Corporate and Allied Laws

FINAL (NEW) COURSE

CORPORATEAND

ALLIED LAWS

Board of Studies The Institute of Chartered Accountants of India(Set up by an Act of Parliament)

New Delhi

FINAL (NEW) COURSE STUDY MATERIAL

PAPERCORPORATE AND ALLIED LAWS

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text books. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in retrieval system, or transmitted, in any form, or by any means, Electronic, Mechanical, photocopying, recording, or otherwise, without prior permission in writing from the publisher. Revised Edition Website Department/ Committee E-mail ISBN No. Published by : : : : : : March, 2010 www.icai.org Board of Studies [email protected] 978-81-8441-073-0 The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi-110 002, India. Typeset and designed at Board of Studies. Printed by : Sahitya Bhawan Publications, Hospital Road, Agra- 282 003 March/2010/ 15,000 Copies (Revised)

PREFACE The liberalisation and globalisation of our economic policies in tune with the global changes brought several reforms in the Corporate and Allied Laws of our country. A scheme of wellstructured Corporate and Allied Laws is sine qua non for the corporate growth. These laws have to be amended and fine tuned from time to time in accordance with the changes that are taking place within the country as well as outside. The Government took several initiatives and series of action plan by brining more amendments in Corporate and Allied Laws in the last 2-3 years and new legislations were brought into force taking into account the global crisis in corporate governance. The preparation and updating of study material is a continuous process and in the process inputs from various sources, literature, have gone into the thought process for benefiting the students in enrichment of their knowledge. We have revised the study material by updating The Competition Act, 2002 as amended by The Competition (Amendment) Act, 2009; The Prevention of Money Laundering Act, 2002 as amended by The Prevention of Money Laundering (Amendment) Act, 2009 and The Securities and Exchange Board of India Act, 1992 by incorporating SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Our special thanks to Shri Deepak Kumar Khaitan FCS, Kolkata, in preparation of the study material relating to The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Prevention of Money Laundering Act, 2002, Shri Bishnupada Sarkhel relating to The Banking Regulation Act, 1949, and Shri Amit Kumar Das relating to The Insurance Act, 1949, and The Insurance Regulatory and Development Authority Act, 1999. We hope that students will find this study material very user friendly and in case of any queries that they may have while reading the material, the same may be addressed to the Board of Studies. While writing your queries, it is advisable to ensure that where a single mail contains queries relating to different subjects, the queries are given clearly under different subject headings. Also, it is advisable not to include any queries other than subject queries and this shall enable us to respond you quickly. You may also note that the Board of Studies has constituted a consultative group of faculty to provide on-line help to students pursuing Chartered Accountancy Course. This group will react to the queries and respond within a reasonable time limit. Students with their queries in any subject may contact the group at guidance @icai.org with their subject-related problems and suggestions. Students who do not have the facility to get guidance for solving their academic problems arising in the course of their preparation may feel free to take advantage of this scheme. Students can also address their queries (subject and other queries separately) to the Board of Studies by post [Director (Board of Studies), ICAI Bhawan, A-94/4, Sector-58, Noida201301 (U.P.)].

SYLLABUSPAPER 4: CORPORATE AND ALLIED LAWS (One paper - Three hours - 100 marks) SECTION A : COMPANY LAW (70 MARKS) Level of Knowledge: Advanced knowledge Objective: To be able to analyze and apply various provisions of the Companies Act in practical situations Contents: 1. The Companies Act, 1956, Rules and Regulations thereunder in its entirety with specific reference to (a) Accounts and audit (b) Dividend (c) Directors - powers, managerial remuneration (d) Meetings, powers of the Board and related party transactions (e) Inspection and Investigation (f) Compromises, Arrangements and Reconstructions (g) Prevention of Oppression and Mismanagement (h) Revival and Rehabilitation of Sick Industrial Companies (i) (j) (l) 2. Corporate Winding up and Dissolution Producer Companies Offences and Penalties

(k) Companies incorporated outside India (m) E-governance Corporate Secretarial PracticeDrafting of Resolution, Minutes, Notices and Reports

SECTION B : ALLIED LAWS (30 MARKS) Objective: To develop ability to analyse the requirements of laws stated in the Section. Contents: 3. An overview of the following laws (a) The Securities and Exchange Board of India Act, 1992, Rules, Regulations and Guidelines issued thereunder. (b) Securities Contracts (Regulation) Act, 1956 (c) The Foreign Exchange Management Act, 1999 (d) The Competition Act, 2002 (e) The Banking Regulation Act, 1949, The Insurance Act, 1938. The Insurance Regulatory and Development Authority Act, 1999. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (f) 4. The Prevention of Money Laundering Act, 2002 Interpretation of Statutes, Deeds and Documents.

CONTENTSPAGE NO. SECTION A: COMPANY LAW CHAPTER 1: ACCOUNTS AND AUDIT ............................................................ 1.1 1.18 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 Maintenance of Books of Accounts ................................................................. 1.1 Nature of Books of Account............................................................................ 1.1 Persons who can Inspect ............................................................................... 1.2 Place of Maintenance of Books of Account ..................................................... 1.2 Period of Maintenance ................................................................................... 1.2 Persons Responsible for Maintenance & Penalty............................................. 1.2 Laying of Annual Accounts and Balance Sheet................................................ 1.3 Form and Contents of Balance Sheet and Profit and Loss Account. ................. 1.3 Deviation from Accounting Standards ............................................................. 1.4 Authentication of Annual Accounts ................................................................. 1.5 Board's Report .............................................................................................. 1.5 Directors' Responsibility Statement (Section 217 (2AA) ................................... 1.6 Disclosures in Board's Report ........................................................................ 1.6 Right of Members to Copies of Balance Sheet and Auditors' Report ................. 1.7 Filing with the Registrar ................................................................................. 1.8 Holding & Subsidiaries Accounts .................................................................... 1.8 Qualifications of an Auditor (Section 226) ..................................................... 1.10 Disqualifications of Auditors ......................................................................... 1.10 First Auditors............................................................................................... 1.10 Subsequent Auditors [Section 224 (1)].......................................................... 1.11 Auditors' Appointment by Special Resolution [Section 224A (1)] .................... 1.11 Re-Appointment of Retiring Auditor .............................................................. 1.11 Ceiling on Number of Audits......................................................................... 1.12 Filling up Casual Vacancy ............................................................................ 1.13

1.24 1.25 1.26 1.27 1.28 1.29 1.30 1.31

Remuneration of Auditors ............................................................................ 1.13 Removal of Auditors .................................................................................... 1.13 Powers of Auditors ...................................................................................... 1.14 Duties of Auditors ........................................................................................ 1.14 Audit of Accounts of Branch Office of Company ............................................ 1.16 Signature of Audit Report, etc. (Section 229) ................................................ 1.17 Special Audit (Section 233A)........................................................................ 1.17 Audit of Cost Accounts (Section 233B) ......................................................... 1.17

CHAPTER 2: DIVIDEND .................................................................................... 2.1 2.6 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 Manner and Time of Payment......................................................................... 2.1 Compulsory Transfer to Reserves: ................................................................. 2.2 Transfer of Higher Percentage of Profits to Reserves ...................................... 2.2 Declaration of Dividend out of Past Reserves ................................................. 2.3 Declaration of Interim Dividend ...................................................................... 2.3 Time Limit ..................................................................................................... 2.4 Unpaid or Unclaimed Dividend (Section 205A) ................................................ 2.4 Payment of Unpaid or Unclaimed Dividend (Section 205B) .............................. 2.4 When Dividend to be kept in Abeyance? (Section 206A).................................. 2.4 Investor Education & Protection Fund (Section 205C) ..................................... 2.5 Payment of Interest out of Capital (Section 208) ............................................. 2.5

CHAPTER 3: DIRECTORS, POWERS, MANAGERIAL REMUNERATION........... 3.1 3.66 3.0 3.1 3.2 3.3 3.4 3.5 Introduction ................................................................................................... 3.1 Legal Position of Directors ............................................................................. 3.1 Appointment of Directors ............................................................................... 3.2 Share Qualification for Directors................................................................... 3.19 Removal of Directors (Section 284) .............................................................. 3.21 Removal of Managerial Personal ................................................................. 3.22

3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18

Directors to act as a Board........................................................................... 3.25 Powers of Directors and Restrictions thereon................................................ 3.26 Duties of Directors ...................................................................................... 3.33 Directors not to hold Office or Place of Profit ................................................ 3.35 Liabilities of Directors .................................................................................. 3.38 Loans to Directors (Section 295) .................................................................. 3.41 Directorial Registers ................................................................................... 3.43 Political Contributions .................................................................................. 3.46 Managerial Remuneration ........................................................................... 3.47 Managing Director ....................................................................................... 3.53 Inter Corporate Loans and Investments (Section 372A) ................................. 3.55 Self-Examination Questions ......................................................................... 3.59 Answers to the Self-Examination Questions .................................................. 3.64

CHAPTER 4: MEETINGS, POWERS OF THE BOARD AND RELATED PARTY TRANSACTIONS ............................................................................................. 4.1 4.22 4.0 4.1 4.2 4.3 4.4 Introduction ................................................................................................... 4.1 Meetings of Directors..................................................................................... 4.2 Protection Against Abuse of Fiduciary Capacity of Directors .......................... 4.12 Disclosure of Interest In Contracts................................................................ 4.13 Sole Selling Agents ..................................................................................... 4.19

CHAPTER 5: INSPECTION AND INVESTIGATION ............................................. 5.1 5.4 5.0 5.1 5.2 5.3 5.4 Inspection ..................................................................................................... 5.1 Investigation.................................................................................................. 5.1 Power of Inspectors ....................................................................................... 5.2 Investigation of Ownership Of Company (Section 247) .................................... 5.3 Voluntary Winding up of Company, etc., not to stop Investigation Proceedings (Section 250A) ........................................................................... 5.4

CHAPTER 6: COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS ... 6.1 6.18 6.0 6.1 6.2 6.3 6.4 Compromise and Arrangement ....................................................................... 6.1 Reconstruction .............................................................................................. 6.1 Amalgamation of two Companies-Steps to be Taken by Both ......................... 6.13 Self-Examination Questions ......................................................................... 6.15 Answers to the Self-Examination Questions ................................................. 6.18

CHAPTER 7: PREVENTION OF OPPRESSION AND MISMANAGEMENT ......... 7.1 7.14 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 "Majority Rule" as Applied in the Management of A Company .......................... 7.1 Protection at Common Law ............................................................................ 7.1 Protection Under The Companies Act, 1956 .................................................... 7.1 Oppression and Mismanagement.................................................................... 7.2 Who May Apply To The Company Law Board When Oppression or Mis-Management Is Complained of ?. ............................................................. 7.3 Difference between Sections 397 and 398 ...................................................... 7.3 Powers of The Company Law Board on Application Under Sections 397 or 398....................................................................................... 7.5 Powers of the Central Government: ................................................................ 7.6 General Observations on Remedy for Oppression Under Sections 397 and 398 .................................................................................... 7.7 Distinction between various Remedies for Oppressions: .................................. 7.8 Powers Of Central Government To Remove Managerial Personnel on the Recommendation of CLB ......................................................................... 7.9 Concept of Public Interest and its Impingement on Company Law .................. 7.10 Self-Examination Questions ......................................................................... 7.13 Answers to Self-Examination Questions........................................................ 7.14

CHAPTER 8: REVIVAL AND REHABILITATION OF SICK INDUSTRIAL COMPANIES .................................................................................................... 8.1 8.14 8.0 8.1 Definitions..................................................................................................... 8.1 Procedure For Revival And Rehabilitation ....................................................... 8.2

8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12

Inquiry Into Working Of Sick Industrial Companies (Section 424B) ................... 8.3 Powers Of Tribunal To Make Suitable Order On Completion Of Inquiry (Section 424C) .............................................................................................. 8.5 Preparation And Sanction Of Schemes (Section 424D).................................... 8.5 Rehabilitation By Giving Financial Assistance (Section 424E) ........................ 8.10 Arrangement for Continuing Operations, Etc., During Inquiry (Section 424F) .. 8.11 Winding up of Sick Industrial Company (Section 424G) ................................. 8.11 Operating Agency to Prepare Complete Inventory, etc. (Section 424H) .......... 8.12 Direction not to Dispose of Assets (section 424I) .......................................... 8.12 Power of Tribunal to Call for Periodic Information (Section 424J) ................... 8.12 Misfeasance Proceedings Section (424K) ..................................................... 8.13 Penalty for certain offences (section 424L) ................................................... 8.13

CHAPTER 9: CORPORATE WINDING UP AND DISSOLUTION......................... 9.1 9.56 9.0 9.1 9.2 9.3 9.4 Introduction ................................................................................................... 9.1 Dissolution of Company ................................................................................. 9.2 Winding-up by Tribunal ................................................................................ 9.13 Voluntary Winding up................................................................................... 9.24 General Provisions on Winding-up................................................................ 9.37

CHAPTER 10: PRODUCER COMPANIES .................................................... 10.1 10.34 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 Introduction ................................................................................................. 10.1 Definitions................................................................................................... 10.6 Objects and Formation of a Producer Company ............................................ 10.8 Memorandum Of Producer Company (Section 581F) ....................................10.11 Articles of Association (Section 581G) .........................................................10.11 Inter-State Co-Operative Societies ..............................................................10.14 Management ..............................................................................................10.17 General Meetings .......................................................................................10.22 Share Capital and Member Rights ...............................................................10.25

10.9 10.10 10.11 10.12

Finance, Accounts and Audit .......................................................................10.25 Penalties....................................................................................................10.28 Amalgamation, Merger or Division ...............................................................10.28 Resolution of Disputes ................................................................................10.31

CHAPTER 11: COMPANIES INCORPORATE OUTSIDE INDIA ....................... 11.1 11.8 11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.10 11.11 11.12 Foreign Companies ..................................................................................... 11.1 Application of Sections 592 to 602 to Foreign Companies (Section 591)......... 11.1 Documents, etc., to be Delivered to the Registrar By Foreign Companies....... 11.1 Return to be Delivered to Registrar where Documents are Altered ................. 11.3 Accounts of Foreign Company...................................................................... 11.3 Obligation to State Name of Foreign Company .............................................. 11.4 Service on Foreign Company ....................................................................... 11.4 Penalties..................................................................................................... 11.5 Effect of Company's Failure to Comply with the Provisions of Part XI of The Companies Act Relating to Companies Incorporated Outside India ...... 11.5 Registration of Charges, Appointment of Receiver and Books of Account (Section 600) ................................................................................. 11.5 Fees For Registration of Documents............................................................. 11.6 Registration of Prospectus ........................................................................... 11.7 Requirements as Regards Prospectus .......................................................... 11.7

CHAPTER 12: OFFENCES AND PENALTIES ............................................... 12.1 12.18 12.0 12.1 12.2 12.3 Types of Penalties ....................................................................................... 12.1 Offences Continuing or Not ....................................................................... 12.1 Non-Cognizable Offences ............................................................................ 12.2 Offences Compoundable Section Wise List ................................................ 12.2

CHAPTER 13: E-GOVERNANCE.................................................................. 13.1 13.18 13.0 MCA 21 Project ........................................................................................... 13.1

13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8

Set up of MCA ............................................................................................. 13.1 MCA 21 Program ......................................................................................... 13.2 Program Scope ........................................................................................... 13.2 Front Office ................................................................................................. 13.2 Back Office ................................................................................................. 13.3 Key Benefits................................................................................................ 13.3 Some FAQs on E-filing ................................................................................ 13.4 Details of New Forms and Fees.................................................................... 13.7

CHAPTER 14: OTHER RELEVANT MISCELLANEOUS PROVISIONS OF THE COMPANIES ACT, 1956 .............................................................................. 14.1 14.22 14.0 14.1 14.2 14.3 14.4 14.5 14.6 Application of The Companies Act, 1956 to Companies Formed or Registered Under Previous Companies Act................................................... 14.1 Companies Authorised to Register under The Act ......................................... 14.1 Guarantee Company .................................................................................... 14.7 Government Companies............................................................................... 14.9 Provisions for Removal of Administrative Difficulties ....................................14.12 Powers of the Central Government ..............................................................14.15 General Provisions .....................................................................................14.17

CHAPTER 15: CORPORATE SECRETARIAL PRACTICE - DRAFTING OF RESOLUTION, MINUTES, NOTICES AND REPORTS .................................... 15.1 15.34 15.0 15.1 15.2 15.3 15.4 15.5 15.6 15.7 Definition .................................................................................................... 15.1 Certain Companies to have Secretaries ........................................................ 15.1 Qualifications of Secretary ........................................................................... 15.2 Position of Secretary ................................................................................... 15.3 Appointment of Secretary............................................................................. 15.5 Duties of a Company Secretary .................................................................... 15.6 Company Correspondence & Reports ..........................................................15.11 Record Maintenance and Filing of Documents..............................................15.15

SECTION B: ALLIED LAWS CHAPTER 16: THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) ACT, 1992...................................................................................................... 16.1.16.62 Unit I 16.0 16.1 16.2 16.3 16.4 16.5 16.6 16.7 Introduction ................................................................................................. 16.1 Purpose of the Act ....................................................................................... 16.1 History of the Legislation ............................................................................. 16.2 Short Title, Extent and Commencement ........................................................ 16.3 Definitions................................................................................................... 16.3 Establishment of SEBI Board ....................................................................... 16.4 Powers & Functions of SEBI [Section 11]...................................................... 16.6 Penalties................................................................................................ Unit II SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.............16.21 (As amended up to 8th January, 2010) CHAPTER 17: SECURITIES CONTRACTS (REGULATION) ACT, 1956 ............ 17.1-17.28 17.0 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 17.10 Introduction ................................................................................................. 17.1 About Corporatisation & Demutualisation of Stock Exchanges ....................... 17.1 Highlights of New Legislation on Securities Laws. ......................................... 17.2 Definitions (Section 2) ................................................................................. 17.3 Recognition of Stock Exchanges .................................................................. 17.6 Granting of Recognition (Section 4) .............................................................. 17.7 Power of Central Government to Make Rules (Section 8)..............................17.10 Power to Stock Exchange to Make Bye-Laws (Section 9)..............................17.11 Power of SEBI (Section 10).........................................................................17.14 Penalties (Section 23).................................................................................17.18 Offences By Companies (Section 24) ..........................................................17.23 16.17

17.11 17.13 17.14 17.15

Title to Dividends (Section 27) ....................................................................17.24 Act Not to Apply in Certain Cases (Section 28) ............................................17.26 Power to Make Rules (Section 30)...............................................................17.27 Power of SEBI to Make Regulations (Section 31) .........................................17.28

17.12. Right to Receive Income from Collective Investment Scheme (Section 27A) ..17.24

CHAPTER 18: FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ................ 18.1 18.44 18.0 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 18.9 18.10 18.11 Introduction ................................................................................................. 18.1 Broad Structure of FEMA ............................................................................. 18.1 FEMA, 1999 And FERA, 1973 a Comparison ................................................ 18.2 Preamble, Extent, Application And Commencement of FEMA, 1999 .............. 18.4 Definition (Section 2) ................................................................................... 18.5 Analysis Of Important Definitions.................................................................. 18.8 Regulations And Management Of Foreign Exchange ....................................18.12 Authorised Person (Section 10) ...................................................................18.23 Contraventions and Penalties In Brief ..........................................................18.25 Adjudication and Appeal .............................................................................18.30 Directorate of Enforcement .........................................................................18.38 Miscellaneous ............................................................................................18.39

CHAPTER 19: THE COMPETITION ACT 2002 .............................................. 19.1 19.57 (As amended by the Amendment Act, 2009) 19.0 19.1 19.2 19.3 19.4 19.5 19.6 Introduction ................................................................................................. 19.1 Why MRTP Act Needed A Fresh Look?......................................................... 19.2 What is Competition?................................................................................... 19.2 Competition Policy And Law ......................................................................... 19.2 Competition Laws In UK And US .................................................................. 19.3 Competition Act, 2002 and further amendments ............................................ 19.3 MRTP Act, 1969 & Competition Act, 2002 ..................................................... 19.5

19.7 19.8

Main Ingredients of Competition Law ............................................................ 19.6 Definitions................................................................................................... 19.7

CHAPTER 20: OVERVIEW OF BANKING REGULATION ACT, 1949, THE INSURANCE ACT, 1938, THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999, THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 ................................. 20.1 20.48 THE BANKING REGULATION ACT, 1949 ................................................................ 20.1 20.0 20.1 20.2 20.3 20.4 20.5 20.6 20.7 20.8 20.9 Introduction ................................................................................................ 20.1 Different Provisions of Banking Regulation Act 1949 ..................................... 20.2 Applicability of The Banking Regulation Act, 1949 ......................................... 20.4 Business of Banking Companies .................................................................. 20.4 Reserve Fund (Section 17) ............................................................................ 20.6 RBIs power to control loans & advances granted by banking company ............... 20.6 Accounts and balance sheet (section 29) ........................................................ 20.7 Audit .......................................................................................................... 20.7 Some Important Recent Changes:- ..............................................................20.12 Conclusion .................................................................................................20.12

THE INSURANCE ACT, 1938..................................................................................20.14 20.10 20.11 20.12 20.13 20.14 20.15 20.16 20.17 20.18 Introduction: ...............................................................................................20.14 Important Definitions:..................................................................................20.14 Provisions Related To Insurance: ................................................................20.15 Insurance Association of India, Council of Association and Committee ..........20.19 Tariff Advisory Committee and Control of Tariff Rates: .................................20.19 Solvency Margin, Advance Payment of Premium And Restrictions on the Opening of A New Place of Business ................................................20.20 Provident Society: ......................................................................................20.20 Insurance Cooperative Societies: ................................................................20.21 Mutual Insurance Companies and Cooperative Life Insurance Societies:.......20.21

20.19 20.20 20.21

Re-Insurance:.............................................................................................20.22 Miscellaneous Matters: ...............................................................................20.22 Conclusion: ................................................................................................20.23

THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999 20.22 20.23 20.24 20.25 Introduction ................................................................................................20.25 Important Definitions...................................................................................20.25 Insurance Regulatory And Development Authority: (Sections 3-12) ...............20.26 Transfer of Assets, Liabilities, Etc. of Indian Insurance Regulatory Authority (IIRA) To Insurance Regulatory Development Authority (IRDA) (Section 13) ...............................................................................................20.27 Duties, Powers and Functions of Authority: Sec 14....................................20.27 Finance, Accounts and Audit: Sections 15 17 ............................................20.27 Other Matters: Sections 18 32 ..................................................................20.28

20.26 20.27 20.28

THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 20.29 20.30 20.31 20.32 20.33 20.34 20.35 20.36 Introduction ................................................................................................20.30 Important Definitions...................................................................................20.30 Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial Institutions ............................................................................20.32 Enforcement of Security Interest .................................................................20.38 Central Registry .........................................................................................20.43 Offences and Penalties ...............................................................................20.44 Miscellaneous Matters ................................................................................20.45 Self Examination Questions ........................................................................20.47

CHAPTER 21: PREVENTION OF MONEY LAUNDERING ACT, 2002............. 21.1 21.14 (As amended by the Amendment Act, 2009) 21.0 21.1 21.2 Introduction ................................................................................................. 21.1 Definitions................................................................................................... 21.2 Punishment for The Offence of Money Laundering .......................................21.10

21.3 21.4 21.5 21.6 21.7 21.8 21.9 21.10 21.11 21.12

Obligation of Banking Companies, Financial Institutions and Intermediaries ..21.10 Appellate Tribunal ......................................................................................21.11 Special Courts............................................................................................21.12 Authorities Under The Act ...........................................................................21.14 Reciprocal Arrangement for Assistance in Certain Matters and Procedure for Attachment and Confiscation of Property ................................................21.17 Disclosure of Information ............................................................................21.17 Recovery of Fines.......................................................................................21.18 Power to Remove Difficulties.......................................................................21.18 Conclusion .................................................................................................21.18 Self Examination Questions ........................................................................21.19

CHAPTER 22: INTERPRETATION OF STATUTES, DEEDS AND DOCUMENTS ............................................................................................. 22.1 22.20 22.0 22.1 22.2 22.3 22.4 22.5 22.6 Introduction ................................................................................................. 22.1 Why do we need interpretation/construction? ................................................ 22.4 Rules of interpretation/construction .............................................................. 22.5 Internal aids to interpretation/construction ...................................................22.14 External aids to interpretation/construction ..................................................22.17 Rules of interpretation/construction of deeds and documents........................22.19 Self-examination Questions ........................................................................22.20

SECTION A

COMPANY LAW

1(A) ACCOUNTS & AUDIT1.0 MAINTENANCE OF BOOKS OF ACCOUNTS Section 209 of the Companies Act, 1956 requires every company to maintain proper books of account with respect to; (a) all sums of money received and expended by the company and the matters in respect of which receipts and expenditure takes places. (b) all sales and purchases of goods by the company (c) the assets and liabilities of the company (d) in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of materials or labour or other items of costs as may be prescribed by the Central Government to any class of companies. 1.1 NATURE OF BOOKS OF ACCOUNT

Proper books of accounts shall not be deemed to be kept with respect to the matters specified in Section 209(1) & (2), (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions and (b) if such books are not kept on accrual basis and according to the double entry system of accounting. [Section 209(3)] 1.2 PERSONS WHO CAN INSPECT

The following persons have the right to inspect the books of accounts. (a) Directors of the Company [Section 209(4)] (b) Registrar of Companies (Section 209 A) (c) Such officer of Government as may be authorized by the Central Government in this behalf (Section 209A).

1.2

Corporate and Allied Laws

The books of account and other books and papers shall be open to inspection by any director during business hours. Inspection shall be made by the SEBI in respect of matters covered under sections referred to in Section 55A. Shareholder has no statutory right of inspection of the books of account unless the articles specifically provides for. 1.3 PLACE OF MAINTENANCE OF BOOKS OF ACCOUNT

The books of account are required to be kept at the registered office of the company. However, the books can be kept at any other place in India as the Board of Directors may decide. In such a case, the company should file with Registrar of Companies a notice in writing giving the full address of the place where the books are kept. This notice should be filed within 7 days of the Boards decision. 1.4 PERIOD OF MAINTENANCE

The books of account of every company relating to a period of not less than eight years immediately preceding the current year together with the vouchers relevant to any entry in such books of account shall be preserved in good order. In case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account shall be so preserved. 1.5 PERSONS RESPONSIBLE FOR MAINTENANCE & PENALTY

The following persons shall be responsible for the failure of maintenance of proper books of account (a) where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and (b) where the company has neither a managing director nor manager, every director of the company.] Penalty for default is imprisonment upto 6 months or fine upto Rs.10,000/- or both, if the persons mentioned above fail to take all reasonable steps to ensure that the provisions of Section 209 are duly complied with by the company or default has been committed by their own willful Act. Further a person shall be sentenced to imprisonment only if the offence was committed willfully [Section 205(5)]. In any penal proceedings, it shall be a defense to prove that a competent and reliable person was charged with the duty of seeing that these requirements are complied with and that he was in a position to discharge that duty [proviso to Section 205(5)]. The person so charged with responsibility of compliance with provisions of Section 209 is punishable with imprisonment upto 6 months or fine upto Rs.10, 000/- or both [Sections 205(7)]. Similar provisions are therein Section 211 [Section 211(7) and (8)].

Accounts & Audit

1.3

Even if the company is managed by Managing Director, it is possible for the Board of Directors to make the Chief Accountant responsible to ensure compliance with Sections 209 and 211 [Section 209(7) and Section 211(8)]. Managing Director may also charge the Chief Accountant with such duty by issuing a memo or office order. No person shall be sentenced to imprisonment for any such offence unless it was committed willfully. Where a director or any other officer has been convicted of an offence, he shall on and from the date on which he is so convicted shall be disqualified for holding such office in any company for a period of five years from such date. 1.6 LAYING OF ANNUAL ACCOUNTS AND BALANCE SHEET

At every annual general meeting of a company the Board of directors of the company shall lay before the company (a) a balance sheet as at the end of the period specified in sub-section (3); and (b) a profit and loss account for that period. In the case of the first annual general meeting of the company, the profit and loss account shall relate to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months and in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted. The period to which the account aforesaid relates is referred to as a financial year may be less or more than a calendar year, but it shall not exceed fifteen months. If any person, being a Director of a company, fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both: 1.7 FORM AND CONTENTS OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT.

Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading Notes at the end of that Part.

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Similarly every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. Insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company are exempted from the purview of Section 210. The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the Every profit and loss account and balance sheet of the company shall comply with the accounting standards. The expression accounting standards means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A. Further the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section. 1.8 DEVIATION FROM ACCOUNTING STANDARDS

Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely: (a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation. If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both . Further that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty. No person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

Accounts & Audit 1.9 AUTHENTICATION OF ANNUAL ACCOUNTS

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According to Section 215, every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of directors by its manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one. In the case of a banking company, by the persons specified in clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the Banking Companies Act, 1949. In the case of a company not being a banking company, when only one of its directors is for the time being in India, the balance sheet and the profit and loss account shall be signed by such director; but in such a case there shall be attached to the balance sheet and the profit and loss account a statement signed by him explaining the reason for non-compliance with the provisions of Section 215 (1). The balance sheet and the profit and loss account shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon. 1.10 BOARDS REPORT There shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of directors, with respect to (a) the state of the companys affairs; (b) the amounts, if any, which it proposes to carry to any reserves in such balance sheet; (c) the amount, if any, which it recommends should be paid by way of dividend; (d) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report; (e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed. [Section 217(1)] The Boards report shall, so far as is material for the appreciation of the state of the companys affairs by its members and will not in the Boards opinion be harmful to the business of the company or of any of its subsidiaries, deal with any changes which have occurred during the financial year (a) in the nature of the companys business; (b) in the companys subsidiaries or in the nature of the business carried on by them; and (c) generally in the classes of business in which the company as an interest. Further, the Boards report shall also include a statement showing the name of every employee of the company who

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(i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than such sum as may be prescribed; or (ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than such sum per month as may be prescribed or (iii) if employed throughout the financial year or part thereof, was in remuneration in that year which, in the aggregate, or as the case may be, at a in the aggregate, is in excess of that drawn by the managing director or director or manager and holds by himself or along with his spouse and children, not less than two per cent, of the equity shares of the company. The statement shall also indicate, (i) whether any such employee is a relative of any director or manager of the company and if so, the name of such director, and (ii) such other particulars as may be prescribed. Remuneration for the purpose has the meaning assigned to it in the Explanation to section 198. 1.11 DIRECTORS RESPONSIBILITY STATEMENT (SECTION 217 (2AA) The Boards report shall also include a Directors Responsibility Statement, indicating therein, (i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) that the directors had prepared the annual accounts on a going concern basis. (Section 217AA) 1.12 DISCLOSURES IN BOARDS REPORT The Boards report shall also specify the reasons for the failure, if any, to complete the buy-back within the time specified in sub-section (4) of section 77A. The Board shall also receipt of rate which, whole-time dependent

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be bound to give the fullest information and explanations in its report aforesaid, or, in cases falling under the proviso to section 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors report. The Boards report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorised, shall be signed by such number of directors as are required to sign the balance sheet and the profit and loss account of the company by virtue of sub-sections (1) and (2) of section 215. If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of sub-sections (1) to (3), or being the Chairman, signs the Boards report otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both: 1.13 RIGHT OF MEMBERS TO COPIES OF BALANCE SHEET AND AUDITORS REPORT A copy of every balance sheet (including the profit and loss account, the auditors report and every other document required by law to be annexed or attached, as the case may be, to the balance sheet) which is to be laid before a company in general meeting shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company, to every trustee for the holders of any debentures issued by the company, whether such member or trustee is or is not entitled to have notices of general meetings of the company sent to him, and to all persons other than such members or trustees, being persons so entitled. [Section 219)(a)]. A copy of the documents need not be sent (i) to a member, or holder of debentures, of the company, who is not entitled to have notices of general meetings of the company sent to him and of whose address the company is unaware; (ii) to more than one of the joint holders of any shares or debentures none of whom is entitled to have such notices sent to him; (iii) in the case of joint holders of any shares or debentures some of whom are and some of whom are not entitled to have such notices sent to them, to those who are not so entitled; (iv) in the case of a company whose shares are listed on a recognized stock exchange, if the copies of the documents aforesaid are made available for inspection at its registered office during working hours for a period of twenty-one days before the date of the meeting and a statement containing the salient features of such documents in the prescribed form or copies of the documents aforesaid, as the company may deem fit, is sent to every member of the company and to every trustee for the holders of any debentures issued by the company not less than twenty-one days before the date of the meeting;

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if the copies of the documents are sent less than twenty-one days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by all the members entitled to vote at the meeting. 1.14 FILING WITH THE REGISTRAR After the balance sheet and the profit and loss account have been laid before a company at an annual general meeting as aforesaid, there shall be filed with the Registrar within thirty days from the date on which the balance sheet and the profit and loss account were so laid, or where the annual general meeting of a company for any year has not been held, there shall be filed with the Registrar within thirty days from the latest day on or before which that meeting should have been held. Three copies of the balance sheet and the profit and loss account, signed by the managing director, manager or secretary of the company, or if there be none of these, by a director of the company, together with three copies of all documents which are required by this Act to be annexed or attached to such balance sheet or profit and loss account: In the case of a private company, copies of the balance sheet and copies of the profit and loss account shall be filed with the Registrar separately. If the annual general meeting of a company before which a balance sheet is laid as aforesaid does not adopt the balance sheet, or is adjourned without adopting the balance sheet, or, if the annual general meeting of a company for any year has not been held, a statement of that fact and of the reasons therefore shall be annexed to the balance sheet and to the copies thereof required to be filed with the Registrar. If default is made in complying with the requirements of sub-sections (1) and (2), the company, and every officer of the company who is in default, shall be liable to the like punishment as is provided by section 162 for a default in complying with the provisions of section 159, 160 or 161. 1.15 HOLDING & SUBSIDIARIES ACCOUNTS Section 213(1) of the Companies Act, 1956 states as follows: Where it appears to the Central Government desirable for a holding company or a holding companys subsidiary to extend its financial year so that the subsidiarys financial year may end with that of the holding company, and for that purpose to postpone the submission of the relevant accounts to a general meeting, the Central Government may on the application or with the consent of the board of directors of the company whose financial year is to be extended, direct that in the case of that company, the submission of accounts to a general meeting, the holding of an annual general meeting or the making of an annual return, shall not be required to be submitted held or made earlier than the dates specified in the direction notwithstanding anything to the contrary in the Companies Act, 1956 or in any other Act for the time being in force. The Central Government shall, on the application of the Board of directors of a holding company or a holding companys subsidiary, exercise the powers conferred on that Government if it is necessary so to do,

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in order to secure that the end of the financial year of the subsidiary does not precede the end of the holding companys financial year by more than six months, where that is not the case at the commencement of this Act, or at the date on which the relationship of holding company and subsidiary comes into existence, where that date is later than the commencement of the Companies Act. Consider the following practical problem and advise. S. Ltd. is a subsidiary company of H Ltd. The financial year of H Ltd. is from 1 st April to 31 st March, whereas the financial year of S ltd. is 1 st July to 30 th June every year. This is now causing difficulties particularly in view of the requirement of reporting and circulating the consolidated annual accounts as required by accounting year of S Ltd. for the year 1 st July, 2005 to 30 th June, 2006 be extended from present 12 months to 21 months, i.e. 1 st July, 2005 to 31 st March, 2007, so that the financial years of the holding company and the subsidiary company end on the same date. The management can extend the financial year of S. Ltd. from 12 months to 21 months as mentioned in the question. Following steps are required to be taken for this purpose: (i) To convene a Meeting of the Board of directors of S. Ltd. where at the resolution for extending the financial year 1 st July, 2005 to 30 th June, 2006 (12 months) to 1 st July, 2005 to 31 st March,.2007 (21 months) is to be passed so that the year ending matches with the year ending of H. Ltd. (ii) To make an application under section 213(1) of the Companies Act, 1956 to the Central Government giving full details and specific reasons for seeking the extension in the year ending. The application may be made on a plain paper as there is no prescribed form for this purpose. (iii) To attach the following to the application: (a) A certified true copy of the last Balance Sheet and Profit and Loss Account of H Ltd. and S. Ltd. (b) A certified true copy of the Memorandum of Association and Articles of Association of both the Companies. (c) A certified true copy of the resolution of the Board of Directors proposing the extension of the financial year ending from 12 months to 21 months. (d) Requisite fee payable to the Central Government as per the Companies (Fees on Application) Rules, 1999.

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AUDIT1.16 QUALIFICATIONS OF AN AUDITOR (SECTION 226) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949. Further in the case of a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm. 1.17 DISQUALIFICATIONS OF AUDITORS The following persons shall be not qualified for appointment as auditor of a company (a) a body corporate; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees; (e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000. Security for the purpose means an instrument which carries voting rights. An officer or employee shall not be construed as an auditor. Further a person shall also not be qualified for appointment as auditor of a company if he is disqualified for appointment as auditor of any other body corporate which is that companys subsidiary or holding company or a subsidiary of that companys holding company, or would be so disqualified if the body corporate were a company. If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4) of section 226, he shall be deemed to have vacated his office as such. 1.18 FIRST AUDITORS The first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting. However the company may, at a general meeting, remove any such auditor or all or any of such auditors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company not less than fourteen days before

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the date of the meeting and if the Board fails to exercise its powers, the company in general meeting may appoint the first auditor or auditors. 1.19 SUBSEQUENT AUDITORS [SECTION 224 (1)] At each annual general meeting, subsequent auditor or auditors are appointed by way of an ordinary resolution. The auditor or auditors so appointed appoint shall hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall within seven days of the appointment, give intimation thereof to every auditor so appointed: Before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or reappointment, if made, will be in accordance with the limits specified. Every auditor appointed shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment. 1.20 AUDITORS APPOINTMENT BY SPECIAL RESOLUTION [SECTION 224A (1)] The appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution in the case of a company in which not less than twenty-five per cent of the subscribed share capital is held, whether singly or in any combination, by (a) a public financial institution or a Government company or Central Government or any State Government, or (b) any financial or other institution established by any Provincial or State Act in which a State Government holds not less than fifty-one per cent of the subscribed share capital, or (c) a nationalised bank or an insurance company carrying on general insurance business, If any company omits or fails to pass at its annual general meeting any special resolution appointing an auditor or auditors, it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting, and thereupon the provisions of sub-section (3) of section 224 shall become applicable in relation to such company. 1.21 RE-APPOINTMENT OF RETIRING AUDITOR At any annual general meeting, a retiring auditor shall be deemed to be re-appointed, unless (a) he is not qualified for re-appointment; (b) he has given the company notice in writing of his unwillingness to be re-appointed; (c) a resolution has been passed at that meeting appointing somebody instead of him or

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providing expressly that he shall not be re-appointed; or (d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with. Where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. 1.22 CEILING ON NUMBER OF AUDITS Any person who is full-time employment elsewhere cannot be appointed as an auditor. Further no company or its Board of directors shall appoint a firm as its auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. In the case of a firm of auditors, specified number of companies shall be construed as the number of companies specified for every partner of the firm who is not in full-time employment elsewhere. Where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all the firms together, in relation to such partner shall not exceed the specified number in the aggregate. Further where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number, in the aggregate. The ceiling on number of company audits does not include a private company. A person or firm holding, appointment as the auditor of a number of companies exceeding the specified number, shall, within sixty days from such commencement, intimate his or its unwillingness to be re-appointed as the auditor from the financial year next following such commencement, to the company or companies of which he or it is not willing to be reappointed as the auditor; and shall simultaneously intimate to the Registrar the names of the companies of which he or it is willing to be re-appointed as the auditor and forward a copy of the intimation to each of the companies referred to therein. specified number means, (a) in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five lakhs, twenty such companies; (b) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more. [Explanation I to sub-Sections (IB) & (IC) of Section 224] In computing the specified number, the number of companies in respect of which or any

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part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm, shall be taken into account. 1.23 FILLING UP CASUAL VACANCY The Board may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the remaining auditor or auditors, if any, may act: Where such vacancy is caused by the resignation of an auditor, the vacancy shall only be filled by the company in general meeting. Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting. Any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf. 1.24 REMUNERATION OF AUDITORS The remuneration of the auditors of a company may be fixed by the Board or the Central Government, in case the auditor is appointed by the Board or the Central Government as the case may be. In the case of an auditor appointed under section 619 by the Comptroller and Auditor-General of India, remuneration shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. The expression remuneration includes any sums paid by the company in respect of the auditors expenses shall be deemed to be included in 1.25 REMOVAL OF AUDITORS Removal of auditor only requires an ordinary resolution. However Section 225 prescribes certain procedure for the removal of an auditor. (1) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed. (2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. (3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so, (a) in any notice of the resolution given to members of the company, state the fact of the representations having been made; and

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(b) send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company; If a copy of the representations is not sent as aforesaid because they were received too late or because of the companys default the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting : The copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, if the Central Government is satisfied that the rights conferred are being abused to secure needless publicity for defamatory matter; and the Central Government may order the companys costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application. 1.26 POWERS OF AUDITORS 1. Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere. 2. He shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. 3. Section 228(2) provides that where the accounts of any branch office are audited by a person other than the companys auditor, the companys auditor (a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and (b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office. 4. He has the right to attend any general meeting of the company and be heard on matters that concerns him as an auditor. 1.27 DUTIES OF AUDITORS 1. The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view [Section 227(2)] 2. It is the duty of the auditor who shall inquire

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(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; (c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading. (3) The auditors report shall also state (a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; (bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the companys auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditors report; (c) whether the companys balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; (d) whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section (3C) of section 211; (e) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f) whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274; (g) whether the cess payable under section 441A has been paid and if not, the details of

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amount of cess not so paid. (4).Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b) (bb)],(c) and (d) of sub-section (3) is answered in the negative or with a qualification, the auditors report shall state the reason for the answer. 1.28 AUDIT OF ACCOUNTS OF BRANCH OFFICE OF COMPANY 1. Section 228 requires that where a company has a branch office, the accounts of that office shall be audited by the companys auditor appointed under section 224 or] by a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, either by the companys auditor or a person qualified as aforesaid or by an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country. 2. Further in the case of a banking company having a branch office outside India, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and accounts of the branch as have been transmitted to the principal office of the company in India. 3. Where a company in general meeting decides to have the accounts of a branch office audited otherwise than by the companys auditor, the company in that meeting shall for the audit of those accounts appoint a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, a person who is either qualified as aforesaid or an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country, or authorise the Board of directors to appoint such a person in consultation with the companys auditor. 4. The person so appointed as the branch auditor shall have the same powers and duties in respect of audit of the accounts of the branch office as the companys auditor has in respect of the same. 5. The branch auditor shall prepare a report on the accounts of the branch office examined by him and forward the same to the companys auditor who shall in preparing the auditors report, deal with the same in such manner as he considers necessary. 6. The branch auditor shall receive such remuneration and shall hold his appointment subject to such terms and conditions as may be fixed either by the company in general meeting or by the Board of directors if so authorised by the company in general meeting. 7. The Central Government may make rules providing for the exemption of any branch office from the provisions of this section to the extent specified in the rules and in making such rules the Central Government shall have regard to all or any of the following matters, namely :

Accounts & Audit

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(a) the arrangement made by the company for the audit of accounts of the branch office by a person otherwise qualified for appointment as branch auditor even though such person may be an officer or employee of the company; (b) the nature and quantum of activity carried on at the branch office during a period of three years immediately preceding the date on which the branch office is exempted from the provisions of this section; (c) the availability at a reasonable cost of a branch auditor for the audit of accounts of the branch office; (d) any other matter which in the opinion of the Central Government justifies the grant of exemption to the branch office from the provisions of this section. 1.29 SIGNATURE OF AUDIT REPORT, ETC. (SECTION 229) Only the person appointed as auditor of the company, or where a firm is so appointed in pursuance of the proviso to sub-section (1) of section 226, only a partner in the firm practising in India, may sign the auditors report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor. 1.30 SPECIAL AUDIT (SECTION 233A) Where the Central Government is of the opinion (a) that the affairs of any company are not being managed in accordance with sound business principles or prudent commercial practices; or (b) that any company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business to which it pertains; or (c) that the financial position of any company is such as to endanger its solvency; the Central Government may at any time by order direct that a special audit of the companys accounts for such period or periods as may be specified in the order, shall be conducted and may by the same or a different order appoint either a chartered accountant whether or not such chartered accountant is a chartered accountant in practice or the companys auditor himself to conduct such special audit and such auditor shall be known as Special auditor. The report of the special auditor shall, as far as may be, include all the matters required to be included in an auditors report under section 227 and, if the Central Government so directs, shall also include a statement on any other matter which may be referred to him by that Government. 1.31 AUDIT OF COST ACCOUNTS (SECTION 233B) Where the Central Government is of the opinion that it is necessary so to do in relation to any company required under clause (d) of sub-section (1) of section 209 to include in its

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books of account the particulars referred to therein, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a cost accountant within the meaning of the Cost and Works Accountants Act, 1959. If the Central Government is of opinion that sufficient number of cost accountants are not available for conducting the audit of the cost accounts of companies generally, that Government may, by notification in the Official Gazette, direct that, for such period as may be specified in the said notification, that such chartered accountant possessing the prescribed qualifications may be appointed to audit the cost accounts of the company. The cost auditor shall be appointed by the Board of directors of the company [in accordance with the provisions of sub-section (1B) of section 224 and with the previous approval of the Central Government. Before the appointment of any auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor proposed to be so appointed to the effect that the appointment, if made, will be in accordance with the provisions of sub-section (1B) of section 224. An audit conducted by an auditor under this section shall be in addition to an audit conducted by an auditor appointed under section 224. Cost auditor shall have the same powers and duties in relation to an audit conducted by him under this section as an auditor of a company has under sub-section (1) of section 227 and such auditor shall make his report to the Central Government] in such form and within such time as may be prescribed and shall also at the same time forward a copy of the report to the company. Note: For detailed material on Accounts & Audit, students are advised to refer to Study Material on Accounting and Audit respectively.

2(B) DIVIDEND2.0 MANNER AND TIME OF PAYMENT (a) Dividend to be paid only out of profits: According to Section 205 dividend shall be declared or paid by a company for any financial year (a) out of the current year profits of the company for that year arrived at after providing for depreciation or (b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed or out of both or (c) out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government : (b) Provisions for depreciation (a) The company should provide for depreciation for any previous financial year or years before declaring or paying dividend for any financial year provide and such depreciation be provided out of the profits of that financial year or out of the profits of any other previous financial year or years (b) If the company has incurred any loss in any previous financial year or years then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less (c) Such loss shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation (d) The Central Government may, if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation (e) It shall not be necessary for a company to provide for depreciation where dividend for any financial year is declared or paid out of the profits of any previous financial year or years

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(c) Method of depreciation Depreciation shall be provided either (a) to the extent specified in section 350; or (b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or (c) on any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or (d) as regards any other depreciable asset for which no rate of depreciation has been laid down by this Act or any] rules made there under, on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case : (e) In the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso to section 350. 2.1 COMPULSORY TRANSFER TO RESERVES:

Dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation only after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding ten per cent, as may be prescribed According to The Companies (Transfer of Profits to Reserves) Rules, 1975, (a) Where the dividend proposed exceeds 10 per cent but not 1

Corporate and Allied Laws

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Transcript of Corporate and Allied Laws