2000 Dec [3] Explain the legal position and the suggested action in the following : (i) No auditors could be appointed in the AGM of a public limited company.(ii) First auditors were not appointed in time by BOD in a public company.

2003 Dec [8](c) Explain the provisions relating to tenure of office of auditors under various circumstances.Answer : A comprehensive answer for the above questions is given below :Appointment of auditors :

1. The first auditor(s) of the company shall be appointed by BOD within one month of the date of registration of the company. The first auditor shall hold office until the conclusion of the first AGM. (Section 224).

2. If the BOD fails to appoint the first auditors, the company in its general meeting may appoint the first auditor or auditors.

3. Statutory Auditors : Section 224 : Auditor will be appointed in AGM. The auditor will hold office from the conclusion of that meeting to the conclusion of next AGM. 4. Section 224A : Appointment by Special Resolution:A company in which not less than 25% of the subscribed capital is held by :(i) a public financial institution or a government company or the Central Govt. or any State Govt. or (ii) any financial or other institution established by any Provincial or State or any State Act in which a State Govt., holds not less than 51% of the subscribed capital, or (iii) a nationalised bank or an insurance company carrying on general insurance business; or

(iv) any combination of the above categories, shall appoint or re-appoint an auditor in the annual general meeting only by passing a special resolution. If the company fails to pass a special resolution, it shall be deemed that, no auditor is appointed by the company.

5. if in an AGM, no auditors are appointed, the company shall bring this fact to the notice of CG within seven days, and the CG may appoint a person to fill the vacancy.6. If there is any casual vacancy(except due to resignation) , the BOD may appoint the auditor. If the vacancy is created by resignation of existing auditor, the vacancy can only be filled in a general meeting. Any auditor appointed in such a casual vacancy, shall hold the office till the conclusion of next AGM.

Ceiling on number of audits for an auditor (restriction on the appointment of auditors) : [Sec 224 (1B)] : An auditor can not have appointments as statutory auditor for more than a specified number of companies : the specified number is as follows :1. Twenty companies out of which , companies having a paid up capital of Rs. 25 lacs or more, should not be more than ten.

2. The specified number is for each partner individually. If a firm has a number of partners, the specified number will be calculated with respect to every partner.

1998 Dec [5]: The Company's Act 1956 prescribes certain disqualifications for appointment as an auditor of a company.

Answer : Sec 226 makes provisions regarding qualifications and disqualifications of an auditor as given below :

a) He must be a chartered accountant holding a valid certificate of practice.b) A firm where all the partners are chartered accountants can also be appointed as

auditors of a company.c) The following persons shall not be eligible for appointment as auditors.(i) A body corporate (ii) An officer or employee of the company (iii) A person who is partner of an officer of the company (iv) a person who is in full time employment of an officer of the company (v) A person who has taken a debt of more than Rs. 1000 from the company (vi) a person who has given guarantee of a person who has taken a debt of more than one thousand rupees from the company (vii) if such appointment crosses the ceiling limit on number of audits as per section 224 (1B) (viii) a person who is disqualified for being an auditor for the subsidiary or holding company of the company to be audited.

2002 June [6a] Explain in brief the duties and responsibilities of auditors under Company's Act 1956.Answer : The auditor must be free from the interest and wishes of the persons appointing him and remunerating him for his services. His independence for performance of his duty is central aspect of auditing and to ensure his independence, assured rights and powers have been granted to him in the Companies Act 1956 which are as follows:Rights and Powers of Auditors are as follows :

1) Right to access to books of accounts : The auditor of a company, at all times, has the right to access to the books and accounts and vouchers of the company whether kept at the head office or elsewhere.

2) To require from officers of the company such information and explanation as he may think necessary for the performance of his duties as auditor. (Section 221)

3) To attend the general meeting of the company and address the members if he deems fit. He can make his representation in writing or orally in the general meeting.

4) all notices and other communications relating to any general meeting of a company which any member is entitled to have sent to him shall also be forwarded to the auditor of the company. (Section 231)

5) specific procedure as described in the Act shall have to be followed for his pre term removal from the post of auditor.

2. The liabilities of auditor under the Companies Act 1956, are as follows(a) In respect of signing of prospectus : The auditor is liable if he signs misleading

statements in the prospectus and he is required to compensate equivalent damages suffered by the persons (civil liability sec 62).

(b) Sec. 253 : Liable for signing false reports or documents u/s 227 and u/s 229 and if held guilty in this regard, he shall be punishable with the fine which may extend to Rs. 10,000.

(c) Sec 539 : He is liable for falsification of books with intent to deceive or commit fraud. The punishment under this section is imprisonment for a term which may extend to 7 years and also liable to fine.

(d) Sec 628: It relates to false statement. If in any return, report, certificate, balance sheet, prospectus statement, or any other documents required under Companies Act 1956, a false statement is made and knowingly it to be false, if the auditor certifies it to be true, he shall be punishable for a term which may extend to 2 years and also be liable to fine.

3. Liabilities for misfeasance : Misfeasance means breach of trust or duty.Sec 543 : liabilities for misfeasance: The auditor is liable for equivalent damages suffered by the Company to third party.

4. Auditor is liable under Indian Penal Code for frauds and furnishing false information, report and statements.Duties of Auditors are given below :

a) He should acquaint himself with MOA and AOA of the company being audited by him.b) He should exercise reasonable care and caution in the performance of work assigned to him.c) He is to make report on the books audited by him. He has to state in his report whether the

accounts represent true and fair view of the state of affairs of the company.2007 June (8) (b) Distinguish between : Special audit and Cost audit:Special Audit : Special audit is ordered under section 233A of the Companies Act 1956, when the Central Govt. opines that such an order is necessary under the following circumstances :

1. Where the affairs of any company are not managed in accordance with sound financial principles or prudent commercial practices;

2. When any company is being managed in a manner likely to cause serious injury or damage to the interest of the trade, industry or business, to which it pertains;

3. When the financial position of any company is such as to endanger its solvency.The special audit is conducted by the auditor of the company or by any other chartered accountant appointed by the Central Govt.Cost Audit : The Central Govt. can order any company u/s 209(1)(d) to maintain cost records of a particular product or process. Section 233B of the Companies Act 1956, prescribes that the record to be kept u/s 209(1)(d) are to audited by a Cost accountant. The audit will result in cost statement of that product or process. The cost auditor is appointed by the Board of directors of the company with the prior approval of the Central Govt. subject to necessary certificate of practice from the cost auditor.2001 June [4a] Explain the provisions of Company's Act 1956 in respect of special audit.Answer : Special Audit : Special audit is ordered under section 233A of the Companies Act 1956, when the Central Govt. opines that such an order is necessary under the following circumstances :

1. Where the affairs of any company are not managed in accordance with sound financial principles or prudent commercial practices;

2. When any company is being managed in a manner likely to cause serious injury or damage to the interest of the trade, industry or business, to which it pertains;

3. When the financial position of any company is such as to endanger its solvency.The special audit is conducted by the auditor of the company or by any other chartered accountant appointed by the Central Govt. He will have the same powers and duties as an auditor of a company in accordance with section 227. however, certain special provisions apply in respect of the report of the special audit. The special provisions and requirements are :

1. Apart from including the matters required u/s 227 of the Companies Act 1956, The report, will further include a statement on any other matter which may be referred to the auditor by the Central Govt.

2. If the special auditor may require, the Central Govt. may order any person to furnish within a time limit information in connection with the special audit.

3. On receipt of the special audit report, the Central Govt. may take necessary action as per the Companies Act 1956, or it may alternatively send the copy of the report or part thereof with comments to the company for information of its members for discussion at its next AGM. All expenses of the special audit are to be borne by the company.

2010 June [8b] : State some of the procedures which an auditor has to follow in order to evaluate going concern uncertainties.Answer : The auditor may assess whether the company is going concern or not. When the company has concrete plans for foreseeable future, it may be ensured that company is going to exist for reasonable time in coming future. Some of the procedures are given below :

1. Analysis of cash flow, profit and other relevant forecasts. Discussion with management.2. Analysis of latest financial statements of the company and discussion with management.3.4. Quantity and status of pending orders with the company. Company's plans to fulfill those

orders.5. Forecasts relating to future cash flows, profit etc. may be discussed with management.6. Capital budgeting decisions, the list of projects to be taken in future.

7. Latest interim financial results may be discussed.8. Financial difficulties faced by the company and company's plans to handle them.9. How the principal and interest of debentures and loans are being paid by the company.

Suggestive reading : Article 20.11 of study note 20 page 251 of the Module.Practical Questions : Take them as they are.tSlk gS oSlk gh ys yhft;s A Chapter 11 Membership of a Company :2000 Dec [5a]: Define the term 'member'. Explain whether a subsidiary company can be a member of its holding companies.2001 Dec [1] : Every shareholder of a company is also known as member, while every member may not be known as shareholder. Comment.Answer :The term member has been defined in section 41 of Company's Act 1956 according to which :

1. The persons who sign the MOA shall be deemed to be member of the company.2. Any person who agrees in writing to become member of the company and whose name is

entered in the register of members, shall be a member of the company.In section 42 it has been clearly provided that a subsidiary company cannot become a member of holding company (with some exceptions as mentioned in that section).Generally speaking every shareholder is a member of the company and every member is a shareholder. However, there may be certain exceptions to this statement. For example a person may be holder of shares by transfer but would not become member until the transfer is registered in the books of company and his name is added in register of members. Same is true when a member transfers his shares to some other person. He is not a shareholder but he is a member as his name still appears in the register of members.A person who signs the MOA is deemed to be its member immediately on incorporation of company though the shares may be allotted to him later on.Similarly a person holding share warrant is a shareholder but he will not be member of that company.A registered member may not be a shareholder of the company as the company may not have share capital at all.2007 June [2b] : Write short notes on : Modes of acquiring membership.2000 June [7a] : What are the various ways of becoming a member of a company?2000 June [7b] : Can the following become a member of a company : (i) a partnership firm and (ii) a private limited company ?2003 Dec [3a] State the modes of acquiring membership in a company.2003 Dec [3b] Repeat 2007 June [3b] Can a member be expelled from a company? 2005 DEc [5b] A register of membership is a prima facie evidence of membership. Comment.2007 Dec [6b] :Explain the circumstances when a person ceases to be a member of a company.

Answer : A comprehensive answer for the above questions is as follows :In general a person competent to contract can be a member of the company provided he fulfills the requirements of MOA and AOA. The following persons can become member of company :

1. Partnership Firm : A Pfirm may hold shares in any company in the individual names of partners. Since the partners and the firm are same in the eyes of law, the firm can also be treated as member of the company.

2. Company : A company can hold shares of another company provided it is permitted by its MOA and AOA. However, a company cannot be member of itself. In other words, a company cannot hold shares in itself. Though there is a provision of buy back of own shares in section 77A, such shares should be cancelled and destroyed immediately.

3. Foreigner : The foreigners can become member of a company if they don't belong to an enemy country.

4. An insolvent can be a member as long as his name appears in the register of members. Such insolvent is also entitled to vote though he may not have physical shares with him because of insolvency.

Modes of acquiring membership : As per section 41 of Company's Act 1956, a person may acquire the membership of a company :

1. By signing MOA (deemed agreement);2. By agreeing in writing to become member : (i) by making an application for allotment of shares (ii) by

purchasing shares from some other person and signing the transfer deed (iii) by getting shares transmitted to him as being legal heir

3. by acquiring shares in the company in the depository system of holding shares.Termination of Membership :A membership may be terminated from two sides, one from the member and other from the company as follows :1. If a member sells his shares; 2. If his shares are forfeited as per an operation of law;3. If he cancels contract with the company in any manner,Can a member be expelled from the company ? No, as it is against the fundamental right of a member. It is ultra vires the company to expel any member. The right is given by the Company's Act 1956, and it is ultra vires the company to exceed the provisions of Act. Any cancellation of membership by the company must be held as illegal. Membership Register or Register of member : (section 150):Section 150 requires that every company shall maintain a register of its member and the following particulars shall be recorded in the same :1. Name, address and occupation of the member,2. Number of shares held by each member and amount thereof paid or to be paid,3. The date of entry in the register4. Date on which his name was deleted.A register of membership is prima facie evidence of the truth of its contents. It is the duty of the company to record all changes duly so that the register reflects the true figure of current membership. Accordingly, if name of a person appears in the register of members and the person knows about it, he shall be deemed to be a member of the company and the onus (responsibility) lies on him to prove that he is not a member.Index of Member : (section 151) : The provisions of section 151 are as follows :1. Every company having more than fifty members shall keep an index of members. Alterations will be

incorporated with 14 days.2. Index must be such that the information relating to the member can be readily found.3. The index will be kept at the same place where the register of member is kept.4. Any default is made, the company and every officer of the company who is in default shall be

punishable with a fine which may extend to five hundred rupees.5. The depository will maintain the register and index of members (beneficial owners) as per Depository

act 1996.Closing the register : (sec 154) : Actually the Company's Act 1956 does not make it mandatory for a company to close the register. It is the requirement of SEBI that the register is to be closed for the purpose of declaration and payment of dividend.Liability of members may be unlimited : (section 45) : As per section 45, the members become personally liable if the membership falls below seven in public limited company.

Power to rectify register (section 164):Entry in the register is actually displaying the rights and liabilities of the members. The rectification of member register becomes where :

1. a forged transfer has been registered ;2. forfeiture of shares is not as per law;3. a person's name has been wrongfully removed from the register;4. surrender of shares improperly;5. the application for shares is conditional and such conditions are not fulfilled.6. the allotment is invalid;7. the registration of shares is invalid;8. the registered person is not represented properly.

Chapter 12 Directors According to section 2(13) of the Company's Act 1956, a director includes any person occupying the position of director, by whatever name called. This definition implies that the director is not by post but by the functions. If a person is discharging duties and functions of a director, he will be called as a

director even though his designation may be different. Thus a person who has influence and control over the directions, conduct and management of the business of the company, is the director of the company.The Company's Act 1956 also provides that only an individual can be director. A body corporate, association of persons or firm or company, cannot function as director. Directors are elected in a general meeting of the shareholders.Disqualifications for directorship (section 274): The Company's Act 1956 provides that a person shall not be capable of being appointed as director of company if :1. A court has declared him of unsound mind, and such declaration is still in force.2. He has applied to be declared insolvent and his application is still pending.3. He has been declared as insolvent by a competent authority.4. He has been sentenced to imprisonment for 6 months or more and a period of five years has not

been finished from the last day of such imprisonment.5. An order has been passed by a court that he can not appointed as director.6. Who is already director of company which has not filed its annual returns and accounts for past

three years or which has failed to repay its deposit or interest on due dates or failed to pay dividend on due date. Such person will not be eligible to be appointed as a director of any other public company for a period of five year from the date of such failure.

Appointment and Qualifications of directors :Appointment of First director :1. Normally the names of first directors are mentioned in the AOA.2. If the AOA does not contain the names of first directors, the subscribers to MOA will decide the names

and number of first directors.3. Even the first directors have not been decided in this manner, the subscribers to MOA will be deemed

to the first directors of the company.4. The appointed directors will hold office till the first AGM.Subsequent appointment of directors :Section 255 provides that at least 2/3 rd of the total number of directors shall retire by rotation every year. The remaining directors shall also be appointed by the company in general meeting.Section 256 has provisions in respect of retirement by rotation as follows :1. One third of the directors, who are appointed as per section 255, shall be liable for

retirement by rotation in the first and subsequent AGM held after retirement.2. The directors holding office for the longest duration, shall be first to retire by rotation.

The retirement by rotation will be by mutual agreement or by drawing lots.3. The vacancy created by retirement can be filled by the retiring director or by any

other person.4. If no such appointment is made, next meeting will be held at the same time and

place next week on a working day.5. The retiring director shall be deemed to be reappointed if the meeting does not

appoint the director. This is of course subject to condition that such director has not conveyed his willingness and is not other wise disqualified for the directorship.

Section 257 : A person other than the retiring director shall also be eligible for appointment as director at any general meeting. Such a person has to give notice of his candidature with a deposit of Rs. 500 before not less than 14 days of the date of meeting. The company will inform the members either by post or by advertisements in the news papers having circulation in the area of registered office.Section 260 : appointment of additional directors : Section 260 gives powers to directors to appoint additional director if provision for the same is in AOA. Such additional directors will hold office till the date of next annual general meeting whether such meeting is held or not, on that date. Total number of directors which the company can have, is given in AOA and such number should not be exceeded.Section 262 : Casual Vacancy : The BOD have the powers to fill the casual vacancy caused in the Board subject to the provisions in the AOA. Such person will hold office till the tenure of director on whose place he is appointed.Section 313 : Appointment of alternate director : An alternate director is appointed in place of a director during his absence for a period of more than three months from the state in which the meeting of the board is ordinarily held. He shall vacate the office as soon as the original director presents himself. The following provisions apply to alternate director : (i) he is not considered as in increase in

the strength of Board (ii) he is not required to hold any qualification shares in the company (iii) his directorship is not counted in the ceiling on number of directorships as given in section 275 (iv) an alternate director may be appointed as managing director or as whole time director.

Appointment by third parties : Third parties may be given powers to represent themselves in the BOD by their nominees. If the AOA permit, the banks, creditors or other financial institution can nominate their directors to safeguard their interest. The number of such directors shall not exceed one third of the total number of directors.Appointment by Central Government (Section 408) : To safeguard the assets of company or the interests of shareholders, the CG may also appoint such number of directors as it may think fit. The tenure of such directors shall not be more than three years. The purpose of this appointment is to prevent the affairs of the company from being conducted in a manner (i) which is oppressive (dominating) to any members of the company or (ii) which is prejudicial (harmful, damaging) to the interests of the company or (iii) which is prejudicial to the public interest.Directors appointed by CG, shall not required to hold any qualification shares not they will be retired by rotation. Such directors can be removed by the CG only and another person may be appointed in his place.Restrictions on the appointment of directors (Section 266) :Certain legal formalities are to be completed before a person can work as director, which are given below : A person shall be appointed as director if :

1. He has signed his consent to work as director and filed his consent with the ROC.2. He has agreed to take his qualification shares if any, and has paid for them or has agreed to

pay for them.3. If he has not taken his qualification shares, he is required to file his undertaking to the ROC

that to take such qualification shares and to make payment for them.4. He would file an affidavit to the ROC stating that his qualification shares are registered in

his name.Number of directorship (section 275: A person can be a director in maximum 15 companies only. Thus the limit of directorship is fifteen companies.Section 277 provides that if a person is holding directorship in 15 companies and he is appointed as director of any other company, such appointment will not take effect. If he vacates the directorship of any one company, then such appointment will take effect. The time limit for vacation of office of director is fifteen days. If he does not vacate office within 15 days of such appointment, such appointment will become ineffective and void.Section 278 provides that for calculating the directorship, following companies shall be excluded:

A private company, which is neither a subsidiary nor a holding company of a public limited company.

An association not carrying on business for profit. An association which does not pay dividend. A company in which such person is only alternate director.

The period for which the company will be excluded would be 3 months.Section 279 provides fine of Rs. 50,000 per company in excess of first fifteen companies.Vacation of office by Directors (Section 283):Section 283 provides that the office of the director shall become vacated if :1. He fails to hold the qualification shares as required in AOA within two months of his appointment.2. He has been declared as of unsound mind.3. He has been declared insolvent by some competent authority.4. He has applied to be declared as insolvent.5. He is convicted in an offence for imprisonment for a period of more than six months.6. He fails to pay calls within six months from the last date fixed for payment of call.7. He remains absent from 3 consecutive meeting of the BOD or from all meetings of the board for

three months whichever is longer, without obtaining leave of absence from the board.8. He fails to make disclosure to the Board about his direct or indirect interest in any contracts with

the company. (section 299)9. He becomes disqualified by an order of a court or Tribunal.10. He is removed by an ordinary resolution.

11. He no longer occupies the office, on account of which he was granted directorship.Relationship between Director and company :The position of director with respect to company can be examined with four angles :

1. Director as trustees : The director can be treated as because (i) they run the management of the company, (ii) they use the property of the company in judicious and prudent way and in the best interest of shareholder (iii) they design the future of the company (iv) they use all the resources and powers of the company. But directors can also be treated as partial trustee or quasi (half) trustees because of following reasons (i) the ownership of the property and money is not given to them (ii) their functions, duties and responsibilities differ from those of trustees.

2. Directors as agents : The directors are agents of the company because the company acts through them hence the relationship between director and company is that of a principal and an agent. The actions of agent are treated as actions of principal and therefore the actions of directors are binding on the company. However, if directors cross their limit as set by law, their actions are not binding on the company although the company may ratify them as principal. Thus the directors are agents of the company in the eyes of law.

3. Directors as officers : The Company's Act 1956 treats directors as officers of the company as per section 2(30). Therefore they are liable to punishment and penalties if they do not follow the provisions of the law.

4. Directors as employees ; Remuneration is paid to directors by the company hence relationship between them is that of employer and employee, although they are not entitled to any benefit which is given to employees of the company. A managing director or whole time director is an employee of the company and any director can hold these positions and become the employee of the company.

Removal of Directors by Company and Shareholders (Section 284) : Section 284 of the Company's Act 1956, provides that a company may remove a director by

passing an ordinary resolution in its general meeting. There are certain exceptions to this rule which are as follows :

1. Director appointed by CG as per section 408;2. Directors appointed by BIFR ;3. Directors appointed by financial institutions under loan agreements;4. Directors under principle of proportional representation. Special notice shall be required for removal of director. Principle of natural justice will be followed

which means the director will be given a chance for explanation and will be heard. Another person may be appointed in place of removed director and such person will hold office for the same period for which the removed director would have held the office.

Removal of director by Central Government (Section 388) : The CG may remove a director or any managerial personnel on recommendation of Tribunal. The CG may use this power if : (i) the CG is satisfied that such person is guilty of fraud, continuous negligence or any other offence or (ii) the person is not following sound economic principles and prudent commercial policies in performance of his duties (iii) the person has caused or likely to cause serious damage or injury to the interest of trade, commerce, industry or business to which the company relates (iv) the conduct of person is with intention to defraud the creditors, members or any person of the company.Removal of Director by Tribunal (section 402): This relates to oppression or mismanagement. The Tribunal may cancel, terminate or modify any agreement between the company and the managing director or any director or any manager if an application is made u/s 397 or 398 and if the Tribunal finds that relief should be granted. If any managing director or director or manager is removed under this section, such person cannot claim damages against the company or compensation for the loss of office. He cannot be appointed in any managerial capacity in the company, without the permission of the Tribunal for a period of five years from the date of order.Board of Directors : Section 285 provides that in case of every company, a meeting of its BOD shall be held at least in every three months and at least four such meetings shall be held every year. The CG has powers to grant exemption to any company in this regard.Notice in writing shall be given to all the directors who are in India at usual address.The quorum shall be one third of strength or two directors whichever is higher. Interested directors shall not be counted for deciding quorum for the meeting.

Subject of provisions of AOA, if a meeting is not held for want of quorum, next meeting will be held on next week on the same day at the same time. If that day is public holiday next working day will be the day of the meeting.Section 290 provides that acts done by a person as director, will be valid even if his appointment is found to be invalid for any reason at a later date. But once it is known that his appointment is invalid, then after such knowledge all his acts as director will be treated as invalid.Powers of BOD : Section 291: General Powers : All powers granted to BOD by the Company's Act 1956 can be exercised by the Board but subject to provisions in the MOA or AOA. Section 292 : Powers to be exercised only at meeting of BOD: Section 292 provides that the Board can exercise the following powers only if the resolution is passed at meeting of the Board. Such powers are

1. The power to make calls for unpaid amount on shares;2. The power to authorize the buy back of shares;3. The power to issue debentures;4. The power to borrow money other wise than debentures;5. The power to invest the funds of the company and 6. The power to make loans.

Section 293 : Powers to be exercised with the approval of the company in general meeting:1. Sell or lease any undertaking either in whole or in part;2. Give time for the repayment of any debt due to director;3. Increase borrowings beyond the total of paid up capital and reserves.4. Contribution to charitable and other funds exceeding 50,000 rupees or five percent of net

profits as per section 349 and 350 of the Act, which ever is greater.Section 293A : Political Contributions

1. Political contributions are prohibited for Govt. companies and for companies which are in existence for less than 3 years.

2. Contribution in any financial year shall not exceed 5% of average net profit of past three years.

3. A resolution in the BOD should be passed in its meeting authorizing the contribution.4. Such contribution should be charged to profit and loss a/c for the year.

Duties of Directors : General duties of directors are discussed below :Fiduciary Duties : Fiduciary relationship means relationship with utmost faith specially in monetary matters. The directors must exercise their powers honestly for the welfare and benefit of the company. There should be no conflict of interests of company and its directors. The directors should first give preference to company. Duties or care, skill and diligence ; Directors should discharge their responsibilities with due care, skill and diligence. Other duties : They should disclose their interests in any contracts of the company.(The reader is advised to elaborate the above points on her/ his own.)Contracts in which directors are interested Section 297:Section 297 provides that : (i) A director of a company or his relative (ii) a firm in which a director or relative is partner (iii) a private company in which the director is member or director , will not enter into any contract with the company without the consent of the BOD. Such contracts may be ;

a) For the sale, purchase or supply of any goods, materials and services or b) For underwriting of any shares or debentures of the company; or

If the company is having a paid up share capital of Rs. 100 lacs or more, any such contract with the company can be made only after the approval of the CG.The above provisions will have no effect if (i) the transactions are on cash basis and at market price (ii) the value of transaction is not more than Rs. 5,000.In case the value of transaction exceeds Rs. 5,000, following shall apply :

a) In case of a proposed contract, the interested director shall disclose his interest at the meeting in which the contract is to be discussed.

b) In case of any other contract, the disclosure shall be made at the meeting held after the director becomes interested in the contract. The concerned director shall give a notice to the Board that he is interested in the contract.

c) A director of a company must not place himself in a position in which a clash between his personal interests and his duty is likely to occur. He must maintain a distance from all discussions relating to the contract in which he has interest. His presence is also not counted in a meeting in which such discussions are going to take place.

Section 301 provides that every company shall a keep a register of contracts in which any of its directors is interested. All particulars regarding such contracts will be kept in the register.Director Identification Number (Section 266):

a) Every person intending to be appointed as director of a company shall make an application to the CG in the prescribed format along with required fees.

b) The CG within one month of receipt of application shall allot a DIN (director identification number) to the applicant.

c) It will be unique number to the director and no director can have another identification number.d) The DIN will be informed to all companies in which such person is a director.e) The number shall also be informed to the ROC within one week of the receipt of number.f) Any reference in respect of director shall have his DIN.

Remuneration of Directors : The provisions are as follows:Managerial remuneration means the remuneration paid to the managing director, whole time director or managers of a company.1. The remuneration will be computed as per section 198.2. A director may receive remuneration by way of a fee for each meeting of BOD or its committee,

attended by him.3. Remuneration may also be made by way of monthly payment or by a specified percentage of net

profit of the company. Without the approval of CG, such remuneration shall not exceed five percent of net profit for one such director, and if there is more than one director, ten percent for all of them.

Remuneration to Managerial PersonnelSection 198 : prescribes the overall maximum managerial remuneration payable.Section 309 : prescribes the remuneration payable to whole-time directors and part-time directors.Section 310 : requires sanction of Central Govt. for increase beyond limit as per section 198.Section 349 : lays down the method for computation of net profit for managerial remuneration.The remuneration to managerial personnel is related to net profit and as calculated as some % of net profit. Two cases may arise −Section 198 Max. % of net

profit1 Overall (excluding fees for attending meetings) 11% Section

1982 If there is one MD/WTD (whole time director) 5% Section

3093 If there are more than one managerial personnel 10% Section

3094 Remuneration of part time directors

(a) If there is no MD / WTD 3% Section 309

(b) if there is available MD/WTD 1% Section 309

5 Manager other than MD /WTD 5% Section 387

Note : A Company can have either MD or Manager and not both. A company can have more than one MD but not more than one manager.

Managing Directors and Managers :A managing director is a director who is given considerable powers of management, which would not otherwise be exercisable by him. The powers may be given to MD by (i) virtue of an agreement with the

company or (ii) a resolution passed by the company in its general meeting or (iii) its BOD or (iv) virtue of its MOA or AOA. He is an employee director of the company and is its chief executive.Appointment (Section 266): Every public company having a paid up share capital of Rs. 5 crores or more shall have a managing director or a whole time director or a manager. Other provisions are as follows :1. Schedule 13 (XIII) of Company's Act 1956, contains the conditions and remuneration payable to a

MD. If the appointment is not made as per schedule XIII, approval of CG is mandatory.2. If the appointment is not made as per schedule XIII, an application should be made to CG for its

approval within 90 days of the appointment.3. The CG may grant its approval after examining the conditions of appointment as fair and just, it

should also see whether the person appointed is a proper person for the post of MD.4. If the CG does not grant its approval, the appointment will be treated as cancelled and the MD will

vacate the office immediately after receipt of information from the CG.Disqualifications of MD (Section 267) are as follows :1. All disqualifications of a director also applicable to MD, WTD (whole time director) or a manager.2. He is not convicted of moral turpitude by a Tribunal or court.3. He is not declared insolvent by any authority of law. 4. He has not suspended payments to the creditors.5. He has not applied for being declared insolvent in any court of law.6. He can be appointed as MD in one company only. 7. He will be appointed for a maximum period of five years.Managers : Manager means a person who has the management of whole or substantial part of, affairs of a company. Manager includes any person occupying the position of manager. Provisions as per Company's Act 1956, are as follows :1. A firm or body corporate cannot be appointed as a manager.2. All disqualifications to MD are also applicable to manager as well.3. The manager of a company shall be subject to the overall limit of managerial remuneration. Such

remuneration shall not exceed 5% of the net profit calculated as per section 349 of the Act. Any excess beyond 5% shall require sanction of CG.

2004 Dec [8](b) :(iii) First director and a director appointed in a casual vacancy.Answer : Take the same as given in the answer.2005 June [1](C) (ii) Executive director and independent director Answer : Executive Director : The term executive director has not been defined in the Company's Act 1956. The executive director may also be called whole time director as they devote their full time to directorship. They can not accept the appointment as executive director or whole time director in any other company. They can accept the appointment as part time director or non-executive director in other companies subject to overall limit of fifteen companies as fixed in section 275 of the Act. The ED or WTD needs to subscribe to the qualification shares as required by the Act.Independent Director : The term independent director has not been defined in the Company's Act 1956. As the name indicates, the ID is independent to the company in every respect except the fact that his remuneration is paid by the company. He can accept appointment in other companies as independent director as well. The ID does not need to subscribe to the qualification shares.2006 June [1] (C) (iv) : Additional director and Alternate director :Answer : Section 260 : appointment of additional directors : Section 260 gives powers to directors to appoint additional director if provision for the same is in AOA. Such additional directors will hold office till the date of next annual general meeting whether such meeting is held or not on that date. Total number of directors which the company can have, is given in AOA and such number should not be exceeded.Section 313 : Appointment of alternate director : An alternate director is appointed in place of a director during his absence for a period of more than three months from the state in which the meeting of the board is ordinarily held. He shall vacate the office as soon as the original director presents himself. The following provisions apply to alternate director : (i) he is not considered as in increase in the strength of Board (ii) he is not required to hold any qualification shares in the company (iii) his directorship is not counted in the ceiling on number of directorships as given in section 275.2007 Dec [4] (a) (ii) Whole time director and Managing Director Answer : Take as given in the answer.

2000 Dec [5](b) :What are the provisions relating ………………………….. Board meetings?Answer : Same as given.

2001 June [2](a) A public…………………. Vacating office.Answer ; As per section 255 of Company's Act 1956, one third of the directors shall retire by rotation in the AGM of the company.Section 260 relates to additional directors. The additional directors hold office till the end of next AGM. They will not be counted for retirement by rotation.The question says there are only 4 directors liable to retire by rotation. One third of 4 is 1.3, the nearest number to 1.3 is one. Hence one director holding office for longest time shall retire by rotation. In all five directors will retire in the AGM.2001 June [3](a) Examine…………………………………… and its directors?Answer : Please see notes on relationship between director and company in this chapter.(b) The articles………………………………………. . Examine.Answer : There is nothing to prevent a company to prescribe a condition or some conditions for getting directorship in it. This is true with private companies as well. 2001 June [6](a) Explain………………………….. general meeting.Answer : Delete this question. It does not appear in module.2001 June [8]: No compensation……………………………. Company's Act 1956.Answer : Delete this question. It does not appear in module. 2001 Dec[2] Explain the legal…………………………….. at book value.Answer :

1. The MD has to show his interest at the Board meeting.2. The transaction requires approval of the Board.3. If the paid up capital of the company is one crore or more, prior approval of the CG is

also required.4. The interested MD can not participate in the meeting in which his matter is taken up.5. The sale has to be entered in the register of contracts also (section 301)6.

2001 Dec [7](a) What is meant……………………………… to such personnel?Answer : Please see notes on remuneration to directors.2002 June [7](a) What are the ………………………………. Company's Act 1956?Answer ; See notes on disqualifications of director.2002 June [8](a) State the………………………….. managing director.Answer ; Delete this question. It does not appear in module. 2002 Dec [1](C) Navneet a retired………………………………….. the company.Answer : Delete this question. It does not appear in module. 2002 Dec [1](C) Navneet a retired………………………………….. Officer in default.Answer :Delete this question. It does not appear in module.2002 Dec [2] answer the following …………………………… the managing director?Answer ; Delete this question. It does not appear in module.2002 Dec [5](a) Director's responsibility statement ………………….. is to figure.Answer : See below.2003 June [4a] The companies amendment act …………………… the said statement.Answer : A comprehensive answer for both the above questions is as follows :The International Standards on Auditing issue by The International Auditing Practicing Committee states that '' While the auditor is responsible for forming an opinion on the financial statements, the responsibilities for the preparation of financial statements are that of management of the entity. Management's responsibilities include the maintenance of accounting records and internal controls, the selection and application of accounting policies and safeguarding the assets of entity. The audit of financial statements does not relieve management of its responsibilities.''Section 210 of the Company's Act 1956 states that Board of directors will place the profit and loss a/c and balance sheet of the company in the annual general meeting. It simply implies that the board of directors is responsible for preparation and presentation of financial statements.Para 6 of IAS – I on '' Preparation of Financial Statements'' requires that the board of directors is responsible for preparation and presentation of financial statements.

Section 212 of Company's Act 1956, requires that the report of the board of directors should include Director's Responsibility Statement. This statement should specify :

1. That the accounting standards have been followed in the preparation of annual accounts and explanation is given where material departure from accounting standards.

2. Accounting policies are selected and applied consistently.3. Estimates are reasonable and prudent so as to give true and fair view of the state of affairs.4. Directors have taken proper and sufficient care for (i) maintenance of accounting records as per

law (ii) safeguarding assets of the company and (iii) preventing and detecting fraud and other irregularities.

5. Directors have prepared the accounts on going concern basis.

2003 June [8b] : Prabhavi is already director……………….. appointment as director?Answer : According to section 275, a person can hold directorship in fifteen companies at a time. In the present case Prabhavi is director in 14 companies, there is no harm if he is appointed as director in one more company as he still remains under the ceiling of 15 companies.Following companies would not be considered for this purpose.

(a) A private company, which is not a subsidiary company of a public company.(b) A private company which is not a holding company of a public company.(c) An association for not for profit business where dividend is not paid.(d) A company in which such person is only acting as alternate director.

2003 Dec [5](a) Define small shareholder………………… at the same time?Answer ; Delete this question. It does not appear in module. 2003 Dec [5](b) Humlog Ltd……………………………. by rotation ?Answer : Following points should be noted in this regard:

1. In general, nominee directors can be appointed if provision exists in MOA or AOA.2. However, in case of financial institutions like LIC, IDBI etc, the institutions can appoint director in

the BOD whether provision exists in the MOA/AOA or not.3. Such director need not have qualification shares, nor he can be retired by rotation.4. The appointing authority i.e. IDBI in this case, can remove him as per its will.

2004 June [1](C) :(v) The appointment of several directors cannot be clubbed toghther.Answer :According to section 263 the appointment of director must be done individually and there should be no clubbing. Each director should individually, be appointed in the general meeting of shareholders. If an unanimous resolution is earlier passed that two or more directors can be appointed by a single resolution, then the directors can be appointed in batches.2005 Dec [3](a) Discuss the powers…………………. Meeting of the Board.Answer : Section 292 : Powers to be exercised only at meeting of BOD: Section 292 provides that the Board can exercise the following powers only if the resolution is passed at meeting of the Board. Such powers are

1. The power to make calls for unpaid amount on shares;2. The power to authorize the buy back of shares u/s 77A;3. The power to issue debentures;4. The power to borrow money other wise than debentures;5. The power to invest the funds of the company and 6. The power to make loans.

In addition to above, there are other powers which the BOD can exercise at its meeting e.g.1. Power to fill up casual vacancy in the office of directors;2. Power to make donations to political parties3. Power to constitute the audit committee;4. Power to sanction contracts in which one or more directors are interested,

(b) A loan given to…………………………. Comment.Answer : The statement is true. Merely because the fact that the employee is wife of managing director of a company, it can not be said that an offence has been committed. This depends on the facts of the cases individually.(c) Explain the ……………………… section 300.

Answer : Section 300 provides that interested director will not take part in any meeting in which the matter in which he is interested is to be discussed. As he does not take part, his presence is not counted in quorum nor he is allowed to vote in such meeting.2005 Dec [8](a) : State the provisions…………………….. to managerial personnel.Answer : See notes on remuneration to managerial personnel.(c) Explain the law relating to alternate director.Answer ; See notes on alternate director.2006 June [6](a) : State the disqualifications of a director.Answer : See notes on disqualification of director.2006 June [8](a) State the provisions……………………….. non-executive directors.Answer ; See note on remuneration to managerial personnel.2006 Dec [4](c) '' Decision taken by the Board…………………………majority.'' Comment.Answer : The statement is true. If some powers are vested in directors, they and they alone can exercise these powers. Shareholders will not dictate them how to use these powers. The directors while exercising their powers do not act as agents for the majority or even all the members and hence the members cannot supersede the powers of directors. The shareholders can however change the directors if they so wish, as the directors are elected or removed in general meeting but they just can not dictate the director. If the power being exercised by the directors is given to them by the AOA, the shareholders can make alterations to Articles. 2006 Dec [7](c) : In the context………………………. mean.Answer :Under section 309, the remuneration is 5% of net profit if there is one managing / whole time director. It is 10% of net profit if there are more than one MD or WTD. If the company is not able to make payment as per section 309, it is said that company has inadequate profit and in such an event the remuneration will be governed by section 198.2008 June [7a] Explain independent……………………… the same meaning?Answer :Independent Director : The term independent director has not been defined in the Company's Act 1956. As the name indicates, the ID is independent to the company in every respect except the fact that his remuneration is paid by the company. He can accept appointment in other companies as independent director as well. The ID does not need to subscribe to the qualification shares.Inside Directors are directors who are in whole time employment of a company e.g. Managing director, Executive Director, Whole time director, Technical director etc.Interested directors are those directors who are interested in some contracts or transactions of the company. They can not take part in the meeting in which such contracts or transactions are being discussed. The interest should be specifically indicated in the meeting before such matter is taken up.In view of the above it can be said that inside directors and interested directors are not same terms.

Practical Questions :2000 June [3](ii) A director ………………………. at the Board meeting.Answer :Section 299 requires that any director should disclose his interests in any contracts or transactions in the meeting in which such matter is taken up. Every director who fails to disclose his interest shall be punishable with fine which may extend to five thousand rupees.Section 283 (vacation of office by director) states that if a director contravenes section 299 and does not disclose his interest in any matter, he will be deemed to have vacated the office. He no longer remains a director in that company.In the light of above, the director is liable to be fined upto Rs. 5,000 and his office as director automatically becomes vacant.2000 June [6]: X, who is not………………………. at the meeting.Answer : Delete this question. It does not appear in module. 2000 Dec [3] Explain the legal……………………………. By the Board.Answer : (ii) Section 295 provides that any advance or loan given to any relative of a director, should be given only after obtaining prior approval of the Central government.

It is clear from the question that such approval was not obtained by the company and hence provisions of section 295 are attracted.However, an advance of Rs. 10,000 to financial advisor of the company is not extra ordinary item. Moreover, she was not given advance because she is wife of MD but she was given advance because she is an employee of the company and holding a post of officer rank of financial advisor of the company. In my view, provisions of section 295 are not applicable and salary advance to an officer of the company should not be treated as loan to a relative of director.Answer (iv) : Same as in 2000 June [3](ii) above.2000 Dec [6](c) X was …………………… advise the Board.Answer : Section 260 : appointment of additional directors : Section 260 gives powers to directors to appoint additional director if provision for the same is in AOA. Such additional directors will hold office till the date of next annual general meeting whether such meeting is held or not, on that date. Total number of directors which the company can have, is given in AOA and such number should not be exceeded.If the Board desires that X should continue on the Board after 30th Sept. 1999 it is suggested that it should call a meeting and make fresh appointment of X as additional director.2001 June [2](c) : Smart……………………… resignation valid?Answer : His verbal resignation is invalid. It is ultra vires to the board to accept verbal resignation though the AOA provide for written resignation. Board should act within the AOA. Articles can be amended only at the general meeting. Verbal resignation can be accepted in general meeting and not in Board meeting.2001 June [7] (i) Prem was appointed……………………………. September 2000.Answer : Same as in 2000 Dec [6](c) above.2001 Dec [7](b): Azad, the managing director ……………………………….. his office ?Answer : Section 283 provides that the office of the director shall become vacant if he is absent from three consecutive meetings of the board or he is absent from all meetings of the board for a continuous period of three months whichever is longer.In the present case, Azad fails to attend three meetings in a year. Assuming that these meetings were not consecutive, Azad need not vacate his office.(c) Richie…………………………… legally permissible ?Answer : Remuneration to managerial personnel is governed by section 198 and section 309 and there is a ceiling limit of 5% of net profit computed as per section 349. The MD is whole time employee of the company and attending meetings is part of his duty, hence any fees over and above his salary is not acceptable. However, if the company decides to him such fees, the overall remuneration should be within limit as set in the Act.2002 June [4](c) : A director……………………………………… advise the chairman.Answer : Company's Act 1956 is silent over the resignation of a director. A director can resign as per the rules laid down in AOA. If AOA does not contain clear provision, any reasonable way of resignation may be accepted. Even oral resignation can be accepted if AOA contain such provision. A director can resign after giving reasonable notice to the company, no matter whether the company accepts it or not.2003 June [3] Examine the following ………………………….. Company's Act 1956 :(iii) A director failed……………………………….. meeting.(iv) Goody-Goody …………………………….. 60,000/Answer : (iii) Same as given above in 2000 June [3](ii)(iv) Section 314 provides that no relative of a director shall be appointed at monthly salary of Rs. 50,000 or more without (i) consent of company by special resolution and (ii) approval of the CG.In this case, the proposed salary is Rs. 60,000 which is more than Rs. 50,000. Passing of special resolution and approval of CG would be essential.2003 June [8](c) : Facts and figures ……………………….. the Board of the company.Answer : Delete this question. It does not appear in module. 2003 Dec [4] (c) : Manoj……………………………. Explain. Answer : The benefit of the borrowings was taken by the company and not by the chairman. The company is principal and the chairman is agent. The chairman did the act on behalf of principal and the benefit of the act was also enjoyed by the principal. The company should pay the loan as per terms.2004 June [2](a) :Arun is a ……………………………………………………….. 2004 ?

Answer : Delete this question. It does not appear in module.2004 June [7](a) :Kith and Kin…………………… Company's Act 1956 .Answer : (i) According to Section 314, for the post of MD or manager, the provisions of this section are not applicable. Appointment of Niraj who is appointed as MD of the company, the provisions of section 314 are not applicable even though he is related to a director of the company, In such cases the appointment will be governed by Section 269 of the act.(ii) Section 314 provides that no relative of a director shall be appointed at monthly salary of Rs. 50,000 or more without (i) consent of company by special resolution and (ii) approval of the CG.In this case, the proposed salary is Rs. 60,000 which is more than Rs. 50,000. Passing of special resolution and approval of CG would be essential.In the present case, the monthly salary of the relative is Rs. 25,000 which is less than the limit of Rs. 50,000, hence appointment is to be supported by special resolution passed by the company but approval of CG is not necessary.2004 Dec [1](C) : Prudent Ltd. is paying……………………………Company's Act 1956.Answer : (i) After the Companies Amendment Act 2000, depreciation as per written down value need not be recalculated where depreciation is charged on the basis of straight line method.(ii) No. If the company is making losses, remuneration to non-executive directors can be paid only after the approval of the CG.2005 June [6](b) :Articles of ……………………….. Advise the company.Answer : Delete this question. It does not appear in module.

2005 June [8](a) Rama is a director…………………… Company's Act 1956 ?Answer : Section 297 provides that : (i) A director of a company or his relative (ii) a firm in which a director or relative is partner (iii) a private company in which the director is member or director , will not enter into any contract with the company without the consent of the BOD. Such contracts may be ;

c) For the sale, purchase or supply of any goods, materials and services or d) For underwriting of any shares or debentures of the company; or

If the company is having a paid up share capital of Rs. 100 lacs or more, any such contract with the company can be made only after the approval of the CG.The provisions of section 297 will not be applicable in this case as the other company is not registered in India.Section 299 requires that any director should disclose his interests in any contracts or transactions in the meeting in which such matter is taken up. Every director who fails to disclose his interest shall be punishable with fine which may extend to five thousand rupees. Thus in this case, the contract shall be entered into the Register of Contracts and signed by all the directors present at the next meeting.2005 Dec [1](C) Attempt the following ……………………. Advise the company.Answer : Take the same answer.2006 June [6](c) Suresh……………………………… by the auditor.Answer : Remuneration payable to managerial personnel is governed by section 198 and section 309. As provided in section 309, the remuneration payable should not include the (i) the services given over and above the directorship e.g. service of a professional nature and (ii) in the opinion of CG, the director has the required knowledge and qualification to give such services.The company should have followed the provisions of section 309. It should have obtained the opinion of CG whether the director Mr. Suresh has the required knowledge and qualification for the services for which he is to be paid a fee of Rs. 5.0 lacs. As the company has failed to obtain the opinion of the CG, the objection of the auditor appears to be valid.2006 June [8](c) Vinay was ……………………………………………. As a director.Answer : No fresh consent is required to be filed as he is immediately reappointed as director as a director.2006 Dec [3](a) :Sampath ………………………………………….. financial year.Answer : Delete this question. It does not appear in module. 2007 June [6b] : Gomez, the chairman………………………………….. Explain.Answer ; Please see above 2003 Dec [4] (c). The benefit of the borrowings was taken by the company and not by the chairman. The company is principal and the chairman is agent. The chairman

did the act on behalf of principal and the benefit of the act was also enjoyed by the principal. The company should pay the loan as per terms.2007 June [8](c) : 40 out of 60 …………………………………. Give reasons.Answer : Delete this question. It does not appear in module. 2008 Dec [6a] Miss Vivitha………………………………… appointment.Answer : Answer : According to section 275, a person can hold directorship in fifteen companies at a time. Following companies would not be considered for this purpose.

1. A private company, which is not a subsidiary company of a public company.2. A private company which is not a holding company of a public company.3. An association for not for profit business where dividend is not paid.4. A company in which such person is only acting as alternate director.5. Companies formed as per section 25 of Company's Act 1956.

If appointment is in excess of 15 companies, it is for the director to decide what to do to be within the limit of 15 companies. He may say no to the new appointment or he may resign from directorship of one of the companies and accept the new appointment. As per Section 278 if the director does not communicate his decision within 15 days of the on which the new appointment is made, his new appointment will automatically become cancelled and void.In view of the above, Miss Vividha should consider the following aspects :The appointment in Balaje Association is not counted for directorship under section 275 because it is registered u/s 25 of the Company's Act 1956.The appointment in Vimla Plastics takes the directorship to fifteen. The appointment on 1st Dec 2008 takes the directorship to 16. She has to decide within 15 days of date of last appointment i.e. 1st Dec 2008 whether she wishes to accept the new one and resign from one of the old ones or she rejects the new appointment. If she does nothing, her new appointment will automatically be cancelled on 16th Dec 2008.2009 June [7a]: The Board of ……………………………… taken on lease?(c) Mr. Janak who had……………………………… been reappointed.Answer (a): Section 630 provides that it is an offence if any officer or employee of a company − (i) wrongfully obtains possession of any property of the company Or (ii) wrongfully withholds the property after obtaining possession Or (iii) Knowingly uses the property for purposes other than those given in AOA. Such an offence is punishable with fine up to Rs. 10,000. The Court can order such person to give the possession of the property to the company within time limit fixed by the courtFrom the above, the course of action for the company is to file a case u/s 630. The section 630 is applicable even if the company is not the owner of property but has obtained it on lease or rent basis. The course of action remains same whether the property is owned or lease held.Answer (c) : Section 256 Deemed reappointment of director : If reappointment of a retiring director is not made in the same meeting or in the adjourned meeting, Section 256 says that retiring director will be deemed as reappointed at such meeting, except in the following cases :

1. His reappointment was not approved by voting; in any previous meeting.2. He has expressed, in writing, his unwillingness to continue as director.3. he is not qualified for re-appointment or he has become disqualified for reappointment.4. It is decided not to fill the vacancy.

In the above case, Mr.Janak will be deemed to have been reappointed as director.2009 June [8a]: Vasudha group of companies………………………… is permissible.Answer : Section 316 states that a person can not be appointed as MD of more than one companies at a time. From this it is clear than Mr. Nabin cannot be appointed as MD of the three companies (two public companies and one private company which is subsidiary to public company). Section 316 states further in its sub-provisions that the CG can permit any person to be appointed as MD of more that two public companies, it it is satisfied that it is necessary that companies should be managed by the same person for proper functioning or for synergy effect.In the light of above, the Vasudha group should approach the CG and explain to it the importance and advantages of having a common MD for the three companies. If the CG is satisfied and issues a order permitting Mr. Nabin to act as MD of three companies, then he can be appointed as MD of these three companies of the group.2009 Dec [6b] The Board of directors……………………………………… can do so.Section 293 : Powers to be exercised with the approval of the company in general meeting:

1. Sell or lease any undertaking either in whole or in part;2. Give time for the repayment of any debt due to director;3. Increase borrowings beyond the total of paid up capital and reserves.4. Contribution to charitable and other funds exceeding 50,000 rupees or five percent of net profits

as per section 349 and 350 of the Act, which ever is greater.In view of the above it is clear that the contribution to charities does not depend on profits of the company if the contribution is within Rs. 50,000.2010 June [7a]: LMN Ltd………………………………………………… in this regard.Section 293A : Political Contributions

1. Political contributions are prohibited for Govt. companies and for companies which are in existence for less than 3 years.

2. Contribution in any financial year shall not exceed 5% of average net profit of past three years.3. A resolution in the BOD should be passed in its meeting authorizing the contribution.4. Such contribution should be charged to profit and loss a/c for the year.

In the context of above :1. Since LNM has not completed 3 years of existence on 1 March 2010, hence it is not eligible to

give political contribution.2. Yes, because in that case it is older than 3 years. The company existing for 3 years or more can

give political contribution.3. Yes, the company can be penalized for fine up to three times the amount of contribution if such

contribution is in contravention to the provisions of this section.4. Such contribution should be charged to profit and loss a/c of the company.

. Chapter 13 : Company Meetings :Types of Company meetings : The following are the types of meetings (i) Shareholder's meeting (ii) Debentureholder's meeting (iii) Creditors' meeting (iv) BOD's meeting etc. The shareholders' meetings can be of various types namely (i) Statutory meeting (ii) Annual General Meeting (iii) Extra-ordinary general meeting.A brief discussion follows ;Statutory Meeting : (Section 165)This is the first general meeting of the company. It is held after one month and before six months from the date of certificate of commencement of business (note that it is not the date of incorporation). This is called statutory meeting and directors place in this meeting what is known as Statutory Report. The section 165 does not specify any time and place for holding statutory meeting, hence it can be held at any time and at any place.The scope of the statutory meeting is also not defined in the section 165, hence the members can discuss any matter as per their requirement. It is also clear that the statutory meeting can be held only once in the lifetime of a company.Statutory Report ; (Section 165) This is a report prepared by the directors and at least two directors must sign it. If there is Managing Director, he must invariably sign the statutory report.The contents of Statutory Report are as follows :

1. Total number of shares allotted, Fully paid and Partly paid2. Total cash received for issued shares;3. Total expenses incurred with classification, commission and brokerage to brokers;4. Names, addresses and occupations of directors, auditors, managers and secretary.5. Details of underwriting contracts;6. Calls in arrears, from general public and from directors'7. Commission and brokerage paid to directors and managers.Annual General Meeting (Section 166) : Legal provisions are as follows :

1. First AGM should be held within 18 months from the date of incorporation of the company.2. If first AGM is held within 18 months from the date of incorporation, it will not be necessary for

the company to hold any general meeting in the year of its incorporation or in the following year.

3. Except first annual general meeting, a company must have a general meeting in every year.4. The time distance between two general meetings should not be more than 15 months. The ROC

can grant extension for a period of three months.

5. Every annual general meeting shall be called during business hours, on a working day and at the registered office of the company or some other place within the town or village where the registered office is located.

6. A general meeting may be called by giving a notice of not less than 21 days. Period may be reduced if all members agree to it.

Extra Ordinary General Meeting : Any meeting of shareholders other than the statutory meeting or Annual general meeting is called extra ordinary general meeting. If there is an urgent issue on which the sanction or approval of the shareholders is required and if it is not advisable to wait till the date of next general meeting, an EOGM may be called. This meeting may be called by any of the parties as given below :

1. By BOD on its own or a request to them by shareholders can call EOGM. A notice of 21 days is required to be given, a shorter notice may also be given under special circumstances.

2. The BOD can be compelled to call EOGM if it is requested by shareholders holding at least 10% of the paid up capital or 10% of the voting powers. The board must within 21 days of the receipt of a valid requisition, issue a notice for the holding of general meeting on a date fixed within 45 days of the receipt of requisition.

Essentials of a valid meeting are (i) Proper authority (ii) Notice (iii) Quorum (iv) Chairman (v) Minutes.(i) Proper authority : BOD is the proper authority to hold a meeting.(ii) Notice Section 171 : Notice of every meeting should be given to all person entitled to take part

in that meeting e.g. shareholders, auditors or other interest persons and parties. If notice is not given to every person entitled to receive notice, any resolution passed in the meeting shall be invalid. A notice of general meeting should be given at least 21 days before the date of the meeting in writing. Notice can be given for a shorter period if (i) all the members agree in case of general meeting and (ii) 95% of the members agree in any other matter.

(iii) Quorum (Section 174): Quorum is the minimum number of members, which must be present in the meeting to make the meeting a valid meeting. Following are provisions regarding quorum : Quorum shall be five members personally present in case of public company and two member

for private limited company. If meeting is called on request of the members, and If within an half an hour from the time of

holding meeting, a quorum is not present, the meeting shall be treated as cancelled. In any other case, if quorum is not present, the meeting will be postponed or adjourned for the

same time, same day and same place on next week or to some other day, some other time and some other place as the Board may decide.

If in the adjourned day, the quorum is not present within half an hour from the appointed time, the members present shall be quorum.

All provisions shall be subjected to AOA.(iv) Chairman : The members will select and elect a member among themselves as chairman.

Other aspects of meetings :1) Proxies :Any member entitled to attend the meeting shall also be entitled to send any person as

his representative in the meeting. Such representative is proxy to the member and such proxy can attend and vote in the meeting but he shall have no right to speak at the meeting.

2) Resolutions : A) Ordinary Resolution : For passing a ordinary resolution, a simple majority is enough. The votes in favaour must be more than votes in against to pass an ordinary resolution. Some of the occasions where ordinary resolution is required are given below :

(i) Passing of annual accounts, profit and loss a/c and balance sheet along with report of the BOD

(ii) Appointment of first and subsequent directors;(iii) Appointment of auditors and fixing his remunerations.(iv) Declaration of dividend ;B) Special Resolution : For passing a special resolution votes cast in favour must be 75% or more of the total strength. A copy of every special resolution together with the copy of explanatory statement should be filed with the ROC within 30 days of passing of the resolution. Some of the occasions on which special resolution is necessary are as follows :(i) Change in registered office of the company (ii) Change in the name of the company (iii) Alternation in MOA or AOA (iv) Payment of interest out of capital (v) For winding up of company ;

C) Resolution requiring special Notice : This is not a separate type of resolution. It is an ordinary resolution for which a special notice is required to be given. A special notice is required for a resolution in the following cases : (i) appointment of auditor other than the retiring auditor (ii) Provision that retiring auditor shall not be reappointed (iii) removal of director before expiry of his period (iv) application of a director in place of director who is removed.

Questions and Answers :1999 Dec [8](i) Write short notes on : Resolution by Circulation 2006 Dec [2](a) Write short notes on : Resolution passed by circulation by directors.2003 June 7 b : Explain the procedure for passing the resolution by circulation under section 289 if the Company's Act 1956.

Answer : When it is not possible to convene a board meeting and a decision is to be taken urgently, Section 289 provides the right to pass a resolution by circulation by directors or committee of directors.The draft of resolution is prepared by the company and this draft is circulated among the directors together with all the necessary papers. The quorum is to be maintained and draft is sent to all directors in India. If majority of the directors gives approval to draft it is assumed that such resolution is passed as per law.The procedure for passing resolution by circulation is as follows :

(i) Send the draft of resolution to be passed to all directors at their residential addresses. Quorum should invariably be followed. Directors outside India may be left for this purpose,

(ii) See that there are certain matters which cannot be taken up in this manner, all those matters should not be considered for approval by circulation.

(iii) If majority of the directors approves the resolution, it is deemed to have passed in the meeting of the board.

(iv) The passed resolution must be recorded in the minutes book.2005 Dec [5b] :Signing of the Board's reportAnswer : Section 217 provides that the board's report should be signed by the chairman or alternatively by two directors, one of them must be Managing director if there is one. The chairman of the Board means the chairman elected by directors to function as such in all board meetings.If in the AOA, provision exists for appointment of chairman and the directors have elected such chairman for all the meetings, then any director chosen to act as chairman in a board meeting such ad hoc director will not be regarded as chairman.Distinguish between : 2006 Dec [2] (b) and 2007 June [5] (iii) : Take the answer as it is. tSlk gS oSlk gh ys yhft;sADescriptive Questions :1998 Dec [5] (i) Examine…………………….. for a meeting.2000 Dec 7b Under what circumstances……………….. valid quorum ?Answer : answer to both the questions is as follows:Normally a single member does not constitute the quorum even if he has all the shares or holds proxies for all the members. One member present will not form the quorum because the quorum is decided on the number of members actually present in the meeting.However, some exceptions to the above are as follows :

If all the shares of a particular class are held by one person, the person may be the quorum. When Company Law Board calls or directs meeting under section 167 or under section 186, and

directs that one member present in person or by proxy shall constitute the meeting.1999 DEc 2a What is adjournment ……………………… meeting?Answer : Take the answer as it is. tSlk gS oSlk gh ys yhft;sA1999 Dec 4b: XYZ ltd…………………………… position.Answer : Section 166 provides that the AGM should not be held on public holiday. Sunday is declared as a public holiday and hence AGM should not be conducted on Sunday.

If the notice is sent for holding a meeting on a working day, and after issue of notice that working day is declared as a public holiday, the meeting will be held on that day because when the notice was issued, that day was not holiday. Sunday was a public holiday before the issue of notice of meeting and as such meeting should not be held on Sunday.1999 Dec 5c Discuss the powers…………………………… otherwise.Answer : Please see : 2005 Dec 3a in Chapter 12 Directors 2000 June 4c: X a member ………………………………. Advise.Answer : Delete this question. 2000 June 8a : What is 'explanatory statement? ………………… a notice?Answer : Explanatory statement is a statement which is attached to the notice of general meeting explaining the type of special business to be considered in that meeting.According to section 173 of Company's Act 1956, the explanatory statement should contain the following :

(i) All required facts about the business to be discussed in the meeting;(ii) Interests of directors in that business;(iii) Time and place where the related documents can be seen and inspected;

Any business discussed in an EOGM is a special business. Therefore notice of any EOGM should have an explanatory statement attached to it.If some special business is to be discussed in the AGM, an explanatory statement is to be attached with the notice of AGM. Any business other than the following shall be treated as special business and will require an explanatory statement attached in this regard.

(i) Passing of annual accounts, profit and loss a/c and balance sheet along with report of the BOD

(ii) Appointment of first and subsequent directors;(iii) Appointment of auditors and fixing his remunerations.(iv) Declaration of dividend ;

2000 Dec 2a : What are the ……………………………… general meeting ?Answer : : Take the answer as it is. tSlk gS oSlk gh ys yhft;sA2000 Dec 6a : What are the ………………………. General meeting ?Answer : Delete this question.

2000 Dec 7c : Certain decisions…………………… meeting.'' Discuss.Answer : Take the answer as it is. tSlk gS oSlk gh ys yhft;sA

2001 June 5b : State the matters………………………….. in this regard.Answer : The matter requiring special notice are ;

(i) When retiring auditor is not to be reappointed;(ii) When a director is to be removed before expiry of his term(iii) When another director is to be appointed in place of a removed director(iv) When AOA provide for giving a special notice;

2001 June 6b; State the matters of ………………………… annual general meeting.Answer Ordinary Resolution (Section 173): For passing a ordinary resolution, a simple majority is enough. The votes in favaour must be more than votes in against to pass an ordinary resolution. Some of the occasions where ordinary resolution is required are given below :

(i) Passing of annual accounts, profit and loss a/c and balance sheet along with report of the BOD

(ii) Appointment of first and subsequent directors;(iii) Appointment of auditors and fixing his remunerations.(iv) Declaration of dividend ;

2001 June 6c : What are the requirements………………………… general meeting ?1998 Dec 5 (iv) Minutes of ……………………………………. Leaf form.

2001 June 8b: State the provisions …………………… minutes of board meetings.2002 Dec [2] (ii) Answer the following ………………….. to all the courts ?2003 June 7a:Acrid ltd maintains the minutes book………………. Be signed and by whom

Answer : Following answer incorporates all the above questions. Minutes Section 193: Minutes are records of the meeting. The provisions of section 193 are as follows :

Every company shall keep proper and adequate records of all the proceedings of every meeting of the board and general meeting.

The proceedings will be recorded in minutes book. Separate minute books will be kept for general meeting and board meetings. Pages should be numbered serially and no attachments in or detachments from the minute book is possible in any manner.

Minutes of all the proceedings of every general meeting and every BOD meeting must be recorded within 30 days of the conclusion of the relevant meeting. It is not necessary however, that such minutes must be signed within 30 days period. The minutes may be signed by the chairman of the meeting or the chairman of the subsequent meeting.

Every page of the minute book on which proceedings are recorded shall be signed by the chairman of the meeting.

The minutes will contain the fair and correct summary of the proceedings of the meeting, so that the viewer of the book may reasonably assess the transactions considered in the meeting. The chairman may exclude any matter from recording in the minutes book if he so thinks. All appointments of officers of the company shall also be recorded in the meeting.

The minutes can be maintained in loose form provided all other procedural requirements are followed with all possible safeguards against manipulations or falsification in the minutes. The loose pages may be combined at regular intervals say three months.

The minutes book must be kept at the Head office of the company. Any member can inspect the minutes book and he is also entitled to receive photo copy of the

minutes book on payment of sum reasonable amount.2001 June 7(iv): With reference to……………………… remain in office ?Answer : Section 262 : Casual Vacancy : A vacancy in the office of the director may occur between two annual general meeting due to death, illness, disqualification, resignation of the director. The BOD have the powers to fill such casual vacancy caused in the Board subject to the provisions in the AOA. Such person will hold office till the tenure of director on whose place he is appointed.In the present case, the company will not be required to call EOGM to approve the appointment of Murari as director. It can appoint Murari at the meeting of the board and Murari would remain in the office of the whole period for which, Mohan, if he had not died, would have continued.2001 Dec 5a: State in ……………Company .Answer : ;s iwjk iz'u ys yhft;sA tSls dk rSlk vkUlj Hkh ys yhft;sA iz'u iwjk yhft;s dqN Hkh er NksfM+;sA2001 Dec [6] state the conditions……………………………….. on requisitions.Answer : Delete this question. It is not in module.2002 Dec [4] Outline the requirements of the Company's Act 1956………… the meeting.Answer : Delete this question. It is not in module.

2001 Dec 8a : the validity………………………. Explain.Answer : Take the same answer.

2002 Dec [1](C) Navneet, a retired …………………………..Answer Delete the entire question.

2005 June 6a : Can an annual general meeting ………….. general meeting ?Answer : Please see essentials of a valid meeting in notes at the beginning of the chapter.

2005 June 6b: In a public company…………… were proxies.

Answer : According to section 174, five members personally present in meeting shall be the quorum of the meeting of the company, unless AOA require a larger number. In the present case the quorum of five members will not be accepted because the AOA requires six members to constitute a quorum.

(i) A representative of Governor of state is considered as member;(ii) Y and Z preference shareholders cannot be considered as members.(iii) Representative of limited companies will be treated as members for quorum.(iv) Proxies are not considered as member for quorum as the members should be

personally present and not through proxies.2003 Dec 4a : In a private ……………….. resolutions so passed.(b) Anubhav Ltd…………………………….. Comment.(c) Whether a chairman ………………………………. General meeting ?Answer :

(a) As the quorum was not complete due to single director present in the meeting, the meeting is not valid and resolutions passed in the meeting stand as void. There is no validity in the resolutions so passed.

(b) As per section 285, at least four meetings of BOD should take place in a calendar year, interval may be more than three months between two meetings. The listing agreement as per clause 49 requires that four meetings of listed company should be held in a year and with the maximum gap of four months between two meetings. In the light of these provisions, there is no violation on the part of the company.

(c) There is no specific provision in the Company's Act 1956 for removal of the chairman. The removal of chairman can be done by the same body which elected him as chairman. The chairman is appointed by the board and only board can remove him from his chair.

2004 June 8a : Discuss the time and place for holding the statutory meeting. What is its scope?Answer : See notes at the beginning of this chapter on statutory meeting.2004 June 8b : Discuss briefly the requirement………………. Board of directors.Answer : An adjourned meeting is continuation of the original meeting. Company's Act 1956 does not specify any notice to be issued for adjourned meeting and the meeting should be governed by the provisions of the AOA of the company. However, notice can be issued to those who were absent in the original meeting. 2004 Dec 2b : Minutes of the meeting………………… by the chairman ?Answer : Minutes once recorded can not be deleted or corrected by any body, however, fresh minutes may be recorded further and signed by chairman, rejecting the terms or whatever which was earlier recorded.2004 Dec 2c : (i) An adjourned meeting……………….. on that day ?(ii) Whether the chairman of a ……………………………… meeting is over?Answer : Adjourned meeting is not a fresh meeting but it simply continuation of the old meeting. The original meeting was duly commenced and after proper commencement it was adjourned for a later date and time fixed in that meeting itself. There is no contravention of law (section 166) if adjourned annual general meeting falls on holiday,(ii) The chairman has no powers to dissolve the meeting before the business of the meeting is over. If he does so, it is open to other members of meeting to select another chairman and continue with the meeting.2004 Dec 7a : Explain 'ordinary resolution and ……………. Is required.Answer : See notes on ordinary resolution, special resolution and resolutions requiring special notice at the beginning of the chapter.2006 Dec 1C : Comment on any four of the following (iv) Every company must hold…………………………… in every calendar year.

Answer : Take the answer as it is.2007 Dec 1C Comment on the following :(ii) Chairman of the general meeting…………………………… of the meeting.(iii) The quorum for Board…………………………….. the meeting.Answer :(i) Sense of the meeting means general attitude or mood of the members of the meeting. In general a show of hands is a good method to reflect its sense. The chairman can also use method of divisions to assess the favour or disfavour of a particular proposal. He can ask the members who are in favour of motion to assemble on one side and the others on opposite side. He can then count the number in favour and in against the motion and declare the result. Ballot system may be used for secret vote when members are reluctant to show their inclination towards a proposal. Poll means counting of heads. The chairman can use the method of poll when members are unsatisfied about the show of hands or by ballots system.

(ii) The statement is true. Quorum is required not only to commence the meeting but also to conclude the meeting. The quorum should be present in every stage of the meeting.

2007 Dec 4 (b); The chairman at a ………………………………….. resolution as passed?

(c) Amol, a non-member………………… of the objection.Answer : Following points should be noted in this regard :Casting of vote by chairman :

(i) The Chairman should be authorised by AOA to cast his vote.(ii) If the chairman decides to use his voting power as a director, he should do so

before the voting is finally concluded.(iii) When the members are equally divided then and only then the vote as chairman

assumes relevance because this vote will be decisive one.(iv) In this case the chairman can not cast his vote because he has not exercised his

vote and the voting is now concluded. The resolution has 6 votes in favour and 7 in against, there is no equality in members hence question of using a casting vote does not arise.

(c) If the AOA permit, a non-member can be a chairman of BOD. Once he becomes chairman he assumes all powers and authority of the chairman. The chairman should preside over every meeting of the board, hence objection of Zahir khan is not a valid objection.2008 June 1C (iv) Statutory meeting is held only once in the lifetime of a company.Answer : See notes on Statutory report at the beginning of the chapter..Practical Questions :1999 June 2: Explain the legal ………………………….(i) An annual general meeting ……………………….. as scheduled ?(iv) The notice of general meeting …………………… notice.Answer :(i) When the notice of meeting was issued the scheduled day was not a public holiday. The meeting can proceed as scheduled even if the day of the meeting is subsequently declared as a holiday by the Central Govt.(ii) Notice should be given for a period of 'not less than 21 days'. As per section 171, the date of service of notice and the date of meeting should be excluded from the period of 21 days. If the notice is sent by post it is assumed that it will be delivered after expiry of 48 hours from the time of positng.In the instant case, by excluding 48 hours from the date of posting of notice, the length of notice is less than 21 days and consent in writing of the prescribed number of members to hold the meeting at shorter notice is also not obtained, hence the notice of the meeting is invalid.1999 June 7 and 1999 Dec 2d :

Answer : Please delete these two questions.2000 June 3(i) The required quorum……………………………………… general meeting.(ii) Four persons …………………………………. Company's Act 1956.Answer :(i) As the quorum is not present within 10 minutes of the scheduled time of holding the annual general meeting, the members should wait for another 20 minutes to ascertain whether quorum is complete or not because as per section 174, if the quorum is not complete within half an hour of the scheduled time of the meeting, the meeting will stand adjourned for the same day, same time and same place next week unless other wise decided by the Board.(ii) In case of public company unless the AOA provide otherwise a larger number, five members personally present at a general meeting constitute a quorum. In the present case one of the four members present is also a representative of a company will be equal to two members personally present, adequate quorum is present for the AGM.2001 June 3b: Cosmos ltd………………….. examine.Answer :In facts of the case, the total number of directors is eleven out of which four are out of India. Therefore in accordance with the provisions of section 289, the resolution by circulation must be approved by all the directors in India i.e. seven directors or by a majority of directors entitled to vote i.e. six directors.As the resolution is passed by four directors out of seven directors in India, the resolution is not deemed to be passed as per section 289.2001 Dec 7d: In a board meeting………………………………….. any irregularity?Answer : Take the same answer.2002 June 4a and 4b: An annual general meeting…………… personnel.Answer : Take the same answer.2003 June 3C: Your company is a ……………. For compliance;Answer : Delete the question.2003 June 3 : Examine the following ……………… in this regard.Answer : Section 288 provides that if a meeting was called but could not be conducted for want of quorum should be treated as a valid meeting and should be counted as meeting. The allegation that the company has contravened the provisions of section 285 is not correct.2004 June 2b : The paid up capital………………… of its members.Answer ; Take the same answer.2004 June 6b: Ram, a director ……………………. Views with reasons.Answer: According to section 269 a person must have age between 25 years and 70 years for the appointment as director and if not, then his appointment should be supported either by special resolution passed in this regard or or If his appointment is supported by ordinary resolution then in addition to it, approval of central government would be necessary.Accordingly, a person who has attained the age of 70 years cannot be appointed without passing special resolution. If the company does not pass special resolution then it must obtain approval of central government.The view of PCS and Company is correct as Ram has attained the age of 79 years (more than 70 years) and the company had passed only ordinary resolution and has not passed a special resolution for his appointment.2004 Dec 1C answer the following ……………………… year 2001.Answer : Take the same answer.2005 June 3a Asia pacific…………………….. and conviction.Answer :Take the same answer.2005 Dec 1C (v) Abhijeet is a shareholder ……………… on a poll.Answer : If one shareholder issues two proxies in respect of same shares, the proxy of the later date will qualify to vote at the poll. Proxy issue earlier will be treated as cancelled.

2007 June 7b : An annual general meeting…………….. in 2005?(c) A proxy was ……………. In the meantime ?Answer :Take the same answer.2007 Dec 6d : A meeting of the …………….. the chairman.Answer ; take the same answer.2007 Dec 8c : In a general meeting of …………….. of the resolution.Answer : take the same answer.2009 Dec 6a A public company ………………………….. company holds good.Answer :As per section 210 the company should present profit and loss a/c and balance sheet at the AGM. The accounts should be for the period between the closing date of last accounts and day before six months from the date of AGM. In this case the company can present balance sheet and profit and loss a/c as required under section 210 in the AGM with extended time. It must be noted here that the company can fulfill requirements of section 166 regarding the timing of the AGM, but it may contravene the provisions of section 210 if it does not submit the financial statements in the AGM. The extension of time has been granted for holding the meeting only. The accounts need not be prepared again if the date of meeting is postponed.The contention of the company does not hold good. It can submit the same accounts in the AGM for which extension of time has been granted.2010 June 6b : An application was ……………… applicant tenable ?Answer :Section 403 deals with interim order to an applicant who files appeals against company for oppression (section 397) and mismanagement (section 398).As per section 166, the AGM should be held at the registered office of the company or at any other place within the city or village where registered office is located. Hence holding AGM at factory is not tenable.The company has followed all formalities regarding change of registered office and informed the ROC in a prescribed manner, hence changing of venue of the AGM as requested by Modi is not tenable.

Chapter 14 : Borrowing Powers Important points regarding borrowing powers :

1. Every company can borrow subject to limits set by MOA and AOA. 2. A company can borrow only after getting the certificate of commencement of business.3. When the company borrows beyond the limit set by its MOA and AOA, it is not illegal on the part of

the company and the company will not suffer for excess borrowing, It is the lender who will suffer in case he lends money to the company beyond the borrowing power of the company. Such borrowing exceeding the limit set by MOA and AOA is called 'ultra vires borrowings' (ultra means beyond and vires means powers).

Legal Consequences of ultra vires borrowings :The interesting part of ultra vires borrowings is that there is no debt at all for the company. In such cases 'doctrine of constructive notice' makes the lender liable for lending money beyond the borrowing power of the company. In such cases, the lender has no right to recover the debt against the company. Therefore it is always advisable and doctrine of constructive notice also requires it, to make sure whether the loans being advanced to the company are within its borrowing power, otherwise the lenders will loose the amount of loan given to the company and the company will move with its head high.However, in case of ultra vires borrowings, the lenders have certain rights as follows:1. Injunction (ban or restriction): This is the right of lender to Tribunal and request the Tribunal to stop company from using such funds. This is available only in the situation when the company has not spent the money. If it has spent the money, this option is gone.

2. Recovery of intra vires payments : If A has given loan of say Rs. 10 lacs to the company which is ultra vires. If becomes irrecoverable on the part of lender. If the company has paid Rs. 4 lacs to another company for repayment of loan, the lender can claim a recovery of Rs. 4 lacs from the company from the ultra vires loan of Rs. 10 lacs. The remaining amount of Rs. 6 lacs will remain ultra vires borrowings.3. Identification and tracing : The lender can have claim on the assets purchased from such loans. But the lender has to identify and trace such assets.4. Claims for the damages : The lender may claim compensation or damages for breach of authority against the directors of the company. However, doctrine of constructive notice applies here the lender is not likely to win in such claims.Intra vires borrowings : Intra vires means within powers. When company borrow funds within the limit set by its MOA and AOA such borrowings are called intra vires borrowing. It may happen the borrowing may be within limits set for the company but beyond the scope of authority of directors. In such case, the borrowings are intra vires to the company but ultra vires to the directors. As the directors have exceeded their authority but the borrowings are within the powers of the company. Here the directors are acting as agents of the company which is principal. If company ratifies the acts of directors, it is okay with lenders. But if company refuses to ratify the acts of directors, as per law of agency, the creditors have no remedy to recover such amount.Charges : A charge is a kind of security given by the company to its lenders and creditors. A charge includes mortage. Mortage or charge or security may be used interchangeably though there is some variation in their meaning. A fixed charge is created on fixed assets of the company. In fixed charge, the company continues to use the assets but it wants to dispose it off, it requires the permission of lender. A floating charge is created on variable assets or current assets of the company.Section 125 Registration of charges : Certain charges must be registered with the ROC otherwise they will be void against the creditors. (it means that the creditors will not be in position to recover any amount from the assets on which the charge is created, if such charges are not registered with the ROC.)As per section 125, such charges are :

1. 1. for the issue of debentures ; 2. on the book debts of the company ;3. on any movable property of the company ; 4. on goodwill, patent, trade mark, copy right or license.2. Charge created outside India on property out side India3. Charge created outside India on property in side India.4. Charge on ship or any share in ship.If the company fails to create such charges and does not register the same with the ROC, its intention of paying the debts or loans or borrowings looks doubtful and the money becomes payable immediately. Other consequences of non-registration are : (i) penalty for non-registration (ii) the risk of creditors increase as a non-registeredMemorandum of satisfaction: When company receives loan from a lender, it has to place the title or other documents of some asset with the lender as a security. This is called charge of loan. After a charge has been created and registered with the ROC, the company becomes duty bound to pay the installments of debt regularly. When the loan is paid off completely, the company informs within 30 days of final payment, to the ROC about the final payment. The ROC confirms with the lender that the charge should be lifted. If the lender raises no objection, the ROC writes in the register of charge, a memorandum of satisfaction, recording this fact that amounts due in respect of loan or debt have been paid and the charge is no longer required.

2004 June 5a (i) Debenture and debenture stock Answer :

(i) Debenture is name and description of an instrument and debenture stock is the amount or total sum of debenture.

2004 June 5a (ii) Debenture and loan2007 june 5 Distinguish between the following (v) debenture and loan.Answer (ii) A debenture is acknowledgement of debt which is to be paid in accordance with a predetermined schedule. The loan givens a right to the giver of loan who can demand the payment of loan at any time.

2007 june 5 (v) dk vkUlj tSlk gS oSlk gh ys yhft;sA

2005 June 1C Distinguish ………………………… debentures and sharesAnswer : take the same answer.2005 Dec 5a : Bring out the ………………………… of finance.Answer ; take the same answer.2006 dec 2b : distinguish between………………… shares and debentures Answer : take the same answer2008 june 8 (iv) Distinguish between : Mortgage and Charge.Answer : Take the same answer Descriptive Questions :1998 Dec 1C: Comment on the following statement :(iv) A charge becomes void………………………………………. Filed for registration .1999 June 1C :Certain charges are void against the liquidator.1999 Dec 5a : Enumerate the charges that are required………….. of companies.(b) Explain the provisions …………………………. By the company.2000 June 1C (iv) '' a specific charge………………. And defined.''2001 June 1C (iv) the non-registration of a charge……………. Concerned.2002 June 3a what are the charges…………………… unless registered?(b) Explain the effect of ……………….. or crystalised.2004 June 1C; A delay in filing …………………….. companies .2004 June 5b : It is basically the ………………………….. the registration of charge.2004 Dec 1C : What is meant by crystalisation………………….. its effects.2005 Dec 1C State the provisions ……………. Of charges.2007 june 3a : What are the consequences………. Of a charge ?2008 June 2a: Discuss the provisions relating to registration of charges.

Answer : A comprehensive answer is presented here for all of the above questions.

Section 125 of Company's Act 1956 requires that the company should get the charge registered with ROC otherwise the loans become immediately payable. The charge shall become void or meaningless (for the creditor) if it is not registered with ROC. The charge has become meaningless or void means the creditor is not in a position to recover the amount against the assets kept with him as security. The creditor has become unsecured. Remember that the debt is still there but the security is not there. The company can not say that it will not pay loans because the charge is not registered, on the contrary the loan becomes immediately payable in absence of registration of charge.if the charge is not registered, the holder of charge (means the creditor) has no right or lien on the title deeds or documents which are given to him by the company as charge. The required particulars of charge should be filed with the ROC otherwise the charge becomes void against the liquidator and any other creditor of the company. It does not mean that the loan has become unrecoverable just because the charge is not properly registered. As long as the company is working as going concern, the charge is good and loan is recoverable from the company even if the charge is not registered. It is void only if the company goes into liquidation. The company cannot refuse to pay loan just because the charge is not registered.Following are the charges that must be registered with the ROC as per Section 125: A charge 1. for securing any issue of debentures ;2. for uncalled share capital of the company3. on any immovable or immovable property of the company 4. on book debts of company;5. on any calls made but not paid6. on a ship or any share in ship7. on goodwill, patent or a license or a copyright.The charge is made against some asset (it means some assets are mortgaged against loan) which is ascertained and definite for example land. A fixed charge is against the security of a specific property and the company loses the right to dispose off such property as long as there is a charge on that property.

The floating charge is made against some movable asset e.g. inventory. The value of asset is changing constantly. The floating charge crystallizes (means to become solid) into fixed charge (when the floating charge becomes fixed charge, it is called crystallization of floating charge) in the following cases (it means company can not now change the value of such assets, it can not dispose it off either):

1. When something happens for making charge fixed, as per the agreement;2. When creditors and debenture holders take step to recover loans through the security;3. When going concern concept is lost 4. When the company goes into liquidation.

A company is required to file a memorandum of satisfaction within 30 days of final payment or satisfaction of charge. The Company's Act 1956 has not given power to ROC for any extension of the time limit of 30 days.It is in the interest of the creditor to get the charge registered with ROC so that he should remain secured. But the according to Company's Act 1956, the primary duty lies with the company and if company fails, it can be fined for Rs. 5,000 for every day during which the fault continues.Effect of non registration of charges : The consequences of non-registration of charges are as follows "

1. The charge is useless for the liquidator or creditor in case of liquidation.2. The creditor become unsecured creditor.3. The creditor loses his right on the property or lien on documents.4. The company can mortgage the same property again.5. The penalty provision exists for non-registration.6. The company cannot use the loan any more as the loan becomes payable immediately.

Modification of Charges : As per section 135 of the Company's Act 1956, it is duty of the company to inform the ROC regarding changes in terms and conditions of charges. A modification of charges can be filed only by the company and not by the holder of the charge.Register of Charges : (Section 143) : Every company shall keep at its registered office, a register of charges and enter in it all charges specifically affecting property of the company. The register should contain (i) short description of the property charged (ii) amount of the charge and (iii) name of the holder of the chargeInspection of register of charge (Section 144) : The register of charge shall be open during business hours for not less than two hours each day for inspection of any creditor or any member of the company without fee. Any other person can inspect the register after paying the prescribed fee. IIf the inspection is refused, the company and every officer of the company, who is in default, shall be punishable with a fine which may extend to Rs. 500 and a further fine which may extend to Rs.200 per day during which the refusal continues.1999 June 7a : Explain the nature…………………….. limited company.Answer : A company may borrow money by the following methods :1. Loans from financial institutions and banks: These loans are secured by the assets of the company. The documents related with the assets of the company are legally handed over to the bank as security for getting the loans. The company can continue to use these assets but it can not dispose off the assets without the permission or approval of the lending institutions.2. Issue of bonds and debentures to public : The bonds and debentures are issued to the public at par, at premium or at discount. In general, these instruments are properly secured.3. Deposits from the public : The company can accept the deposits from public at large and promise them to pay interest at a fixed rate. The principal amount is paid after a predetermined period. This is governed by Section 58 A of the Company's Act 1956.Extent of Borrowings :Section 293 directs that the BOD can borrow up to an amount which is equal to or less than sum of paid up capital and free reserves. If the BOD want to borrow more amount than the sum of paid up capital and free reserves of the company, it has to obtain the consent of shareholders in a general meeting. For the purpose of this section temporary borrowings from bank in ordinary course of business, would not be considered. Section 292 gives power to BOD to borrow money, Board can borrow money only after a resolution is passed in the board's meeting.

2000 Dec 8a How can a holding company……………………. Urgent needs?Delete this question . 2003 Dec 8b Discuss the law relating to……………………. Guarantees.Delete this question.2004 June 4a: '' Save as provided…………………… company'' Comment.Answer : As per section 117 of Company's Act 1956 the following persons can not be appointed as debenture trustees : (i) one who is shareholder of the company (ii) one to whom the company has to make some payment on any account (iii) one who is any way related to the payment of principal or interest in respect of such debentures.2004 june 5b : Can debentures be reissued?According to section 121 a company can reissue the debentures if the MOA and AOA contain the provision of reissue of debentures.2005 june 4 Comment of the following statement (iv) the debenture ………….. debenture holders.Answer : Section 119 of Company's Act 1956, the trustees for debenture holders are made liable for breach of trust where they do not exercise due care and diligence required of them as trustees.Regulation 15 of SEBI (debenture trustee) regulation 2003 states the following duties of debenture trustees:

a) Call for periodical reports from the company;b) Take custody of trust documents;c) Do such action as necessary if the securities become due or enforceable;d) See that debenture certificates have been dispatched to debenture holders in

accordance with the provisions of Company's Act 1956.e) Exercise due diligence to ensure the compliance of provisions of Company's Act

1956 by the company ;f) See also the compliance of other statutory provisions e.g. as trust deed, listing

agreement etc.g) If any breach of trust deed or law is noticed, take necessary action;h) Inform SEBI if any breach of law is noticed.

The trustees can inspect books of accounts, records, registers and trust property.Some of the other ways of protecting the interest of debenture holders by debenture trustees are :1. the trustees are normally given power to sell and thus realize amount without the help of court;2. the assets are in full control of them, the physical assets as well as documents thereof. This prevents any subsequent mortgage of the assets by the company.3. the ensure that the mortgaged property is kept insured and maintained in proper condition.2006 june 6b debenture holders……………… Discuss.Answer : Take the same answer'Practical Questions :Take the practical questions and answers same. tSlk gS oSlk gh ys yhft;sAChapter 15 : Oppression and Mismanagement1999 June 3a :Explain the protections………………………….. company law.2000 Dec 4b: Briefly state the 'rule of majority' and its exception.2002 June 7b:How does the Company's Act 1956 provide……………… shareholders ?2002 Dec 7a :Demonstrate how the shareholders'…………………………. Give three examples.2003 June 6c:Explain the powers of the ……………………….. to prevent oppression and mismanagement.2005 Dec 7:

Explain the provisions of Company's Act 1956 relating to…………….. shareholders.2006 June 3b :Explain the provisions …………………………. to prevent oppression and mismanagement.2006 Dec 8a:Discuss the provisions ……………………………… rights of majority.2006 Dec 8b:What are the …………………………………. Minority shareholders ?2007 Dec 7c : Discuss the rule of Foss vs Harbottle.2008 June 2b:Discuss the majority rule and minority rightsAnswer : A comprehensive answer to the above questions is given below:

Oppression means domination or coercion which simply means force applied. The company runs on majority rule. Oppression means any injustice to the minority by the majority. Some mechanism must be available with the minority to challenge the majority.The minority shareholders may also suffer if there is mismanagement of a company.Section 399 provides that the following members may apply against oppression and mismanagement of the company : one hundred members of the company or 10% of the total number of members whichever is less or member holding 10% of the issued share capital of the company. Application can be made by any member on behalf of others after obtaining their written consent.Section 397 deals with oppression and section 398 deals with mismanagement. The language of both the sections is quite similar except some minor variation. Student should see this properly :Section 397 : It provides that :Any member having right as per section 399 may complain to the National Company Law Tribunal that :The affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member of the company.The Tribunal is of the opinion after considering the application made under section 397 :1. The affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members and :2. the facts are such that the company should be wound up. From the above, it is clear that the Tribunal is of the opinion that the winding up of company in the given circumstances will be perfectly justifiable but this will mean that the remedy is worse than the disease. It implies that some other kind of relief is necessary.Section 398 : It provides that :Any member who has the following complaint, may apply to the Tribunal for an order :1. that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company ; Or2. that a material change has taken place in the management or control of the company and it is likely that the affairs of the company will be conducted in a manner prejudicial to the public interest or prejudicial to the interest of the company.The Tribunal may make such orders as it deems fit. However, the Tribunal will act when such request is made by the specific number of members as specified in section 399.The Powers of Tribunal are as follows (Section 402) : The Tribunal may pass an order1. To regulate the affairs of company in future,2. To purchase of the shares of the members by the company or other members;3. To terminate or modify or postpone any agreement made the Managing director, director or manager of the company with any third party after giving due notice to the third party and after following the law of natural justice. 4. The Tribunal has powers u/s 409 for prevention of change in management i.e. BOD.5. The Tribunal may pass an interim order before passing final order as it may deem fit.6. The Tribunal may order for alteration of MOA and AOA.The powers of Central Government to prevent oppression and mismanagement :Section 408 provides that the CG can appoint directors to safeguard the interest of the company, or its shareholders or the public interest. The period of such directors will not be more than three years. Such directors will not be required to hold the qualification shares nor they would be retired by rotation. They can be removed or replaced by their appointing authority i.e. CG.Principle of majority rule :

The principle of majority rule states that in running the affairs of the company majority should make rules and such rules are binding on minority whether they like it or not. The directors are elected in AGM of the company and their decisions are supposed to be binding on every member of the company. As per section 87 of the Company's Act 1956, every shareholder is entitled to vote in a general meeting on every resolution placed in that meeting. The resolution is passed either by ordinary majority (more than 50% vote of the members present) or by special majority (more than 75% of the members present). Thus whatever resolution is passed by the majority is binding on the minority as well. But this is subject to two important limitations (i) this resolution is subject to provisions of MOA and AOA and (ii) the resolution must be within the law of the country and must not constitute a fraud or oppression on the minority.The principle of majority rule has been laid down in the famous case of Foss v/s Harbottle in which the court refused to intervene with the internal management of the company. The facts of the case are as follows :Two shareholders alleged that the directors of the company were guilty of purchasing their (directors') own land for the use of company. Since the directors were the owners of the land, they sold the land to the company at a much higher price than its market price. This action of directors caused loss to the company and the two shareholders decided to take action against the directors.However, In a general meeting, it was decided by the majority of shareholders that no action should be taken against the directors. The two shareholders went to the court against this resolution. The court rejected the plea of two shareholders on the ground that as the action of the directors was approved by majority of shareholders in a general meeting, the minority shareholders should also obey it. If something wrong is done to the company, the company itself should take the action and not these two shareholders.

Exceptions to the principle of majority rule Or Protection to minority shareholders : The supremacy of majority rule does not prevail in all situations specially when the majority is causing oppression of the minority or mismanagement in the conduct of affairs of the company. Following are the exceptions to the principle of majority rule :

(i) When the majority does any thing which is ultra vires to the MOA or AOA because the resolution passed by majority is subject to MOA and AOA.

(ii) When action taken by majority is a fraud on minority.(iii) When decision is to be taken by special majority but it is taken by simple majority.(iv) If personal right of a shareholder is challenged.(v) If there is any oppression or mismanagement

Protections to minority shareholders as per Company's Act 1956 :(i) Variation of rights of shareholders : The shares are attached with certain rights. If any such

rights are altered the approval of shareholders is necessary.(ii) Members qualified to apply u/s 399, may apply to CLB for relief in case of oppression and

mismanagement.(iii) Member may apply to CG u/s 408 to appoint directors for the safeguard of assets of the

company.(iv) The members who do not agree with any scheme of amalgamation and reconstruction, will be

given protection.(v) Requisite number of members may apply to CLB for investigation of the affairs of the company

u/s 235 of the Company's Act 1956.

2001 Dec 4b:State whether there is oppression or mismanagement in following cases ,,,,,,,,,…….Answer : Take the answer as it is.2007 Dec 8b :In a public company, ………………….. directors can be prevented.Answer :Take the answer as it is. Practical Questions :1999 June 3b:A minority shareholder……………………………. Will he succeed ?2002 June 3b:ABC private ltd……………………………. will he succeed?Answer ; Take the answer as it is. 2007 June 8b :

A company was in dire…………………………………………… . Decide.Answer ; Take the answer as it is. Chapter 16 : Compromises, Arrangements, Reconstruction and Inter-corporate loans and Investments Compromise : When a dispute between a company and any other party is settled by mutual consultation with some mechanism (say Tribunal) between them, such settlement or adjustment is called compromises. It does not mean one sided settlement but requires sacrifices and adjustments from both the sides.Arrangements : Section 390 states that arrangements includes reorganization of the share capital of the company either by consolidation or by division of existing shares or by both of these methods.Reconstruction : When a company transfers all of its assets and liabilities to a new company under an arrangement by which the shareholders of old company are entitled to receive some shares in the new company.Amalgamation :When two or more companies combine into one company it is amalgamation.Legal provisions relating to Compromises (Section 391, 392 and 393) :A compromise can proceed between a company and its creditors or its members. The following procedure is followed in case of compromise or arrangement.

1. When both the parties agree to compromise after mutual consultation, both or any of them may apply to Tribunal for a compromise.

2. The Tribunal will examine the terms of compromise and see whether it is reasonable to both the parties. The Tribunal shall then call the meeting of both the parties. The meeting shall be conducted in a manner as prescribed by The Tribunal.

3. The compromise will be placed in the meeting as a resolution. It should be passed by special majority of the members present in the meeting. After passing resolution Tribunal will verify and satisfy itself that all the material facts regarding the compromise are presented to it. After satisfaction it may sanction the scheme. Its decision to sanction the scheme must be communicated to the ROC.

4. Once a compromise is sanctioned by the Tribunal, it becomes binding on all the concerned parties.

Procedure to be followed for reconstruction and amalgamation :1. Where a compromise or arrangement has been proposed for reconstruction of a company or

amalgamation of a company into another company, the scheme shall be approved by the holders of 75% of value of shares concerned.

2. The scheme then shall be sanctioned by the Tribunal . the Tribunal may pass orders for any of the following matters :(i) transfer of assets and liabilities of one company to another (ii) the allotment of shares as per scheme (iii) transfer of legal cases by or against the company (iv) provide and protect the member who is not accepting the scheme (v) all other matters to make smooth the process of reconstruction or amalgamation.

3. If the Tribunal has received a report from the ROC that the affairs of the company have been conducted in a manner prejudicial (harmful) to the interest of its members or to the public interest, it shall not sanction the scheme and ask for further investment into the matter.

4. A similar report from the official liquidator is also necessary for the Tribunal.5. The Tribunal may after satisfying itself regarding all aspects of scheme, may pass an order to

sanction the scheme.6. A certified copy of the order of the Tribunal shall be filed with ROC and CG.

Rights of Dissenting Shareholders (section 395) : (dissent means to oppose, to disagree) :1. A scheme of reconstruction or amalgamation involves the transfer of shares of one company to the

other company.2. When the new company makes an offer to the shareholders of old company, the offer should be

accepted by 90% of the shareholders. In this computation of 90% the shares already held by the transferee company i.e. the new company, will not be counted.

3. When the 90% shareholders give their consent, the company shall get the right to acquire the dissenting (opposing, disagreeing) shareholders. The company will give notice to dissenting shareholders that it desired to acquire their shares. The dissenting shareholders may apply to the Tribunal.

4. If the scheme appears to be oppressive, unfair or unjust to the Tribunal, or it appears that the consent of majority shareholders has been obtained by fraud, deception, coercion or any unfair or

improper means, the Tribunal will interfere. If no such knowledge comes to the Tribunal or no application is made before it in this respect, the Tribunal will give green signal to the new company to acquire the shares of dissenting shareholders.

5. When the new company acquires the shares and pays their price to the old company, the old company shall register the new company as holder of those shares. After registration the dissenting shareholders shall be paid the amount due to them.

Section 396 : Amalgamation of companies in national interest :If the CG is satisfied that two or more companies should be amalgamated in the public interest, it has

power u/s 396 to issue order for such amalgamation.All terms and conditions of such amalgamation e.g. property, powers, rights, interests, constitution etc.

of the involved companies, shall be explained in the order of the CG.The order may also provide remedies for various court cases by the company or against the company.All other necessary provisions regarding the amalgamation will be made in the order.The debenture holder or other creditors of the company shall have the same credit terms as previous

and if any reduction in rates become effective, such creditors or debenture holders will be suitably compensated. They may appeal in the Tribunal if unsatisfied with the arrangement.

Copies of every order made under 396 shall be placed before both the houses of the parliament at the earliest.

Inter Corporate Loans and Investments (Section 372):According to section 372, A company can use 60% of its paid up capital and free reserves or 100% of its free reserves whichever is more, as loan to any other company or as guarantee for loan made by any other person or as consideration for acquisition of shares of any other company. It is further provided in the same section 372 that if the limits as provided above is exceeded for any loans, guarantee or investments, such further loans, guarantees or investments should be given only after passing a special resolution in a general meeting authorizing these loans, guarantees or investments.If the company has defaulted in compliance of provisions of section 58 A, it can not use any provisions of section 372.Thus worded differently, according to section 372, the company cannot give loan, provide security, provide guarantee or make investments exceeding 60% of its paid capital and free reserves or 100% of its free reserves which is more except with the previous authorization of general meeting by a special resolution.The approval of members is not required, even if the ceiling or limits as set in section 372 is exceeded, in the following cases :

o banking company 2. Insurance company 3. Housing financial company 4. Any company whose principal business is acquisition of shares.

Any made in shares acquired as rights as per section 81. Any loans made or guarantee given by a holding company to its wholly owned subsidiary company.

Descriptive Questions :2009 Dec 6c:Ganga plastics………………………………………….. Government tenable ?Answer :Section 17 requires that any change in MOA should be passed with special resolution and confirmed by the Central government. If the MOA does not contain provision of amalgamation, the company has to amend it as required in section 17.Section 394 (provisions for facilitating reconstruction and amalgamation of companies) does not require the precondition that provision for amalgamation must exist in MOA. It means that even if the MOA does not contain amalgamation clause, it can still go for amalgamation with an other company by virtue of section 394. The scheme of amalgamation is to be approved by the Court and if it approves such scheme, it is immaterial that the object clause contains the provision of amalgamation or not.The objection of central government is not tenable (tenable means acceptable).1998 dec 6 : outline the provisions………………… loansDelete this question. It does not appear in module. 2000 june 7 (c) : Can a subsidiary…………………………………. Of H Ltd.?Answer : Delete this question. It does not appear in module. 2001 June 6 b : What are the………………………………. And investments ?

2003 June 2 b : What are the…………………………………. Bodies corporate?Answer : The approval of members is not required, even if the ceiling or limits as set in section 372 is exceeded, in the following cases :o banking company 2. Insurance company 3. Housing financial company 4. Any company whose

principal business is acquisition of shares. Any made in shares acquired as rights as per section 81. Any loans made or guarantee given by a holding company to its wholly owned subsidiary company.2007 Dec 1C : All investments made ……………………….. in its own name.Answer ; Delete this question. It does not appear in module. 2008 June 6c : The entire assets of a company…………………….. Why?Answer : The separate entity concept states that a company is a distinct and different entity from its owners, creditors, assets and liabilities. In this case all assets of a company are acquired but the company is more and above than its assets. Acquisition of all assets does not mean that the company itself is acquired.

Practical Questions :2002 June 6a : High Dream ltd…………………….. XYZ Ltd.Answer : Take the answer as it is. 2004 June 3a : The Board ……………………….. Company's Act 1956.Answer : Take the answer as it is. 2004 Dec 6c : this is same as above. 2004 June 3a2005 June 5ab : Hum tum………………………. Directors?Answer : Delete this question. It does not appear in module.2005 Dec 4a Balance sheet ……………………inter-corporate investments.Answer : Take the answer as it is. 2006 June 2a : The Board…………………. 372 A.Answer : Take the answer as it is. 2006 June 2b: Gold ltd is a listed…………………………… the companies.Take the answer as it is. 2006 Dec 5a :Balance sheet of DEF……………….. therefore.Take the answer as it is. 2008 June 5b Following information has ………………….. advise the Board CS Final Grade II Deleter all questions.Ikz'u cgqr T;knk gks x;s gSaA ekMz;wy esa ;g psIVj flQZ ikap ist dk gSaA mlh ds fglkc ls Dos"pu jf[k;sAChapter 17 ; Winding up of Company Winding up or liquidation means closure of the company or dissolution of the company. This is the last stage of life of company. The company sells or realizes the fixed assets and current assets and also settles all outstanding liabilities. For saying final good bye to company, an administrator called liquidator is appointed. There are two types of winding up (i) Voluntary winding up and (ii) Compulsory winding up.Voluntary Winding Up of Company : It means winding up by the members or creditors of the company without the involvement or interference of the Tribunal. The following are the method of voluntary winging up of company :

1. By passing ordinary resolution : When the company's life was decided at the time of its birth, the company may decide itself to wind up at the expiry of such period. A ordinary resolution is enough for this purpose.

2. By passing special resolution : By passing a special resolution for winding up of company, the company can decide to wind up at any moment. No reasons need to be given for such winding up. This is statutory right given to the member and AOA cannot deny this right to members.

A voluntary winding up shall be deemed to have commenced at the time when the resolution either ordinary or special resolution is passed for its winding up. The company will have to give notice of winding up within 14 days of passing such resolution by advertisement in the official gazette and in some news papers of the district of place where registered office of the company is located.

Types of Voluntary Winding Up : There are two types :1. Voluntary winding up due to members and 2. Winding up due to creditors.For first case i.e. Voluntary winding up due to members, the following provisions will be applicable :1. Declaration of solvency : (Section 488) : If a declaration of solvency as required in section 488 of the Act, is made by the company it is deemed to be voluntary wind up by the company. The declaration shall be made by the BOD after passing a resolution that the company has enough resources to pay the debts within three years from the commencement of the winding up. The declaration is to be filed with the ROC with a copy of Balance sheet and profit and loss a/c for last year and statement of affairs as on the date of declaration of solvency. 2. Appointment of liquidators : The winding up process will be supervised by liquidator. The liquidator will be appointed by the company and his remuneration will also be fixed before he commences the work of winding up. With the appointment of liquidator is the sole authority to conduct the business and affairs of the company. All the powers of all the directors will be redefined as per the directions of the liquidator. Any vacancy due to death, resignation or otherwise in the office of the liquidator will be filled by the general meeting of the members.3. Information to ROC : The company will inform the ROC of the appointment of the liquidator. 4. If the liquidator is of the opinion that the it is unlikely that the company will be able to pay its debts, he can call the meeting of the creditors of the company and place before them the position of all the assets and liabilities of the company. After such a meeting, the winding up will become creditors' winding up.5. If the winding up continues for more than one year from the date of winding up, the liquidator will call a meeting of the members and place before them the accounts of his actions and dealings during the past year since the time of his appointment as liquidator.6. When the process of winding up is over, the liquidator shall draw an account of all the transactions made in this regard. A meeting of members will be called by liquidator and he place the account of winding up giving every details of disposal of assets and payment of liabilities. Within one week

Compulsory winding up or Winding up by an order of court (Section 433): This can be ordered in the following cases :

(i) Opinion of the members : If members of a company pass a special resolution regarding winding up of the company, the Tribunal may order winding up which shall be binding on company.

(ii) Opinion of the Tribunal: If the the Tribunal is of the opinion that it is fair and reasonable to wind up the company, it may pass order in this respect. The opinion of the Tribunal must be formed on the basis of concrete facts and circumstances about the company.

(iii) Default in holding statutory meeting (first meeting) and file statutory report : the ROC has powers to file a petition for winding up if the company fails to convene the statutory meeting and file a statutory report with the ROC, however, in general the company is generally asked to hold the meeting and send the report rather taking the extreme measure of winding up the company.

(iv) Default in payment of Debts : If it is established that the company is unable to pay its debts, the Tribunal may order for winding up of company. However, temporary delay or suspension in paying debts cannot be a ground for ordering of winding up of company.

(v) Default in commencing business : The Tribunal has powers to order winding up if the company does not commence business in one year from date of incorporation or the company suspends operations for a complete one year. However, the extreme step of winging up of company is generally not taken by ROC.

(vi) Statutory minimum number of membership : If the number of members falls below the statutory limit of 7, the company may be ordered to be closed.

(Note ; If the company has no assets, it is not a valid ground for winding up of the company.)Petition (section 439) : Petition is the beginning point of the process of winding up of company. The company may be filed by any of the following parties :

1. Company ; If members of a company pass a special resolution regarding winding up of the company, the Tribunal may order winding up which shall be binding on company. A petition is filed

by the company itself and the Tribunal may order compulsory winding up of company. However, a company may not make petition under this section because it is more convenient to have a voluntary winding up rather than a compulsory winding up.

2. Creditor : Any creditor may file a petition for winding up of the company. Any person other than the creditors, who is having any pecuniary ( means monetary, financial) claims pending against the company may also file petition to wind up the company.

3. Contributories ( it is not contributors) : Contributory is the person who is liable to contribute to the assets of the company on the event of its being wound up. Contributory includes the shareholders of the company whether fully paid up shares or partly paid up shares.

4. All parties mentioned above jointly : The company, creditors and contributories can file the petition either together or individually.

5. ROC : The ROC can file the petition on the following grounds (i) If company has failed to hold the statutory meeting and submit the statutory report within the statutory time limit; (ii) If the company is not able to pay its debts ; (iii) If the company has defaulted in commencing the business within one year from the date of incorporation (iv) if the company has suspended its operation for one full year (v) if the number of members falls below the statutory limit of 7.

6. Central government : The Central government may appoint inspectors u/s 235 to report in respect of affairs, business and management of the company. If the CG is of the opinion after studying the report of its inspectors, that company has an intention to defraud its creditors or members or any other person; Or there is oppression of any member or the management is guilty of fraud or misappropriation of funds, the CG may apply to the Tribunal for winding up of the company.

Commencement of Winding up of the company (Section 441): Section 441 provides that (i) in case of voluntary winding up of company, when a resolution has been passed, the date of commencement of winding up will be the date of passing of the resolution. (ii) in any other case the date of presentation of petition would be the date of commencement of winding up.Powers of the Tribunal with regard to petition : The Tribunal shall have the following powers on hearing the petition :

1. Dismiss it with or without costs ;2. Postpone or adjourn the proceedings either conditionally or unconditionally.3. Make an interim order as it may consider suitable;4. Make an order of winding up of the company.

Consequences of Winding up order : If the Tribunal gives an order to wind up the company, the following legal provisions become applicable :

1. Intimation to official liquidator and ROC : The Tribunal gives a copy of winding up order to the Official liquidator and ROC. Certified copy of the order shall be filed by the company within 30 days of the date of order.

2. Discharge Notice to all officers and employees of the company : The winding up order shall be deemed to be the discharge notice to all the officers and employees of the company. Any contract of any person with the company for employment will be treated as cancelled and terminated. The damages or compensation will be allowed, if contract is cancelled before the date of its maturity.

3. Stopping of legal cases against the company : After the issue of winding up order of the Tribunal, no further cases against the company can be filed in the Tribunal. The pending cases against the company will not be proceeded against the company without the permission of the Tribunal.

Procedure for winding up :Once the Tribunal has passed order of the winding up of company, several steps need to be taken by the company for winding up which are given below :Appointment of Official liquidator Section 448 :

1. According to section 448 the Tribunal should appoint an official liquidator after passing of order of winding up.

2. The liquidator may be appointed from a panel of firms of chartered accountants, cost accountants, company secretaries or advocates. The panel will be approved by the central government.

3. The liquidator may also be any officer of CG.4. The Tribunal should give due weight to the views of creditors and workmen before appointing the

liquidator.5. If the liquidator is appointed from professional firms, the remuneration will be at maximum of 5% of

A where A is sum of value of debt recovered and realisation of sale of assets.

6. If the liquidator is an officer from CG, his remuneration will be decided on the basis of rules made by the CG in this behalf. The CG may also appoint assistant or deputy liquidator and also fix their remuneration on the basis of rules made by it in this behalf.

7. The realisation of assets will be paid to liquidator first of all.8. The official liquidator will perform such duties as fixed by the Tribunal, in the winding up process.

Section 449 Official liquidator to be liquidator :The official liquidator is called as provisional liquidator before the winding up order is passed by the Tribunal. The provisional liquidator becomes the liquidator as soon as the winding up order is passed by the Tribunal.Section 450 Appointment and powers of liquidator :The official liquidator shall cease to hold office as provisional liquidator, and shall become the liquidator of the company, on a winding up order being made.Section 451 General provisions as to liquidator :

1. The proceedings of winding up will be done by the liquidator. He will perform all duties as assigned by the Tribunal.

2. When the official liquidator becomes liquidator, his fees will be paid by the realisation of assets of the company.

3. The acts of liquidator shall be valid even if it is found later that his appointment or qualification have defects,

4. All acts done by him after becoming known that his appointment is invalid, shall be invalid.Section 457 Powers of liquidator :The liquidator shall have the following powers with the sanction of the Tribunal:

1. he is official representative of the company in all matters. He can appear in all legal proceedings by or against the company, as the representative of the company.

2. he can continue the business of the company as far as he thinks profitable to the company;3. he can sell the movable and immovable assets of the company to general public by auction or

private contact or by any other suitable method4. he can sell the whole of the company as a going concern;5. he can raise any amount of money on the basis of security of the assets of the company.6. he can do all things which may be necessary for the winding up of the company.

The liquidator shall have the following powers without the sanction of the Tribunal;1. He can prepare all documents and deeds on behalf of company using the common seal of the

company.2. He can inspect all records, returns, registers and files of the company without paying any fees.3. He can draw, accept, make or endorse any bill of exchange, hundi, or promissory note on behalf of

the company in the course of business.4. He can appoint any person as his agent or representative to perform any work which he himself

cannot do.Distinguish Between :2003 Dec 5a : Distinguish between………………………………… of company/Answer : Take the answer as it is. Descriptive questions 2003 June 5a: Mention the ……………………. By the court.Answer : Take the answer as it is.2004 June 4d : What are the ……………………………….. by the Tribunal ?Answer : See the notes under consequences of winding up.2004 Dec 3a : Mention the powers…………………….. by the Tribunal.Answer : See the notes under 'Powers of liquidator'.2005 June 1C : (v) Best lit. has ………………………….. ceases to exist.Answer : Take the answer as it is. 2006 June 4a State the …………………………. By the court.Answer : Take the answer as it is. 2006 Dec 1C (a)(iv) A company unable to pay its debts can be wound up.Answer : Take the answer as it is. 2010 June 6a : The official liquidator …………… provisions of the Company's Act 1956.Answer :

According to section 529A of the Company's Act 1956, the dues of the workmen and the dues of the secured creditors are to be treated at same footing. Both these dues are to be discharged on priority over all other dues of the company.Section 529 A is overriding (means above) all other provisions and states clearly that workmen's dues and debts due to secured creditors shall be paid in priority to all other debts. Hon'ble Supreme Court has also confirmed this in Uco Bank 1994 that provisions of section 529A of the Company's Act 1956 will over ride all other claims of the creditors.Practical Questions :2009 Dec 7a :Fruits ltd has its ……………………………. Business ?Answer ; Take the answer as it is. Chapter 18 : Right to Information Act 2004The salient features of Right to Information Act, 2004

Information means any material in any form, including records, documents, file notings, memos, emails, opinions, advices, press releases, circulars, orders, logbooks, contracts, reports, papers, samples, models, data, material held in any electronic form.

All persons shall have right to information.How to obtain information : The person desirous of obtaining information shall make a request in writing or through electronic means in English or in the official language of the area to Public Information Officer or his designated officer. The request should give particulars of the information sought by him / her. He is not required to give any reason for requesting for information nor he is required to give any personal details except those necessary for contacting the applicant.Appointments :Chief Information Commissioner: The President shall appoint or designate a Chief Commissioner for all matters pertaining to the Union on the recommendation made by an Appointing Committee presided by the Prime Minister with the Leader of Opposition in the Lok Sabha and the Chief Justice of India as members.State Information Commissioner : The Governor shall appoint a State Information Commissioner for all matters pertaining to the State on the recommendation by an Appointing Committee presided by the Chief Minister with the Leader of Opposition in the Vidhan Sabha (or Legislative Assembly) and Chief Justice of the High Court as members.Tenure : Every person appointed as Chief Information Commissioner ( CIC) or State Information Commissioner (SIC) shall hold office for a term of five years from the date on which he enters upon office. He / She will not be eligible for reappointment.Time for providing Information :

1) Where the information is related with life and liberty of a person, the same should be provided within 48 hours of receipt of the request,

2) the Public Information Officer shall as expeditiously as possible and in any case within 15 days of the receipt of the request, either provide the information or reject the request for any of the reasons specified in the Act.

Rejection of Request for Information :The information is not given :

(a) disclosure of which would affect the sovereignty and integrity of India;(b) Information forbidden to be published by any court of law, disclosure of which may amount to

contempt of court;(c) Disclosure of which can cause a breach of privilege of Lok Sabha or Vidhan Sabha;(d) Information including commercial confidence, trade secrets, disclosure of which would be harmful

to the competitive position of a third party,(e) Information received in confidence from a foreign government.(f) Information, the disclosure of which would endanger the life or physical safety of any person.

When a request is rejected , the Public Information Officer shall communicate to the person making a request : (i) the reason for such rejection, (ii) the period within which an appeal against such rejections may be preferred and (iii) the particulars of the appellate authority.An appeal against the decision of PIO can be made within 30 days which may be extended if the appellate authority is satisfied regarding the reasons of delay.Penalties :

(1) If any PIO has without any reasonable cause, has failed to supply the information sought within the prescribed period, the relevant Information Commissioner shall impose a penalty of Rs. 250 for each day’s delay in furnishing the information, after giving such PIO a reasonable opportunity of being heard.

(2) When it is found in appeal that any PIO has :

(i) Refused to receive an application for information;(ii) Mala fide denied a request for information;(iii) Knowingly given incorrect or misleading information;(iv) Knowingly given wrong or incomplete information or (v) Destroyed information subject to request

The PIO commits an offence and will be liable to a fine of not less than Rs. 2000 and imprisonment of up to five years or both

Descriptive Questions :2008 Dec 5a (ii) Specify the manner in which ……………………… 2005 .Answer :Take the answer the same as given.2009 June 4(iii) Specify the……………………………….. 2005.Answer : Please see above on 'rejection of request for information',

Chapter 19: The Competition Act , 2002: The competition is essential component of economic growth. Competition has several

advantages to business and consumers both, hence it is reasonable to generate and advocate competition in business scenario. It is imperative to produce, present, preserve, promote and prolong conducive environment to generate, endorse, sustain and enhance competition for the benefit of business, public and the nation. The Competition act 2002 has been passed to prevent practices having appreciable adverse effect on competition, to promote and sustain competition in the market and to protect the interest of consumers and to ensure freedom of trade.

The central objective of The Competition Act 2002 is ‘not permitting an appreciable adverse effect on competition in India’.

The Competition Act 2002 deals with three situations (i) prohibition of anti-competitive agreements (ii) abuse of dominant position and (iii) regulation of combinations (covered acquisitions, mergers and amalgamations.)

Basic Concepts:Acquisition : When (i) Shares or voting rights or (ii) assets or (iii) control over assets or (iv) control over management, of any enterprise, are acquired, it is called acquisition.Acquisition means directly or indirectly acquiring or agreeing to acquire :

(1) shares or assets of any enterprise ; (2) control over assets of any enterprise (3) control over management of any enterprise.

Agreement : Agreement is not required to be in writing for the purpose of this act. It may be in writing or oral or formal. It is also not necessary that any agreement must be enforceable by law. Any arrangement or understanding between two parties may be termed as agreement under this law.

Cartel: (Cartel means interest group, lobby, alliance or association)Cartel has been defined in section 2(c) of Competition Act 2002. Cartel includes an association of producers, sellers, distributors, traders or service providers who by agreement among themselves , limit, controls or attempts to control for the production, distribution, sale or price of , or trade in goods or provision of services.

Competition : The term competition is not defined in the Act. However, in the corporate world, the term is generally understood as a process whereby the economic enterprises compete with each other to secure customers for their product.Consumer : Consumer means any person who :

1. buys goods for a consideration ;2. uses the goods bought by some other person;

Payment of consideration is not a condition for being consumer, the consideration may be paid fully or partly or may be promised to be paid.The goods purchased may be for personal use or commercial use or for resale.

Anti Competitive Agreements : Anti competitive agreements are those agreements which relate to production, supply. Distribution, storage, acquisition or control of goods or provision of services, and which causes or likely to cause adverse effect on competition in India.According to section 3(1) of the The Competition Act 2002, no enterprise or association of enterprises or persons or association of persons shall enter into any agreement in respect of

production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable effect on competition within India. Any agreement entered into in contravention of the provisions contained in the above shall be Void. Examples of anti competitive agreements may be as follows :

1. Any agreement which directly or indirectly determines purchase or sale price;2. Any agreement which controls production, supply, provision etc of goods or services;3. Any agreement which is to reduce the chance of fair bidding in any auction or tender etc.

Any agreement among the enterprises in respect of production, supply, distribution, storage, sale or provision of services, including (i) tie in arrangements (ii) exclusive supply agreement (iii) exclusive distribution agreement (iv) refusal to deal (v) resale price maintenance shall be treated as anti competitive agreement if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.For this purpose, the following points should be noted :Tie in agreement means and includes any agreement which requires that some other goods should also be purchased if certain goods are purchased. Exclusive supply agreement means and includes any agreement which requires that a person can purchase some goods from only one specified particular supplier.Exclusive distribution agreement means and includes which requires that distribution of certain goods or services will be done by only a particular person.Dominant position : It means any position of strength of enterprise which makes it able to operate independently of the competitors or which to affect its competitors or consumers in its favour.Abuse of dominant position : If an enterprise imposes an unfair or discriminatory (HksnHkko okyh) condition in purchase or sale of goods or services or in the price of purchase or sale of goods or services, this is called abuse of dominant position.

'Objectives of the Competition Act 2002'.The objectives of the Competition Act,2002 are as follows

to prevent practices having adverse effect on competition, to promote and sustain competition in markets in India, to protect the interest of consumers, to ensure freedom of trade carried on by other participants in markets in India

Competition Commission of India : It is a body corporate by the name '' Competition Commission of India'' with power to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall by the said name, sue or be sued.The Head Office of the Commission shall be at such place as the Central Govt. may decide from time to time,The commission may establish offices at other places in India.Composition of Commission: 1. The commission shall consist of Chairperson and not less than two and not more than ten other

members to be appointed by the Central Govt.2. The Chairperson and other members shall be whole-time Members.3. The Chairperson and other members shall be a person of ability, integrity and standing. They

should be qualified to be Judge of High Court or They have special knowledge of and professional experience of not less than fifteen years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administrative or in any manner which in the opinion of the Central Govt., may be useful to the Commission.

Selection of Chairperson and other members : The Chairperson and every other member shall hold office as such for a term of five years and

shall be eligible for reappointment (Note here that Chief Information Officer of India shall also hold office for a term of five years but he / she is NOT eligible for reappointment.)

The upper age limit for the Chairperson is 67 years and for members 65 years.

Duties, Powers and Functions of Commission: Duties of Commission :

Subject to the provisions of this Act, it shall be the duty of the Commission1) to prevent practices having adverse effect on competition,2) to promote and sustain competition in markets in India,3) to protect the interest of consumers,4) to ensure freedom of trade carried on by other participants in markets in India

Functions of Commission :a) Inquiry into certain agreements and dominant position of enterprise:

The Commission has the powers to enquire that no enterprise or association of enterprises or persons or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India. Any agreement entered into in contravention of the provisions contained in the above shall be Void.b) Inquiry into Combination by Commission : The commission may enquire, either suo-motto (vius vki) or upon information from others, into acquisition or merger or amalgamation to see whether this causes or is likely to cause an appreciable adverse effect on competition within India. c) Reference to Statutory Authority: The commission is required to give its opinion, on receipt of any

reference from any statutory authority as per the Act, within 60 days of receipt of such reference to such authority on the issues referred to it.

d) Advice to the Central Govt.: The CCI is required to give its opinion to the CG on the possible effect of the policy on competition within sixty days of receiving such reference from the CG. The role of CCI is advisory and the CG is not bound to abide by the opinion of the CCI. Apart from advising the CG, the CCI has also been assigned the task of taking suitable measures in the following matters:

1) promotion of competition advocacy;2) imparting training about competition issues;3) generating awareness about the advantages of competition.

Questions and Answers :Short Notes :2006 June 1C :With reference to the …………………………….. agreementsAnswer : See Anti competitive agreements above.2006 Dec 1C With reference…………………….. Cartels .Answer : See notes on 'Cartels' above.2006 Dec 3c : Write a……………………. Competition Act 2002Answer : Delete this question. It does not appear in module. 2007 June 1C With reference to…………………………… 2002 >Answer ; See above under '' objectives of company act 2002''.2007 Dec 7 (1C) With reference…………………………. 2002''Answer : (iv) Competitive Policy : Take the same answer.(v) Regulation of combinations : See below under descriptive questions.Descriptive Questions :2006 June 2a : Define the terms ………………………..Answer : See notes above.2006 June 4c Mention the provisions ……………….. combinations.Answer :An acquisition of one enterprise by another enterprise will be called as combination of these two enterprises if certain limits in relation to assets or turnover are exceeded.The limits are as follows :

1. Total assets of both the parties are more than Rs. 1000 crores in India Or2. Total turnover of both the parties is more than Rs. 3000 crores in India.3. Total assets of both the parties are more than 500 million dollars in India or

outside India.4. Total turnover of both the parties is more than 1500 million dollars in India or

outside India.5. The group after acquisition will have assets of the value of Rs. 4000 crores or

turnover of Rs. 12000 crores in India or6. The group after acquisition will have assets of the value of 2 billion dollars or

turnover of 6 billion dollars.The merger or amalgamation will be called as acquisition under this definition.If such combination is causing or likely to cause appreciable adverse on competition, this will be treated as void in the eyes of law. Following are exempted from regulation of combination : (i) Share subscription (ii) any acquisition by public financial institution (iii) bank or venture capital fund (iv) loan agreement and investment agreement.

The persons forming combinations are required to give a notice of forming combination to the Competition Commission of India in the prescribed format and with required fees.2006 June 2a :Define the terms ………………………….. .Answer :Take the answer as it is. 2006 Dec 2 c : Mention the provisions ………………………. combinations.Answer : See notes above.2007 June 4c Mention the important factors………………. On competitions.Answer : Take the answer as it is. 2008 June 4c Mention briefly………………………… 2002.Answer : Take the answer as it is.2008 Dec 8b : Briefly discuss………………….. information.Answer : Take the answer as it is.2010 June 6c : Where the………………………….. 2002.Answer : Take the answer as it is.Practical questions;2009 June 7b: Vasudha…………………………………… industry.Answer : Take the answer as it is. Chapter 20 : Merger and AcquisitionAn acquisition is a buying of one company by another. A merger is just one type of acquisition. A merger is a combination of two companies into one large company i.e. a merger is said to occur when two or more businesses combine into one. In general acquisition means a larger firm buys a smaller but some time reverse may also happen where a smaller firms takes the control of a larger firm, this is called reverse merger. The term amalgamation also means that two companies amalgamate into one larger company. In general the merger and amalgamation are used synonymously and the line of demarcation between them is very thin.

Varieties of Merger : The merger may take several forms. Some of them are given below:a) Horizontal merger : Two merging companies produce similar product in the same

industry.b) Vertical merger : When a company merges with its supplier company.c) Market extension merger : Two companies that sell the same product in different

markets.d) Conglomeration : The companies have no common business.

Same terminology can be used for varieties of acquisition.Demerger : Demerger is the reverse of merger or acquisition. In demerger shareholders in the parent company gain direct ownership in a subsidiary. Distinction between Acquisition and Merger :The line of demarcation between these two terms is very thin and generally they are used interchangeably. However, at a closer look, they have slightly different meanings and connotations.When one company swallows the other completely, worded differently, a company purchases the company and becomes its new owner, it is acquisition. A purchase may also be called merger if both the companies feel that joining hands would be in best interests of both of them, the purchase may be called as merger.Whether the purchase will be considered as an acquisition or as a merger simply depends upon whether the purchase is friendly or hostile. In other words the difference lies not in purchase, but in mode of communicating the purchase to the other company.

Amalgamation means two or more existing companies are amalgamated into one new company which is formed to take over the businesses of above companies. The assets and liabilities of existing companies are acquired by new company. Amalgamation involves : (i) Formation of new company which is called Amalgamating Company or Transferee Company, and (ii) Liquidation of two or more existing companies which are called amalgamated companies or transferor companies.

It may be noted the Companies Act 1956 has not specifically defined the term Amalgamation.

Transferor Company : It means the Company which transfers its assets and liabilities to some other company in which it is amalgamated. Transferor company means the company which is amalgamated into another company.

Transferee Company : It means the company which amalgamates some other company into it. The transferor company is amalgamated into the amalgamating company or transferee company.

Consideration : Consideration for an amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the Transferee company to the shareholders of Transferor company.

AS -- 14 recognises two types of amalgamation : (a) amalgamation in the nature of merger and (b) amalgamation in the nature of purchaseAn amalgamation is in the nature of merger if all of the following conditions are satisfied :(i) All the assets and liabilities of transferor company are taken over by the transferee company. Transferee company means purchasing company or the amalgamating company.(ii) The shareholders holding at least 90% or more of the equity shares of the transferor (amalgamated) company become the equity shareholders of the transferee company.

(iii) Consideration for the amalgamation is paid in equity shares by the transferee company to the shareholders of transferor company (except fractional shares which can be paid in cash).

(iv) Business of the transferor company is intended to be continued by the transferee company.(v) No adjustment is made in the book values of the assets and liabilities of the transferor company by way of revaluation or otherwise, except to ensure the uniformity of the accounting policies. For example, if transferor company follows SLM for depreciation while transferee co. follows WDVM, the transferee company can adjust the book value of fixed assets of transferor company in the books of transferee company only for the difference of the depreciation between the two methods. Such adjustment in the book value of fixed assets will not be treated as revaluation.

It must be noted here that the difference between the amount recorded as share capital issued plus any additional consideration in the form of cash or other assets on one hand and the amount of share capital of the transferor (amalgamated) company on the other hand is adjusted in reserves.

An amalgamation is in the nature of purchase if any of the conditions regarding amalgamation in the nature of merger is not satisfied.

Points to Remember regarding purchase consideration : Only payment of shareholders is to be taken into consideration.Consideration for debenture holders will NOT be included in the purchase consideration.Liquidation expenses or payment for cost of absorption are NOT included in purchase consideration.

Sources of gains from acquisitions (Advantages of M&A) :1. Increase in revenues may come from increase in market area, more effective

advertising, Strategic benefits of entering new area of business and new lines of the products, the market may reduce competition in a positive sense and result in increase in market power to increase the volume of sales.

2. Reduction in costs because a larger firm may be able to operate with lesser costs than the costs for two firms. Horizontal mergers may generate economies of scale. This means that the average production cost will fall as production volume increases. A vertical integration downward or upward may allow a firm to decrease costs by expanding its activities towards the direction of supplier (downward integration) or towards the direction of consumer (upward integration). The merged firms may have complementary resources and facilities e.g. a firm having more production but less packing facilities may merge with a firm having more packing facility.

3. Tax gains may arise in mergers because of unused tax losses, unused debt capacity, depreciation on assets etc. Tax losses of merged (amalgamated or

acquired) firms may be used for tax benefit for the new firm. The losses upto past three years are considered for these purpose. A merger is not considered for tax benefit purposes. Tax benefits are just by-product of the process of merger and do not form the motivational force behind merger.

4. Diversification is often cited as benefit of merger. The firms may diversify into new areas, new products etc.

Short notes :2005 Dec 8 : (iii) Operational synergy Answer : Take the answer as it is. 2007 Dec 4a : Distinguish between……………………. of merger.Answer :See notes for (i) Answer (ii) : Delete this question. It does not appear in module. Descriptive questions:1999 Dec 6a :briefly ……………….. amalgamationsDelete this question. It does not appear in module.2003 dec 2c : explain……………………. LBO. Delete this question. It does not appear in module.2003 Dec 3a ; company……………….. with case laws.Delete this question. It does not appear in module.2005 june 4b discuss whether the……………..mergerDelete this question. It does not appear in module.2006 dec 1c a the main purpose…………………… Indian mergers.Take the answer as it is. 2005 june 3a : rosy………………………… companies.Answer :Take the answer as it is. Practical questions :No practical question please. Delete all of them.

Chapter 21 : Corporate governance Write short notes on : 2004 June 7(i) : Corporate governance through committees Take the answer as it is. Descriptive questions :2002 June 1C apparently as ………………………. Corporate governance.2009 Dec 7b : What do you ……………………………… Corporate governance.Answer : A comprehensive answer of both the questions is given below:Corporate governance may be defined as the system which the companies are directed, managed, administered and controlled. It may be in related to the internal management of the company to ensure and show how beautifully a company is run. It is about promoting fairness, transparency and accountability in conduct of business and use of resources.Section 292A of the Company's Act 1956, provides that every company having a paid up capital of not less than Rs. 5 crores will constitute an Audit Committee which shall consist of not less than 3 directors. The board may determine additional number of directors on its own. The provisions of section 292A are as follows :

1. Minimum number of directors will be three.

2. Two third directors will be other than MD and WTDs. It means one third of the strength of the audit committee can be given to executives of the management of the company.

3. The committee will elect its chairperson.4. The committee will act according to the directions given by the board.5. The composition of audit committee shall be disclosed in the annual report of the

company.6. The statutory auditor, internal auditor and the Head of finance department are required

to attend the meeting of the audit committee but they will not have a right to vote in the meeting.

7. The committee will review the internal control and management of the company, its half yearly and yearly report, the points raised by the auditors. The committee will also review other documents before their presentation to the board.

8. The recommendations of the audit committee are binding on the board. If the board is not implementing such recommendations, it should give reasons for the same to the shareholders.

9. One of the members of the committee will be elected as chairperson of the committee.10. The chairperson of the committee shall attend the annual general meeting to provide

clarification if any relating to the performance of audit committee.

From the above it is evident that the basic objectives of corporate governance like transparency, accountability and fairness are also chief considerations in the formation and performance of audit committee.In addition to section 292A of the Company's Act 1956, The additional requirements in respect of audit committee, in the listing agreement are as follows :

1. The audit committee should invite appropriate number of executives of the company to its meetings.

2. On some occasions the audit committee can meet without the presence of any executive.

3. The company secretary of the company shall act as secretary of the committee.4. The committee should meet thrice in a year. One must be before the finalization of the

annual accounts.5. The quorum of the audit committee should be two members or one-third of the

members whichever is higher and minimum of two independent directors.Role of BOD on recommendations of Audit Committee (section 292A):

1. If the recommendations relate to financial management the recommendations of the audit committee shall be binding on the BOD and board will have to approve and take action on those recommendations.

2. If the recommendations relate to other matters than financial management or audit report, such recommendations are not binding on the board.

3. If the board does not accept any recommendations of the audit committee, it has to record the reasons of such action and communicate such reasons to the the shareholders.

4. The chairman of the audit committee shall attend the AGM of the company to give any information, clarification on any matters related to functions and performance of audit committee.

2003 Dec 6b :Discuss the salient features ………………………… Report.Answer :Narayan Murthy Committee Report 2003The NM Committee was to submit a report on :

1. To review the performance of corporate governance2. To determine the role of companies in responding to rumour and other price sensitive

information circulating in the market to increase the transparency in the marketThe committee supported that the following recommendations of the Naresh Chandra Committee :

1. Disclosure of contingent liabilities ;

2. Certification by Chief Executive Officer and Chief Finance Officer ;3. Definition of independent directors ;4. Independence of Audit committee.

The committee also supported the requirements of clause 49 of the listing agreement.The report of the committee was in two parts namely Mandatory Recommendations and Non-mandatory recommendations.

Mandatory Recommendations :1. Committee : The Audit committee should review the following information mandatorily : i) All financial statements (ii) Quarterly, half yearly and annual audit reports (iii) all reports

relating to compliance with laws (iv) risk management (v) management's letter relating to weakness of internal control system (vi) analysis of financial condition and results of operations (vii) records of related party transactions

2. Proceeds from IPOs : Each year the company shall prepare a statement showing the utilization of proceeds for purposes other than those stated in prospectus. This statement shall be certified by the independent auditors of the company.3. Risk Management : There must be a procedure to inform the Board about the assessment of risk and its management. These procedures should be reviewed periodically to ensure that the management has an effective and efficient system for managing risks. The management should give a report to the board in every quarter giving details of risks faced by the company and the steps taken by the company reduce and remove them.4. Code of Conduct : The committee has recommended that it should be obligatory (means essential, mandatory, necessary or compulsory) on the part of every board member and top officers of the company to follow a code of conduct. This code of conduct should be posted on the website of the company. The annual report should contain a declaration to this effect. 5. Nominee Directors : The committee recommended that there should be no nominee directors. The company recommended that all directors should be treated on same footing with same responsibility, liability and accountability.6. Whistle blower policy : Any person having any knowledge of anything going on against the company, should be able to communicate such facts, figures or information to the top management immediately and effectively. The identity of such persons need to kept secret. Such policy called the whistle blower policy should be in place in the company.2004 Dec 6b: List out the items to be ……………………….. Birla committee.2005 Dec 8b : What is the ……………………… recommendations ?Answer : Take the answer as it is. 2006 June 8c what is the crux……………………… corporate governance Answer :Delete this question. It does not appear in module. 2008 June 8b : Discuss the recommendations……………………. Auditor's liability.Answer : Delete this question. It does not appear in module. 2009 Dec 7b : What do you………………… Corporate governance .Answer : See above in this chapter.2010 June 8 a :SEBI has introduced Corporate governance …………………………. Discuss.8 c : What were the recommendations …………………………. Independent director?Answer : Take the answer as it is.

Chapter 22 Board of director………………..1999 DEC 7 : Write short notes on : Audit committee;2001 june 8 Write short notes on : Audit committee.Answer : Please refer previous chapter.2006 dec 8 Write short notes on : (iv) Nomination committee and (v) Remuneration committeeAnswer ;Nomination committee : The role, functions and responsibilities of nomination committee is as follows :

1. to decide the nominees for selection in BOD;2. to assist in identifying, interviewing and recruiting candidates for the Board.3. to fill casual vacancies in the Board;

4. to evaluate the status of Corporate governance and issue fresh guide lines for improvement;

5. to monitor compliance with the Corporate governance guidelines;6. to review the company's policies and programs in the light of corporate responsibility.

The committee will have at least two members. The Board appoints (and can remove) the members of the committee and its chairperson.The committee meets at least twice a year, however, it may meet more often if members so decide. The committee will report to the Board on quarterly basis. The committee will frame its own rules, regulations and procedures within the provisions of the AOA and other laws of the state and Company's Act 1956.The committee will have adequate resources and authority to discharge its duties and responsibilities.Remuneration Committee : Good corporate governance requires that the Board should constitute the remuneration committee. As the name indicates this committee is related to remuneration policies, programs and practices of the company. It should finalize the packages so as to attract, retain and motivate executives of the required quality and qualification. The committee presents its recommendations to the board for final decision.The following responsibilities are given to the Remuneration committee:

1. Remuneration packages to the top officers of the company.2. Remuneration policies, programs and practices of the company.3. Retirement, superannuation and pension policies of the company.

.Descriptive Questions :1999 Dec 6: Explain the term……………………………………… by it.Answer : The committee of management is constituted by the board to represent the board in its absence. The board does not meet every time when a problem appears here and there. The board delegates its power to the COM to look after business and other affairs of the company. The functions of the COM are as follows :

1. To appoint, terminate, suspend and promote the services of the employees of the company.2. To open and close the bank accounts on behalf of the company.3. To appoint advocates, consultants and other counselor of the company.4. To obtain new telephone connections.5. To open new branches and godowns and to close the existing ones.6. To perform all actions and activities in day to day management of the company.

2000 dec 5 : Explain constitution, role and the objectives of an audit committee.Answer : See previous chapter.2002 June 2b: Who can sign……………… Company's Act 1956 ?Answer : Section 217 : The Board report or any annexure to it, must be signed by the chairperson of the board, if he is authorised to sign. If the chairperson is not so authorised, the report may be signed by two directors one of them must be the Managing director if there is one.2002 June 6b : What disclosures are…………………………… corporate governance?Answer :

Remuneration to Managerial PersonnelSection 198 : prescribes the overall maximum managerial remuneration payable.Section 309 : prescribes the remuneration payable to whole-time directors and part-time directors.Section 310 : requires sanction of Central Govt. for increase beyond limit as per section 198.Section 349 : lays down the method for computation of net profit for managerial remuneration.The remuneration to managerial personnel is related to net profit and as calculated as some % of net profit. Two cases may arise −

1. If the company has made adequate profits : Section 198 (1) will apply. Overall remuneration will not exceed 11% of net profit with sub limits as under :

Section 198 Max. % of net profit

1 Overall (excluding fees for attending meetings) 11% Section 198

2 If there is one MD/WTD (whole time director) 5% Section 309

3 If there are more than one managerial personnel 10% Section 309

4 Remuneration of part time directors(a) If there is no MD / WTD 3% Section

309(b) if there is available MD/WTD 1% Section

3095 Manager other than MD /WTD 5% Section

387Note : A Company can have either MD or Manager and not both. A company can have more than one MD but not more than one manager.

2. If the company has no profits or inadequate profits : The following table will apply:Effective Capital of the Company Monthly salary payable shall not exceed 1. Less than Rs. one crore Rs. 75,0002. More than Rs. 1 crore but less than Rs. 5 crore Rs. 100,0003. More than Rs. 5 crore but less than Rs. 25 crore Rs. 125,0004. More than Rs. 25 crore but less than Rs. 50 crore Rs. 150,0005. More than Rs. 50 crore but less than Rs. 100 crore Rs. 175,0006. More than Rs. 100 crore Rs. 200,000

2002 Dec 4b:State with ……………………………………………….. to make donations.Answer :Take the answer as it is. 2003 june 6a:Which of the matters…………………………… unfettered ?Answer : See 'Powers of director ' in the chapter 12 :Directors2003 dec 4: Compare and …………………… agreement Answer Delete this question. It does not appear in module. 2005 June 1C comment on the following ………………………… shareholders.Answer ; Delete this question. It does not appear in module.

2005 dec 6a : Prepare a …………………. Is a shareholder.Take the answer as it is. 2006 june 7b ; Discuss the ………………………… audit committee.Answer : See audit committee under chapter 21: Corporate governance.2006 dec 7a:Under what ……………….. to be balanced?Answer : Take the answer as it is. 2007 june 8d : Set out ………………………………….. directors.Answer : Delete this question. It does not appear in module. 2007 dec 6a:Successive corporate failures……………………….. corporate governance. Discuss.Answer : Delete this question. It does not appear in module. 2008 june 6b :Merely being…………………………….. company. Discuss.Answer :

In most of the offences done by the company two officer are mainly responsible namely the Managing director and the company secretary. The independent director is liable only when he does not any action when some wrong is done by the company and he knows about it.2008 june 8b :Describe the risk …………………………………………………… corporate governance.Answer : Take the answer as it is. 2008 /dec 7b :Your help is sought……………………draft the same.Answer ; Take the answer as it is. 2008 dec 7c:State the additional …………………………. Company's Act 1956.Answer :In addition to section 292A of the Company's Act 1956, The additional requirements in respect of audit committee, in the listing agreement are as follows :

1. The audit committee should invite appropriate number of executives of the company to its meetings.

2. On some occasions the audit committee can meet without the presence of any executive.

3. The company secretary of the company shall act as secretary of the committee.4. The committee should meet thrice in a year. One must be before the finalization of the

annual accounts.5. The quorum of the audit committee should be two members or one-third of the

members whichever is higher and minimum of two independent directors.

2008 Dec 8c (repeat 2009 June 6c)What are the actions ………………….. risk management.Answer :The identification of risk is first step towards its management. Once the risk is definitely identified it is entered in what is called Risk Log or Risk register with the various particulars of risk. The next step is to reply the question that what are the remedial measures which can be taken to eliminate or minimize the risk. Depending upon the type and magnitude of the risk suitable responses are designed to address the risk. The actions in response to risk may be categorized in five categories namely :1. Prevent : Whenever possible, prevent the risk. the risk can be prevented if risk presenting process or system is changed and altogether replaced with the something safer. By doing the things differently the risk can be removed or reduced. In such case, either the problem or threat producing the risk is countered or managed in such a manner that it is completely removed or its impact on the project is significantly reduced.2. Reduce : If risk cannot be prevented, reduce it. Take action to contain and control the risk. If you can not stop the rains, arrange for umbrella and raincoat. Insurance is a very good example of reduction of risk which can not be removed. A penalty clause can be introduced to control the risk of delay in completion of the project.3. Transfer: If risk cannot be prevented and cannot be reduced, transfer it. If you can not stop the rains, arrange for umbrella and raincoat. Insurance is a very good example of transfer of risk which can not be removed. A penalty clause can be introduced to control the risk of delay in completion of the project.4. Accept : If the risk can not be prevented, reduced and transferred, accept it. When nothing can be done, accept it and move. Everybody drives on crowded roads accepting the risk of life.5. Contingency planning : It is the next alternative route that can be taken if the designed and desired route can not be taken because of some unavoidable reason.

2009 june 6a :State the ………………………………………………. to such committee?Answer : See above on 'Remuneration committee'.2009 june 6b : What are the………………………………….. Listing agreement?Answer : See Audit committee in Chapter 21: Corporate governance

2009 june 6c:Ii is said that……………………………………………types of action.Answer :See above under 2008 Dec 8c.2009 june 8c:What are the important………………………………. Project governance?Answer : The elements of project governance are as follows :

1. Define clearly the objectives of the project. Explain its scope.2. Develop the system to know whether the project has achieved its objective properly.3. Identify all the stakeholders of the project. 4. Develop a system to communicate with each stakeholder. Determine the requirements

of stakeholders.5. Appointment of project manager.6. Define the roles, responsibility, accountability of each member of the project team.

Development the chain of command. Hierarchical order to be clearly made.7. Detailed project report should be available at all salient points of the project

management.8. System for solution of day to day problems relating to project.9. System for assessing, recording and communicating the risks associated with the

project.10. System for periodical review and remedy.

2009 dec 8a : Can it be said that management …………………………. Efficiency audit ?Answer : The efficiency audit is carried out to ensure whether the resources and assets of the organisation are used in optimum manner and the activities being performed conform to established norms and standards. The main parameters to evaluate the efficiency, are as follows1. Rate of return on capital employed 2. Capacity utilisation 3. Bottle necks in the system 4. Effective utilisation of resources 5. Ratio analysis 6. Export and import figures etc. The list is just illustrative and many more parameters may be added.

The objectives of management audit are (i) to detect and correct the human limitations of top management; (ii) to improve upon management’s productivity; (iii) to avoid possible losses arising from inefficient management and (iv) to study the current state of all affairs of the management and suggest suitable measures for improvement. The management audit encompasses efficiency audit, compliance audit, propriety audit and system audit. All audits are aiming towards the objectives of the organization and management audit is the prominent among all audits.

2009 Dec 8b: State the importance of……………………………… in this context?Answer :The financial statements are prepared on the basis of three basic assumptions namely : Consistency, Going concern and Accrual concept. All the three basic concern stand at the foundation that the company has neither the intention nor the necessity of going into liquidation in the foreseeable future, the term foreseeable future has not been defined in the Company's Act 1956. If the company is following the three basic concepts in preparation and presentation of financial statements, it is not required to make any explicit or specific disclosure regarding the same. Thus the auditor has to look specifically whether the management of company is following the going concern or not.The auditor should look for the following indicators which provide serious doubt about the going concern concept :

Current liabilities are more than current assets i.e. negative working capital. Negative net worth. Existence of fictitious assets in balance sheet. Unfavourable financial ratios. Court cases against the companies. Multiple bank accounts. No or delayed payment of interest and principal components of loan.

Absence of prudent commercial policies and sound financial system. Non compliance of statutory requirements. Loss of key personnel with out any replacement. Frequent change of internal auditor. Major loss of supplier, franchise, market, license etc. Company being sick under any statutory definitions.

Practical Questions 2008 dec 6b:The audit committee……………………. Respond.Answer : See audit committee in previous chapter 21.