The Companies Act, 2013 - Yamuna Sridhar
Transcript of The Companies Act, 2013 - Yamuna Sridhar
Volume I
The Companies Act, 2013
- Yamuna Sridhar
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Contents
Sl. No Title Page No.
Company Law
4.1 Introduction 4.1
4.2 Corporate veil Theory 4.4
4.3 Types of Companies 4.5
4.4 Registration / Incorporation of a Company 4.9
4.5 Memorandum of Association & Articles of Association 4.12
4.6 Prospectus 4.16
4.7 Share and Share Capital 4.18
4.8 Borrowing Powers 4.23
4.9 Debuntures 4.24
4.10 Deposits 4.25
4.11 Charges 4.32
4.12 General Meetings 4.43
4.13 Distribution of Profits - Dividend 4.48
Sahasri Singar Academy 4.1
4. The Companies Act, 2013
4.1. Introduction
The Act
Earlier Act: The Companies Act, 1956
Current Act: Act to amend and consolidate the law relating to companies | Contemporary
Content: 470 Sections | 7 Schedules | 29 Chapters | Rules
Highlights:
To improve Corporate Governance
Simply Regulations
Strengthen the interests of Minority investors
Whistle Blowers (first time)
Resident Director | Woman Director
Necessity:
Changes in national / international economic environment
To facilitate expansion & growth of our economy
Applicability:
Companies incorporated under 1956 / 2013 Act
Insurance | Banking | Electricity | Special Act (except inconsistent)
CG – Notification
Characteristics / Features
Incorporated association
Artificial person
Corporate Personality
Separate Legal entity
Perpetual succession
Limited liability
Common Seal
Transferability of shares
Separate Management
Separate property
Capacity to sue and be sued
Termination of Existence
Voluntary Association for profit
Nationality and Residence
Citizenship | Experience
Limitation of action
Separate Legal Entity
Striking Feature
Unique Character
Own property
Clothed with legal personality
Enter into contracts
Open Bank Account
Same rights and powers as human being
Distinct and Separate from its members
Raise Loans | Incur Liabilities
Sahasri Singar Academy 4.2
Points to Ponder:
A person and Subscriber (MOA) are different
Even members can enter into contracts
Creditors can sue for the debts of the company
Property – Company is the owner, even though SHs contribute the capital and assets.
Case Law: Macaura v. Assurance Co. Ltd: A member does not have insurable interest in the property
of the company
Perpetual Succession
Members may come and go, but company goes on forever
No death – Legal Entity
Even an atom bomb cannot destroy a company
Limited Liability – Depends on the kind of the company
1. Limited by shares – to the extent of unpaid amount
2. Limited by Guarantee – to the extent of amount guaranteed (during wind up and adjustment of
rights of the contributories)
3. Unlimited – whole liability
Artificial Legal Person
Status:
Legal Process
No natural Birth
Clothed with rights of individuals
Capacity to sue and be sued
Non – Eligibility:
Send to jail |Take oath |Marry |Practice profession
Acting through:
Human agency - Directors (But not the agents for the members)
Authenticate the formal acts thro common seal
Common Seal
Symbol of Incorporation
Official Signature
Affixed by Officers and Employees
Sahasri Singar Academy 4.3
A relic of medieval times
Optional under the Companies (Amendment Act), 2015
Alternative mode – Authorisation by 2 Directors / Director and CS
Sahasri Singar Academy 4.4
4.2. Corporate veil theory
Corporate Veil - A legal Concept to identify the company separate from its members
Concept: Members are shielded from liability connected to the company’s action.
The members enjoy the corporate insulation.
Case Law: Salomon v Salomon and Co Ltd – A SH cannot be held liable even virtually holds the
entire capital
Lifting / Piercing of Corporate Veil –
Looking behind the company as a legal person
Court’s willingness to lift to question the control and not ownership
BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai - Evasion of tax
Statutory cases – by statue and abuse of the status
Judicial decision
Cases Case Law
Enemy Character Daimler Co Ltd Vs Continental type Rubber co Ltd
Connors Bros. v. Connors
Protection of Revenue Juggilal vs. Comm of IT
Re Sir Dinshaw Mauckjee Petit
Welfare legislation / Legal
Obligation
Workmen employed in Associated Rubber Industries
Ltd Vs Associated Rubber Industries Ltd
Formation of subsidiaries
to act as agents
Merchandise Transport Limited vs. British Transport
Commission (1982)
Prevention of Fraud or
Improper conduct
Gilford Motor Co Ltd Vs Horne
Transfer of property Jones v. Lipman
State is responsible for
PSUs
Kapila Hingorani v. State of Bihar
Sahasri Singar Academy 4.5
4.3. Types of Companies
Incorporation Size/members Control Liability Listing Sh Capital Others
Charter
Statutory
Registered
(1) Public
(2) Private
OPC /
Small /
Others
(1) Holding
(2)
Subsidiary
(3)
Associate
(1)
Unlimited
(2) Limited
by Shares /
by
Guarantee
(1) Listed
(2)
Unlisted
1. Having
2. Not
having
1. Section 8
2. Foreign
3.
Government
4. Dormant
5. Vanishing
6. Nidhi
7. producer
8. Dormant
9. PFIs
I. On the basis of liability
(a) Limited by shares – Section 2(22) | MOA | A SH is the owner of the company but not for the
company’s assets.
(b) Limited by Guarantee - Section 2(22) | MOA | guaranteed amount during wind up
Case Law: Narendra Kumar Agarwal vs. Saroj Maloo. The membership of a guarantee company may
carry privileges much different from those of ordinary SHs
(c) Unlimited Company – Whole Liability | Entitlement to claim compensation from other members
II. On the basis of members
(a) One person Company – To encourage entrepreneurship and corporatization of business
ONE
Person (Natural Person with RoI | No Minor)
Nominee (No Minor)
Director (may be more than 1 also)
in only one OPC
More about OPC….
Pvt Ltd Co
Exemptions given
Suffix OPC
Nominee – consent and withdrawal
Nominee becomes the member on the death of the original member
Change in the name of the person shall not be deemed to be alteration in the MOA
No carrying Non-Banking Financial investment activities including investment in other companies
No conversion to Sec 8 companies, but can convert to private / pub Companies
Sahasri Singar Academy 4.6
Voluntary conversion only after 2 years
(Except – paid up capital > ₹ 50 L / Avg T/O > ₹ 2 cr)
Contravention: Fine – ₹ 10,000 and ₹ 1000 / day
(b) Private Company
Restricts – Rights to transfer | Max – 200 members |Prohibits invitation to the public
Number of members: OPC – Not applicable | Joint holding – single SH
Excludes: Employees | Ex-employees cum members
Small Co: Pvt Co| paid up share capital – ₹ 50L and T/O – ₹ 2 Cr
Non-applicability – Holding / Subsidiary / Sec 8 / Special Act
(c) Public Company
Not a pvt Co | Free Transferability of shares | Members: min – 7 / Max – any | Deemed pub Co – sub
of pub co
III. On the basis of control
(a)Holding and Subsidiary companies
Controls – Composition of BoD | > ½ Total voting power | No layers of subsidiaries
Examples:
1. B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be the subsidiary of A.
Likewise, if D is a subsidiary of C, D will be subsidiary of B as well as of A and so on.
(b) Associate Company
Significant Influence (20% of the voting power) | Not a subsidiary Co. | Includes Joint Venture
IV. On the basis of Capital
(a) Listed Company – Listed on any recognized Stock exchange Definition – Sec 2 of Securities
Contracts (Regulation) Act, 1956
(b) Unlisted Company – Not listed
V. Other Companies
(a) Government Company
Pub Co | 51% paid up capital by CG / SG / both | Includes – Sub of a Govt company
(b) Foreign Company
Company / Body Corporate outside India | Place of business (thro agent / e mode) in India and
conducts any business activity
Sahasri Singar Academy 4.7
(c) Formation of Companies with Charitable objects etc. (Section 8 Company)
Promote – Charitable Objects of commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment, etc.
Applies profit to promote its object | prohibits payment of dividend
Examples: FICCI | ASSOCHAM | National Sports Club of India | CII
License:
CG’s Power | No suffix –Ltd or Pvt Ltd | Apply for Registration | same privileges as Ltd Co.
Revocation – Fraud | violation of objects | written notice by CG and opportunity of being heard
Order of CG – On revocation,
1. Amalgamate with another Sec 8 company with the similar objects
2. Wind up
Contravention:
Company: Fine - ₹ 10Ls – ₹ 1Cr
Director / Officer: Imprisonment – 3 years / Fine ₹ 25T to ₹ 25 L / both
Officer in default for Fraud – Liable under Sec 447
Others:
A partnership firm can be partner
14 days clear notice for GM, instead of 21 days
Non requirement of min number of directors and IDs | NRC | SRC
(d) Dormant Company (Status)
Formed for future project/ hold an asset or intellectual property
No SAT
Apply to the Registrar for Dormant Status
Inactive Company shall also apply
Note:
1. Inactive company: Not carrying business / operation | No SAT for 2 years | Not filed Fin,
Statements and AR for 2 years
2. Not SAT: Allotment of shares | Payments w.r.t. Fees to Registrar / other payments / maintenance of
office & records
(e) Nidhi Companies
To cultivate the habit thrift (cost cutting) and savings amongst its members | receive deposits |
Lending to its members only for their mutual benefit |Comply CG Rules (Sec 406)
Sahasri Singar Academy 4.8
(f) Public Financial Institutions (PFI)
LIC | IDFCI | UTI | CG Notification under Companies Act and RBI
Conditions: Unless under Central / State Acts or Companies Act | Govt Company
Sahasri Singar Academy 4.9
4.4. Registration / Incorporation of Company
Promoters:
The person who formed the company
Named in Prospectus
Conceived the idea
Identified in AR under sec 92
Has control over the affairs of the company
The BoD accustomed by their advice / directions / instructions
Taken steps for registration (But not in professional capacity)
Formation of Company
Pub Co – 7 / Pvt Co - 2 or more subscribers for lawful purpose and complying the Act
Incorporation of company
1. Filling of the Documents and information with the registrar
MOA – signed by Subscribers
Declaration by person involved in formation and proposed directors / officers / Secretary
Declaration by subscribers and Directors w.r.t. conviction of any offence / found guilty of fraud /
misfeasance during 5 years / documents filed are true to the best of their knowledge and belief.
Address - Registered office / correspondence
Particulars of subscribers / first directors
2. Issues: Certificate of Incorporation | Allotment of Corporate Identify Number (CIN)
3. Maintenance of copies of all documents and information at Registered Office till its dissolution
4. Furnishing of false / incorrect information / Suppression of material fact - Fraud under Sec 447
At the time of incorporation – All person is liable
Post incorporation – Promoters / First Directors / persons given declaration are liable
5. Order of Tribunal, NCLT -
Pass such orders | Unlimited Liability | Removal of Name | Wind up | others
Simplified Proforma for Incorporating Company Electronically (SPICe) – E form
Effect of Registration: Date in CoI | Exercises all functions of a body corporate
Case Law:
Hari Nagar Sugar Mills Ltd vs S. S. Jhunjhunwala | State Trading Corporation of India
Spencer & Co. Ltd Madras vs. CWT Madras | Heavy Electrical Union vs. State of Bihar
Effect of MOA and AOA: Binds the company and its members | Money paid by a member is a debt
Sahasri Singar Academy 4.10
Shares
I. Nature of Shares
Definition – a share in the share capital | Includes stock |Proportion of interest
An interest in the Company
Case Law: Borland Trustees vs. Steel Bros & Co Ltd – Share is an interest measured by a sum of
money and various rights | as per MOA and AOA | Contractual rights and legal rights for SH
Movable property – Movable Property | Transferable as per AOA | Includes Debentures also
Numbering – Distinguished by distinctive numbers | Except – Demat Shares
II. Kinds of share Capital – Not Applicable for Pvt Co
(i) Equity share Capital – voting rights | Differential rights w.r.t. dividend, voting or otherwise
Example:
Tata Motors in 2008 issued equity shares with differential rights
‘A’ equity shares with every 10 ‘A’ equity shares carrying only one voting right but 5% more
dividend. This share is traded at discount.
Future Retail, Jian Irrigation also issued equity shares with differential rights
(ii) Preference share Capital- Rights to participate in the proceeds during wind up
Points to Ponder:
Equity Share Capital: For Company limited by shares - all share capital and not preference share
capital
Preference Share Capital – preferential right w.r.t. payment of dividend and repayment during
winding up
Capital shall be deemed to be preference capital – w.r.t. dividend and capital
Classification of capital
Capital – Share Capital | Rupees divided into shares of fixed amount | contribution to the stock.
“A share is not the sum of money, it is rather an interest (and rights) measured by a sum of money”
a. Nominal / Authorised / Registered capital
Authorised by MOA | The maximum amount of share capital of the company | stamp duty is paid
accordingly | Fixed including working capital and reserve capital
b. Issued Capital
Company issues from time to time | Includes shares allotted for consideration other than cash
Schedule III – To disclose in the B/S
c. Subscribed Capital - Shares taken by public
Stating of Authorised, Subscribed and Nominal Capital in notice, advertisement, Communication /
business letter, bill head, letter paper.
Contravention: company – ₹ 5000 and Officer – ₹ 10,000
Sahasri Singar Academy 4.11
d. Called-up Capital - Capital called for payment
e. Paid-up Capital - Amount paid or credited | Capital less in arrears
Sahasri Singar Academy 4.12
4.5. Memorandum of Association & Articles of Association
Memorandum of Association (MOA)
Charter | Public Document (open for inspection) | Defines constitution, object and scope |
Foundation | an Edifice | Limitation of action |Powers of SHs, Creditors and other | Ultra vires act is
prohibited
Tables (Format): Schedule III –
Table A – Ltd by Shares
Table B – Ltd by Guarantee and having SH capital
Table C – Ltd by Guarantee and not having SH
capital
Table D – Unlimited Company
Table E – Unlimited Company and having SH
capital
More about MOA…
Contents – Clauses | Compulsory Clauses | Conditions
a. Name clause – Ltd | Pvt Ltd | OPC | Section 8 – Electoral Trust, Foundation, Forum, Association,
Chambers, Confederation, Council | Govt Co - Ltd
b. Registered office / Situation Clause - State
c. Object clause – Scope of the company| shall change its name in its activities
d. Liability clause – Ltd by shares / guarantee
e. Capital clause – Authorised Capital |share of fixed amounts | Not applicable to the company not
having share capital
f. Association / Subscription clause – Every subscriber shall take atleast one share | Indicated in the
table under the clause
Must: printed | paragraphs | consecutively numbered | signed by subscribed and witnessed and
details entered | Company enters thro’ its agents | Minor is not competent, but guardian in his
personal capacity | Not contrary to The Companies Act | All other documents should comply with
MOA.
Doctrine of Ultra vires
Ultra vires:
Beyond its powers
Not to do acts in excess of the legal powers
Presupposes limited powers
Constructive notice
Void, inoperative and not binding
Restriction on employment of Company’s fund
Exception to “Capacity to sue and be sued”
Departure of objects to the extent provided by law
Sahasri Singar Academy 4.13
Ratification by SHs: MOA – No | AOA – Yes (if done within the powers) | Directors – Yes
Disadvantage is that the company cannot change its activities in a direction agreed by all. But does
not affect the change in Object clause
Disadvantage is its advantage: Protection to the SHs and Creditors
No Intravires by estoppel / Acquiescence / Lapse of time / delay / ratification
Case Law: Ashbury Railway carriage & Iron company Ltd V Richie – w.r.t. financing (not in object
clause)
Points to Ponder:
Money lent on supplied goods / performed service cannot be recovered, unless not expended it can be
done by injunction.
Money lent for payment debts is recoverable.
Articles of Association (AOA)
Rules and Regulations for internal affairs | Bye laws of the company
Directors / officers are required to perform their functions as regards the management of the
company, its accounts and audit.
Case Law:
1. Guinness vs Land corporation of Ireland - Benefit of the creditors and outside public | Internal
regulation
2. Ashbury Railway carriage & Iron company Ltd V Richie – Subsidiary to MOA | Defines duties, the
rights and powers of the governing body | w.r.t. changes in internal regulation
3. S. S. Rajkumar vs Perfect Castings (P) Ltd – AOA is the business document | Domestic
management of the company | creates certain rights and obligations between members and the
company
Section 5: Contents and Model AOA
1. Contains Regulations for management
2. Inclusion of matters – Additional matters may be included
3. Contains provisions for entrenchment – i.e. Alteration for more restrictions only (like special
resolutions)
4. Manner of inclusion in the entrenchment provision – at the time formation / by amendment.
Pvt Co – All the members | Pub Co. – Special Resolution
5. Notice to the Registrar of the entrenchment provision
6. Forms of AOA – Schedule I | Tables F, G, H, I and J
7. Model Articles – Adopt all or any as per applicability
8. Company registered after the commencement of this 2013 Act – Not to exclude or modify
regulations.
Sahasri Singar Academy 4.14
Contents
Exclusion wholly or in part of Table F Adoption of Preliminary Contracts
SH Capital, Variation of Rights, Number and
Value of Shares
Issue of Preference Shares
Shares – Allotment | Calls | Lien | Transfer &
Transmission | Nomination | Forfeiture | Buy –
Back | SH Certificates | Dematerialisation |
Conversion of Shares to Stock
Directors – Appointment | Delagation of Powers
| Nominee Directors | MD | WTD | Manager |
Secretary | CEO | CFO | Additional Directors |
Remuneration | BoD | Meetings | Proceedings of
Meetings | Rules regarding Committees of the
BoD
Voting Rights & Proxies GMs | Proceedings | Adjournment | Voting
Rights & Proxies
Seal Audit Commitee
Borrowing Powers Dividends & Reserves | Capitalisation of profits,
Reserves
Accounts and Audit Winding up
Indemnity Secrecy
Key Differences between MOA and AOA
Characteristics MOA AOA
Objective Defines and delimits the objectives Provides Rules and Regulations
Relationship Company and outside world Company and its members
Alteration As provided in the act
Permission of RD / Tribunal is required
Special Resolution
Ultra vires Acts are void | Cannot Ratify Ratified thro’ special Resolution,
if not contrary to MOA
Doctrine of Constructive Notice
Section 399 – Inspection of documents kept by the Registrar by electronic means | Take record | get
copy or extracts including CoI.
MOA and AOA are public documents available on payment of nominal fees.
Duty of outsider to inspect its documents and conformity.
Presumption / Implied Notice that the person has not only read but also has knowledge of the
contents of the documents and understood in its true perspective
A person cannot acquire any rights under the contract when a company has entered in ultra vires act
Doctrine of Indoor Management - Turquand’s Rule
Sahasri Singar Academy 4.15
Exception to the Doctrine of Constructive Notice
Case Law: D. Royal British Bank V Turquand – If an act is authorised by MOA / AOA, an outsider is
entitled to assume all the detailed formalities for doing that act
Exceptions:
a. Actual or Constructive Knowledge of irregularity:
Case Law:
1. Howard v Patent Ivory Manufacturing Company
The directors of a company could borrow upto £1,000 without the sanction of members in GM
The consent of the shareholders was required to borrow in excess of £1,000
The directors themselves lent £3,500 to the company, internal irregularity – company is liable
only for £1,000
2. Morris v Kansseen – A director cannot defend an allotment | validity of Director’s appointment
b. Negligence – suspicious circumstances or unusual magnitude of transactions
Case Laws:
1. Anand Bihari Lal v Dinshaw & Company- the third party could not enforce a contract against
the company (contract entered by an accountant to sell the property) even-though the third party
acted bonafide
2. Haughton & Co. v Nothard Lowe & Mills Ltd – Apply one company’s money for the payment of
debt in another company by a director
c. Forgery:
Case Law: Ruben v Great Fingall Consolidated Company: Forgery of signature by the secretary for
two directors is not defect in consent but absence of consent. Hence the certificate is invalid, even
though the holder of the certificate is not aware of this.
Sahasri Singar Academy 4.16
4.6. Prospectus Introduction
A Comparison:
The Indian Contract Act, 1872 The Companies Act, 2013
Invitation to an offer - Prospectus
Offer - Application
Acceptance - Allotment
Nature:
- Information booklet
- Offer document
- Any document as prospectus inviting offers to the public
- Notice
- Circular
- Advertisement
- Red Herring | Shelf Prospectus
Contents: Financial Information | Reports
Golden rules to prospectus: No Untrue Statement | Ex: Dividend Paid out of reserve
Preferential basis or Private Placement (Other than the issue of Prospectus)
- Select / group of persons
- Cash / other than cash
(i) SR
(ii) Price – Value
- AOA
- SR
- Fully paid (at allotment)
- Explanatory statement
- within 1 year - SR valid (else another SR)
- Less than 50% earlier FY
- Not included QIB and employee ESOP
Types / Classifications of Prospectus
1. Shelf Prospectus
- One or more issues (certain period) max 1 year
- For multiple to the public
- No separate / only one prospectus
- Submitted at 1st stage but information to be given in PAS 2
- New charges
- Changes in financial position
- Other changes
- File prior issue 1 month prior
2. Red Herring
- No price / quantum, key details)
- A Prospectus Prior to Prospectus
- B/f 3 days of opening of subscription list
- Same as prospectus, highlight if any variation)
- On closing
Sahasri Singar Academy 4.17
3. Abridged Prospectus (AP)
- Salient features of prospectus
- No application without AP
- Issue B/f subscription clause
Non – Applicability:
- Underwriting
- Not offered to public
- Penal provision 10 - Rs.50,000
4. Offer for Sale (OFS)
- Members (Existing SHs) to Public through prospectus
- Company - Intermediary (Issue house / Merchant banker)
- conditions as applicable to prospectus
Additional information:
- Net amount of consideration
- Inspection of the contract with mention time & place
Conditions:
- Make OFS within 6 months to the public after allotment / agree to allot
- The whole consideration to be received by the company in respect of the company has not
been received at the date when the offer is made
Sign by Intermediary: Company - 2 directors | Firm - ½ partners
Nature: Deemed prospectus
Others:
- Whole / part of the shares
- Consult with board
- Individual / Body Corporate
- Collectively authorize
- Reimburse expenses to the company
Non-Applicability:
- Minimum subscription
- Minimum application value
- BOD - utilization of money
- Other provision
Sahasri Singar Academy 4.18
4.7. Share and Share Capital
Shares
I. Nature of Shares
Definition – a share in the share capital | Includes stock |Proportion of interest
An interest in the Company
Case Law: Borland Trustees vs. Steel Bros & Co Ltd – Share is an interest measured by a sum of
money and various rights | as per MOA and AOA | Contractual rights and legal rights for SH
Movable property – Movable Property | Transferable as per AOA | Includes Debentures also
Numbering – Distinguished by distinctive numbers | Except – Demat Shares
II. Shares and Stock
Shares Stock
- Sum of money
- Rights (bundle of rights) & Liabilities
- Interest & Mutual convert
- Right in profit - Dividend
- Going concern / Winding up
- Sum of money but “Bundle of rights”
- Not a debt
- Numbering
III. Kinds of share Capital – Not Applicable for Pvt Co
(i) Equity share Capital – voting rights | Differential rights w.r.t. dividend, voting or otherwise
Issued at:
- Par (equal to FV)
- Premium, more than FV)
- Discount (less than FV) [Exception: only Sweat Equity]
(ii) Equity shares with differential voting rights
- With voting share (no conversion)
- With differential voting rights / dividend
- AOA
- OR (Postal ballot)
- Not less than 26% (Post – issue)
- Track record
- Filling (i) Final Returns
(ii) Dividend
(iii) Redemption
(iv) Deposit
(v) Interest
- Not penalized Court / Tribunal
Example: Tata Motors in 2008 issued equity shares with differential rights
‘A’ equity shares with every 10 ‘A’ equity shares carrying only one voting right but 5% more
dividend. This share is traded at discount.
Future Retail, Jian Irrigation also issued equity shares with differential rights
Sahasri Singar Academy 4.19
(iii) Preference share Capital-
- Owners likes only preferred
- Rights to participate in the proceeds during wind up - Surplus profit / Assets
- Capital shall be deemed to be preference capital – w.r.t. (% of return – dividend) and capital
- Voting rights: Only when dividend not given)
Types:
Redemption: (i) Redeemable | (ii) Irredeemable
Accumulation: (i) Cumulative | (ii) Non – Cumulative
Conversion: (i) Convertible | (ii) Non-Convertible
Note:
Equity Share Capital: For Company limited by shares - all share capital and no preference share
capital
Preference Share Capital – preferential right w.r.t. payment of dividend and repayment during
winding up
Sweat Equity Shares
- Meant for IPR
- Issued at discount / consideration other than cash
- To employees (in/out India) for atleast 1 year
- Directors (Includes WTD)
- 3 Years Lock – in period
- Subsidiary also
- Register SH-3
Nature: Class already issue | Pari-paasu shares
Resolution:
- No Special Resolution
- Current Market Price, How Much)
- Consider, what price)
- within 1 year from SR after 1 year from commencement of business
Securities Premium Account:
- Fully paid bonus
- Write off - preliminary expenses
- Write off - comm./ Discount - Debentures
- Premium - Redemption - Preference Shares / Debentures
- Buy – back shares
- No Banking co
- No Trust (fully paid) - Benefits of employees
Nature: SP A/C | Sanctity - Right consider
Buy – Back of Shares:
- From FR/SP / Fresh proceeds
- BR - 10% (Paid-up + FR)
- SR (i) 25% (Paid-up + FR)
(ii) 25% (Paid-up equity)
- DE Ration 2:1 (after Paid-up + FR)
Sahasri Singar Academy 4.20
- Within 1 year (i) Resolution
(ii) Solvency
(iii) Next buy-back
- Existing / open market/
- Destroy within 7 days
- No shares issue within 6 months
- CRR - FR/SP
Reduction of Share Capital:
Cases: Accumulated business loss | Assets of reduced or doubtful value | Excess in wants of a
company
Nature
- Reduction is on unpaid capital
- Part is also allowed
- Tribunal to CG/ Registrar/ SEBI/ Crs
- AOA
- SR + Court approval (discretionary)
- Notice to CG (RD) | Registrar | SEBI | Crs [Take the representations within 3 months]
- Alter MOA
- Publish as reduced
Non – Applicability: Arrears in the Repayment of Deposits & Interest
Methods of Reduction:
Methods Illustration
Share Capital: 1,00,000 shares * ₹ 10 each = ₹
10,00,000
FV: ₹ 10 | Paid -up: ₹ 7 | Unpaid-up: ₹ 3
(a)Extinguish / Reduce – not paid Reduce
₹ 3 unpaid value (FV: ₹ 7 | Paid-up: ₹ 7 |
Unpaid: ₹ 0)
₹ 2 unpaid value (FV: ₹ 8| Paid-up: ₹ 7 |
Unpaid: ₹ 1)
(b)With / Without extinguishing / Reducing –
Paid up
P/L – ₹ 1L
Reduce
₹ 1 paid value (FV: ₹ 9| Paid-up: ₹ 6 | Unpaid:
₹ 3)
(i)cancel: Lost / unrepresented by available
assets
(ii)pay-off: Excess of the wants of the company
A comparison between Reduction & Dimunition
Reduction Dimunition
- On Issued Capital
- 3 Methods
- Creditor consent Required
- SR + Court Approval Required
- On Authorised Capital
- No such methods
- No such
- OR + No Court required
Right Shares:
- Right to accept or renounce (with value)
- Letter of offer
- Loan / Debentures – conversion
Sahasri Singar Academy 4.21
Bonus Shares:
- AOA + ‘Recommend - Board’
- SR
- FR / SP / CRR
- No default - Debts and statutory dues
- Fully paid
- Not for dividend
Employees Stock Option Plan:
- Future / Pre-determined Price
- Employee not include Sweat equity
- Stock option (Accept or Reject)
- SR / OR (Pvt co.)
Allotment of Shares:
- Appropriate the unappropriated capital
- Shares into existence - within 60 days
- Minimum amount as prescribed in prospectus
- File PAS-3 (within 30 days)
- List of allotees - name / address / occupation / no,of securities
- Copy of contract (stamped)
(i) W.r.t. property / Assets / Other securities
(ii) May be fully / Partly paid (except for bonus share)
- If no copy of contract, the particulars & valuation report
- For bonus issue, GM resolution
App. Amt not less than 5% of FV / prescribe
Proper Authority
- BOD / Committee / if not qualified but known later
- Similar to acceptance under Indian contract Act
- Reasonable law
- Absolute / Unconditioned
- Communicated
- Against application only
- Not in contravention (ex: allotment to a minor)
Irregular Allotment
- Prospectus / to registrar + No fraud + Issue ,listed SEBI)
- Min. Sub. + Min. Amount (less than 5%)
- PAS - 3
- Separate A/c
Refund of money
- Min. amount has not been subscribed
- App. Money not received within 30 days (date of issue of prospectus)
- Repay within 15 days from the closure
- Else directors - Jointly & Severable - 5% later
Penal Provision
- Company + Officers
Sahasri Singar Academy 4.22
- (1000 per day / 1 lakhs) WEL
Time limit - 60 days / Application money
Share Certificates - Prima facie evidence
Time of Delivery Nature
2 Months Subscribers from the date of allotment for Subscribers
On allotment of shares
1 Month Transfer / Transmission
6 Months On allotment of shares
Redemption of Preference Shares
Redeemable
- Max 20 years (Exception: Infrastructure projects, annual basis 10%)
- Check: No default in redemption and dividend PS
- AOA / SR
- Fully paid-up, Sources
i) Profits for dividend
ii) Fresh issue of shares
- If premium, Sources
i) Profits
ii) B/F commencement of this Act
iii) Profits (SP A/c)
- Others (out of profits and SP A/c)
- If from profits CRR is mandatory (NV of Shares) from profits
- Notice to registrar
- within 30 days (with AOA)
Irredeemable
- If not redeemed on time
- Issued redeemable preference shares
- Consent 3/4th of parties + approval of Tribunal
- For discount - redeem
- Limit fully paid up + FR (Temporary Loans)
Note:
- CRR for fully paid bonus shares
- Not Similar to reduction of share capital
Sahasri Singar Academy 4.23
4.8. Borrowing Powers
Eligible Companies: Trading Co | Others by MOA – Object Clause
A comparison – Shares and Debuntures
Shares Debenture
- capital
- Dividend
- App. Of profits
- Varies
- Not at discount
- No purchase of own share
- No security
- No trust
- No redemption
- Shares to security - No
- No bearer shares
- Last in sequence during winding up
- Debt
- Interest
- Charge on profits
- Fixed
- May be at discount
- Purchase & Cancel
- Security
- DRT
- Redemption
- Deb – Shares
- Bearer debentures
- Preferred b/f SHs
Types:
Period:
Long term - 5 years & above
Short term – less than 1 year
Medium term - 2 years
Secured & Unsecured
Syndicated Borrowing (Large)
Public / Private (Deb / Bonds)
Bilated (particular financial position)
Ultra vires Borrowings:
MOA / Trading Co.
i. Void-ab-initio
ii. No ratification
iii. No securities to lender
But right of lender
i. Trace-injunction (injunction recovery)
ii. Lawful debt (suit against directors)
iii. Asset acquisition - charge on assets
iv. Directors liable
Directors - Intra virus but ultra vires ‘Doctrine of Indoor Management’
Sahasri Singar Academy 4.24
4.9. Debuntures Forms of Debt: ECB | Debuntures | Bank Loan | Public Fixed Deposits
Debenture & debenture stock - bonds - secured?
- Company property or undertaking
- Holders - Crs
- No voting rights
- certain %
- Series of debentures
- Pari-passu clause (may or based on date may not be)
Types:
Redeemable Irredeemable
- Secured or unsecured
- Convertible (partly / wholly) / Non-convertible
- Registered / bearers
- Perpectual
Secured Debuntures:
Redemption:
- 10/30 years
- Infrastructure projects
- Infrastructure finance
- Infrastructure debt
- Ministry / Department of CG/ RBI/ NHB or OR
Charge Creation: Co | Sub | Holding
Disqualification of Debenture Trustee:
- More than 500 nos - Debenture trustee / Trust Deed
- Redress - grievances––
- Liability of breach of trust
i. DRR
ii. Source of profits
iii. Dividend utilize
iv. For redemption of debentures
- Indemnity - 3/4th value
i. Decree of specific performance
- File to Tribunal
i. Insufficient facts
- Redeem/ intent
Debunture Redemption Reserve - 25% of o/s debentures
Exception
- All India FI (AIFIs) public issue or
private placement
- Banking co.
- NBFCs (with registered RBI)
i. 25% ,public issue)
ii. 0 (Private placement)
i. FIs
Invent b/f 30th April
- Strictly less than 15% (31st March)
- Deposit (Sch. Bank / No charge / gain)
- Unencumbered securities of CG/ SG/
Indian notified 20 (a) to (d) & (ee) & (f)
/ Trust Act
- Only for redemption
Meeting: Convene by D. trustee | Writing less than 1/10th value
Sahasri Singar Academy 4.25
4.10. Deposits Introduction:
Receipt of money – Deposit / Loan / other form
External Finance
Cost effective
A receipt of finance
To control the malpractices
To safeguard the investors made the investment [Sec 76]
Private Company - From Members only
Statutory / Regulating Provisions: Else Prohibited
Chapter V: Sec 73 to 76 of The Companies Act, 2013
The Companies (Acceptance of Deposits) Rules, 2014
Non – Applicability: Sec 73(1) & Rule 1(3)
Banking Company | NBFCs (RBI) | Housing Finance Company (NHB Act, 1987) | CG + RBI
Consultation
“NOT” Deposits: Sec 2(31) | Rule 2(1)(c): Any amount received from
(i) CG | SG | other source (guaranteed by CG/ SG) | Local Authority | Statutory Authority (Act of
Parliament / State Legislature)
(ii) Foreign Govts | Foreign / International Banks
Multilateral Financial Corporations (International Finance Corporation, Asian Development Bank,
Commonwealth Development Corporation and International Bank for Industrial and Financial
Reconstruction)
Development Financial Institutions, Foreign Export Credit agencies, foreign collaborators, foreign
bodies corporate Foreign - Citizens | Authorities | PROI
(*FEMA, 1999 | Rules and Regulations)
(iii) Loan / facility from Banking Company / SBI / Subsidiary Banks
Banking Institutions
- notified by CG under Sec 51, Banking Regulation Act, 1949
- New Bank, Sec 2(d) or Sec 2(b) of Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 and 1980
- Co-Operative Bank, Sec 2(b-ii), RBI, 1934
(iv) Loan / Financial Assistance – PFI (CG + RBI) | RFI| Insurance Companies / Scheduled Banks (RBI
Act, 1934)
(v) Issue of CP / Instrument (RBI Guidelines)
(vi) By a company from another company
(vii)Towards subscription of shares - Share Application Money
- Advance (Pending Allotment – if not allowed within 60 days & not refunded within 15
days from 60 days)
- Adjustment for other purpose, not treated as refund.
Sahasri Singar Academy 4.26
(viii)Person – Director / Relative of a Director
Provided:
Declaration to the company is given
Not from Loans / Deposits from others
Disclosure in Board’s Report
(ix) Issue of Bonds / Debentures (First charge / pari paasu Charge – Sch III / Excluding Intangible
Assets / Not exceeding MV)
Bonds / Debentures (Compulsory Convertible within ten years)
(ixa) Issue of Non-Convertible debenture (No charge) | Listed – SEBI
(x) Employee (not exceeding his annual salary – Contract of Employment | Non - interest bearing
security deposit)
(xi) Non - interest bearing amount received and held in trust
(xii) Business (* Refundable (with / without interest) | No permission – Goods / Services)
(a) *Advance – Supply of Goods / provision of services – appropriated within 365 days (NA- Legal
proceedings)
(b) *Advance – Immovable Property – Agreement / Arrangement – provided adjusted
(c) Security Deposit – Performance of the contract – Goods / Services
(d) *Advance – Long term projects – Capital Goods (except (b))
(e) Advance – Future services – warranty / maintenance contract (written agreement / arrangement)
– period (WEL: Common parlance / 5 years)
(f) Advance – Received / allowed – Sectoral Regulator – CG/SG
(g) Advance – Subscription towards publication (print / electronic)
(xiii) Promoters – Unsecured Loan (Lender: FIs / Banks)
Conditions: (a) Brought in by stipulation (b) promoters/ relatives (c) Exempted - until repayment
(xiv) Nidhi Company – Sec 406, The Companies Act, 2013.
The following is considered as deposits unless specifically excluded
(a) Amount received by the company– Instalments / others – Promise / offer to give returns in
cash / kind – on completion of period
(b) Additional contribution of (a) made by the company
(xv) Subscription of chit (Chit Fund Act, 1982)
(xvi) CIS – as per SEBI
(xvii) ₹ 25 L or more – Start – up Company – Convertible Note (to Equity or repayable in 10 years) –
Single tranche
[Start-up Company: Private Company | Recognised by DPIIT
Convertible Note: Instrument evidencing Receipt of money initially as debt – Convertible to Equity
Shares of Start – up company]
(xviii) Amount – Alternate Investment Funds | Domestic Venture Capital Fund | Infrastructure
Investment Trusts | Real Estate Investment Trusts | Mutual Funds (Reg with SEBI)
DPIIT - Department for Promotion of Industry and Internal Trade
Sahasri Singar Academy 4.27
Tenure: 6 months to 36 months [Sec 73 (2), Rule 3]
Exception: Earlier than 6 months, but nor repayable earlier than 3 months
- Meeting short term requirements
- Accept / Renew
- Not more than 10% of paid-up share capital + FR + SP
Depositor / Deposit Holder: Member (deposited as per sec 73(2)) | Any person (deposited as per Sec
76 & Rule 2(1)(d))
Acceptance Limit: Deposits (+ outstanding) [Sec 73(2), Rule 2 (3, 4, & 5)]
Type of Company % of paid-up share capital + FR + SP
Members Public
Eligible Company 10%
25%
Non- Eligible
Company
(Sec 73 (2))
35% Prohibited
Govt Company - 35%
Exception IFSC Public Company | Private Company – Not exceeding 100% (File form
DPT 3)
Non – Applicability Private Company
(i) Start-up – 10 years from the date of incorporation or
(ii) (a) Not an Associate / Subsidiary
(b) Borrowings (from Banks / FI / Body Corporate) < WEL (2* Paid up share
capital / ₹ 50Crs)
(c) No default in repayment of borrowings subsisting at the time of
acceptance of deposits
Eligible Company:
A public company [Sec 76(1)]
- Net worth – not less than ₹ 100 crs
- T/O – Not less than ₹ 500 crs
- Prior Consent (SR in GM) | Filed with RoC b/f inviting the public
- OR, if within the limits as specified in Sec 180(1)
Acceptance of Deposits: From Members (Private & other Company) | Public (Eligible Companies)
From Members: Conditions – Sec 73(2)
(i) Resolution – GM
(ii) RBI Consultation + Conditions
(a) Circular (DPT 1) – Financial Position | Credit Rating | Total number of depositors | Previous
deposit dues | Other particulars
(b) File to Registrar within 30 days b/f the date of issue
(c) DRR
Sahasri Singar Academy 4.28
(d) Omitted
(e) Certification – No default (+ Interest) b/f or a/f commencement | Default made good & Five
years elapsed
(f) Secured Deposits: Security (Deposit + Interest) – Deposit Insurance / Charge Creation (in
favour of a Trustee)
Furnishing of deposit receipts to depositors [Rule 12]:
- Includes Agents | within 21 days | Signed by an officer authorised by the BoD
- Content: Date of Deposit | Name & Address | Amount | Rate and periodicity of Interest |
Repayable Date
Maintenance of liquid assets and creation of DRR Account [Sec 73(5), Rule 13]:
- A specific Reserve
- Deposit not less than 20% in Separate Bank A/C in Scheduled Bank
- on or b/f 30th April of each year
Exemptions:
Private Companies: [No compliance under 73(2) (a) to (e) | Follow only 73(2)(f)]
- Amount – Not exceeding 100% of paid – up share capital + FR + SP
- Start – up – 10 years
- Conditions:
Not an Associate / Subsidiary
Borrowings from Banks / FIs / Body Corporate | WEL (less than twice of paid-up share
capital / ₹ 50 cr)
No default in repayment
- File DPT -3 to Registrar
Specified IFSC Public Company: A unlisted Public Company | Licensed | RBI / SEBI / IRDA – IFSC
(Multi services SEZ)
[No compliance under 73(2) (a) to (e) | Follow only 73(2)(f)]
- Amount – Not exceeding 100% of Paid – up share capital + FR
- File DPT -3 to Registrar
From Public:
- Eligible Company | Compliance as per Sec 73(2) | CG + RBI
- Rating (Net worth | Liquidity | Ability to repay) @ invitation to the public
- Secured (Create charge within 30 days | Amount – not less than the amount of deposits)
Tenure: 6 months to 36 months [Sec 73 (2), Rule 3]
Exception: Earlier than 6 months, but nor repayable earlier than 3 months
- Meeting short term requirements
- Accept / Renew
- Not more than 10% of paid up share capital + FR + SP
Rate of interest / Payment of brokerage [Rule 3 (6)]: Not to exceed the maximum rate prescribed by
RBI for NBFC.
Sahasri Singar Academy 4.29
Types of Deposits: Secured / Unsecured | Payable on demand / on notice
Joint Names [Rule 3 (2)]: Max 3 names | Clauses (not mandatory): “Jointly”, “Either or Survivor”,
“First named or Survivor”, “Anyone or Survivor”
Broker [Rule 3(6)]: Person authorised in writing
Alteration of terms & conditions [Rule 3(7)]:
- No right reserved to company
- To disadvantage the Depositor
- Deposit / Deposit Trust Deed / Deposit Insurance Contract
- Circular issued & deposits accepted
Credit Rating [Rule 3(8)]:
- Atleast once in a year
- File Form DPT 3 to RoC
- Rating not below Minimum investment grade rating / Specified Credit Rating
- Agency: Specified for NBFCs (NBFC Acceptance of Public deposits (Reserve Bank)
Directions, 1998)
Forms & Particulars of Advertisements / Circulars [Rule 4]:
- Circular to members in DPT 1 | Newspaper – English & Vernacular
- Certification (Statutory): No default (+ Interest) b/f or a/f commencement | Default made
good & Five years elapsed
- Upload – website
- Circular – Issued in authority, BoD
- Issued not less than thirty days b/f the date of issue signed by majority of directors
- Circular (Advertisement) - Valid 6 months: WEL (Close of FY / FS in AGM / AGM been
held)
- Fresh circular (advertisement) in each succeeding year
- Date of issue [newspaper - Date of advertisement |Circular – Date of dispatch
Deposit Trustees (DT) [Rule 7]:
- Written Consent – Appointment (one or more trustees) | Include in Circular
- Execute Trust Deed | DPT 3 | 7 days b/f issue of circular / advertisement
- Remove – consent of all Directors present in the BM (atleast one ID in BM)
Who cannot be DTs?
- Director | LMP | Officer | Employee - Includes Relative
- Depositor
- Person indebted to the company
- Having material pecuniary relationship
- Enter in Guarantee Arrangement – Secured Principal Debts
[*Company includes Holding / Subsidiary / associate]
Sahasri Singar Academy 4.30
Duties of DTs [Rule 8]:
- Ensure: Sufficient amount (including O/S Deposits) for charge creation
- Satisfy: Not inconsistent content in the Circular w.r.t. Deposit scheme / Trust Deed /
Compliance
- Ensure & Steps to Remedy: Company does not commit any breach of covenants and
provisions of the trust deed
- Meet: Deposit Holders, as and when required
- Supervise: Implementation – Charge creation
- Such acts: security becomes enforceable
- Other Acts: Protection of interest of DHs
- Resolve Grievances
Meeting of depositors with DTs [Rule 9]:
- Request in writing | signed | 1/10th of Depositors (+O/S) in value
- Happening of an event – default | affects the interest of the Depositors
Nomination [Sec 72, Rule 11]: Nominate any person
Registers of deposits [Rule 14]:
- Maintain at Registered office
- One or more Registers
- Entries within 7 days | authenticated by Director / Secretary / Authorised Officer
- Preserve for not less than 8 years from the latest entry
Contents:
Name, address and PAN
Guardian’s Details, if
Minor
Nominee’s
Particulars
Deposit Receipt Number Security & Charge
Creation
Date & Amount Duration
Repayable
date
Interest - Rate (%)|Due dates
Mandates & Instructions |
No TDS, if any
others
General provisions regarding premature repayment of deposits [Rule 15]:
- Reduce the rate of interest payment by 1%
Non - Applicability:
(a)Rule 3
(b)War risk | Related benefits:
– Naval / military / Air forces
– Personnel / family
– Application made by Associations / Societies – Emergency under Article
352, CoI
Part of the year: Less than 6 months – Exclude | More than 6 months – Reckoned
as one year
Company shall permit to renew for higher rate of interest, in accordance with terms and conditions, a
period longer than the unexpired period
Sahasri Singar Academy 4.31
Return of Deposits (includes reporting of “What is not a deposit?’)
- Periodic Return
- On or b/f 30th June, every year
- File DPT 3 + fee
- Furnish by 31st March of every year
[* DPT 3: Form to file return & / or “Not a deposit” by every company other than a Govt Company
Additional Requirement – One time return within 90 days from 31st March, 2019]
Disclosure in FS [Rule 16A]: As notes
Other than Private Company – If received from Director
Private Company – If received from Director / his relatives
Penal rate of Interest [Rule 17]: 18% p.a. |overdue period | matured & claimed but remains unpaid
Power of Central Govt to decide certain Questions [Rule 18]: w.r.t. applicability | with RBI
Applicability of sections 73, 74 and 75 to eligible companies [Rule 19]:
Earlier Deposits: follows 1956 Act | Fresh deposits – follows Ch – V, 2013 Act
Statement Regarding Deposits existing as on the Date of Commencement of the Act [Sec 74(1)(a),
Rule 20]: File DPT 4
Miscellaneous:
Sec 73 (3) - Repayment as per terms and conditions
Sec 73 (4) - On failure of repayment, the depositor may apply to Tribunal & it orders / directs for the
sum due | Loss | Damage
Sec 74(1) - Deposits (includes Interest) b/f 2013 Act - Unpaid / becomes due after
– File within 3 months (All deposits / interest / arrangements for repayment)
– Repay (WEE: within 3 months / expiry period) [Renewal as per Chapter V]
Sec 74 (2) - Tribunal (applied by the company) allow further time based on financial condition for
repayment
Sec 75(1) – Defraud the Depositors / Fraudulent Purpose – Criminal Liability – Sec 447
Sec75(2) – Person / Group of Persons / AOPs – File suit / proceedings / other action – For loss
Penal Provisions:
Provisions Penalty
Company Officer
Failure for repayment
[Sec 74 (3)]
₹ 1 cr to ₹ 10 cr Imprisonment – 7 years / Fine – ₹ 25L to ₹ 2
crs
Contravention of Rules
[Rule 21]
₹ 5000 | Continuing: ₹ 500 / day for every day
Contravention of Sec 73/
76
WEL (₹ 1 cr / 2x
amount) to ₹ 10crs
Imprisonment – 7 years / Fine – ₹ 25L to ₹ 2
crs
Criminal Liability – Sec
447
- w.r.t Company / SHs / DHs / Crs / Tax
Authorities
Sahasri Singar Academy 4.32
4.11. Charges
Introduction:
A right created by the company to the Cr who extended financial assistance, but not a transfer
A security – secured loans / debentures / other borrowings - Towards repayment of debt
Includes Mortgage
Debt - Existing | Future
Legal right of Cr
– Not absolute / special
– Enforced only if terms and conditions of the loan are not met
- By order of the court
Gets priority to unsecured loans on waterfall arrangement
Statutory / Regulatory Provisions:
The Companies Act, 2013 Companies (Registration of Charges) Rules, 2014
Rule 12, Companies (Registration of offices
and Fees) Rules, 2014
Registration of Charges by Secured Creditor
with Central Registry under SARFAESI.
Legislative Intent:
- Sec77
- Protection to the Lender
- To make public – all encumbrances
- Two - fold purpose:
1. Prevent Company to borrow on the same assets.
2. Provide clear information to the lender
- CERSAI [The Central Registry of Securitization, Asset Reconstruction and Security Interest of
India]
- Single & centralized Registry for Equitable Mortgages (Mortgage on Single Property)
Definition [Sec 2(16)]:
An interest/lien
On Company’s property /assets / undertakings
Security
Includes Mortgage
Essential Features:
Min 2 parties – Charge Creator | Charge Holder
Subject Matter – Current / Future Assets
Intention – written
Charge and Sec 100, TPA Act: All provisions relating to mortgage is applicable
Comparison with 1956 Act: Only 9 type were required for registration, where else now it covers any
interest / lien created for security is covered
Note: Interest: Legal Share – Property / Right / title / interest / privileges / Powers / Immunity
Lien: A legal right / Interest | A right to possess]
Why charge creation?
FIs may lend only for safe funds
Security creation for the lent amount
Execute Loan Agreements| Hypothecation Agreements | mortgage deeds | other
Sahasri Singar Academy 4.33
Consent (Give / reject) required for Second Charge created in favor of different CR | Ranks pari-paasu
Insist for Registration
Registerable charges: An indicative list
1. Issue of Debentures / Deposits
2. Uncalled share capital | On call money (Called and unpaid)
3. On Tangible / Intangible
4. Movable / Immovable Property [+ Mortgage by title deeds] [Case Laws: Wallis v Simmonds
(Builders)Ltd]
5. On any Book debt [Case Law: Paul and Frank Ltd v Discount Bank Overseas Ltd]
6. A lien on Sub freight [Case Laws: Welsh Irish Ferries Ltd, Ladenberg & Co. v Goodwin]
7. Floating Charge (Includes stock in trade)
8. Ship / share in a ship
9. Charge / Assignment on Insurance Policies
10. Pledge margin money (+ shares) – Pledge of shares
Example: Company A is a member of Company B. Company B supplied goods on credit to Co A.
(Thro AOA) Lien is created on trade debts due from members
Kinds of Charges
I. Basis - Nature of Charge:
Fixed / specific Charge
Company to give up its right to dispose of the property
[Charge Holder gets priority over the subsequent transfers]
Property: Ascertained / Definite [Ex: Land / Building / Plant & Machinery]
Priority during wind-up / Liquidation
Floating Charge:
Property: Not definite | Not specific
In ordinary course of business| fluctuating type [Ex: Stock in trade]
The security remains dormant until freezed / crystallised
Company has the right to deal over the assets until takes the enforcement – The company can sell /
mortgage / lease (w.r.t. MOA)
The creation of a floating charge leaves the company free to create a legal and equitable mortgage on
the same property until the floating charge crystallises
II. Basis – Conditions:
Pari-paasu Charge: Charge shared by more than one lender | Prior consent required
Exclusive Charge: To a particular lender
Further / Second Charge: Charge already created provided to other lenders. First charge holder gets
priority on liquidation.
III. Basis - Registration: Registered Charge | Unregistered Charge
IV. Basis – country: Within India | Outside India
V. Basis – Property: Tangible / Intangible
Floating Charge – In detail:
Crystallisation:
- Liquidation of the company
- Ceases to carry on the business
- On happening of the specified event
- DH / CR take steps to enforce their security [Appointing receiver]
Sahasri Singar Academy 4.34
Case Laws:
1. Parmanent Houses (Holdings) Ltd. 1988 BCLC 563(CH D)
• The debenture mentioning that the charge shall crystallize on happening of an event or
default in payment.
• The payment was not made on demand by bank,
• No longer a floating charge at the time when receiver was appointed
2. Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd. - Held, the mortgagee had
priority
• The debentures with floating charge
• Three months’ interest became due
• DH took no steps. So, the charge did not crystallize but remained floating.
• The company then made a mortgage of a specific part of its property
Effect of Crystallisation:
Gets converted into a fixed charge
Has priority over any subsequent equitable charge and other unsecured creditors.
Note: Preferential creditors (priority as secured creditors) get priority over the claims of the debenture
holders having floating charge
Postponement: In favour of the following persons, if they act before the crystallization of the security:
(a) a landlord who distrains for rent;
(b) a creditor who obtains a garnishee order absolute;
(c) a judgement creditor who attaches goods of the company and gets them sold
(But if the goods are not sold and the debenture holders take action in the meantime, the floating
charge has priority);
(d) the employees of the company, as well as other preferential creditors in the event of winding-up
of the company;
(e) the supplier of goods to the company under a hire-purchase agreement on terms that goods are to
remain the property of the seller until they are paid for in full
(But hire-purchase agreement is to be made before or after the issue of the debentures with a floating
charge.)
Are Debenture-holders – Secured Creditors?
General Law – No, if secured with a floating charge
But, the deed creating the floating charge may contain a clause restricting the power of the company
to create charges in priority to or pari passu with it.
But, still a person who takes mortgage without notice of floating charge gets priority.
But, such a contingency can be safeguarded by registering the charge.
Deemed notice: From the date of registration
Restraint on the Power to Create Charges with Priority to a Floating Charge:
Restricting Clause - Insertion for priority / pari passu
“After ranking” - Notice of the charge & Restriction
But still Mortgage is valid – Not aware of the existence of the charge | Aware of charge but not aware
of the restriction
“Specific charge” in floating charge – Specific charge is postponed as from the date when the floating
charge crystallises by the appointment of a receiver.
Sahasri Singar Academy 4.35
Invalidity of Floating Charge:
Remains afloat | Valid only against unsecured CR, except on imminent situation
Invalid [Sec332] –
- Created within 12 months immediately preceeding the commencement of the winding up
proceedings of a company, unless solvency proved.
- Still valid to the extent of the amount of any cash paid together with interest @ 5% p.a. /
notified by the Govt.
Charge compared with Mortgage:
A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing
the payment of money advanced or to be advanced by way of loan, an existing or future debt or the
performance of an agreement which may give rise to pecuniary liability.
Features Mortgage Charge
Creation By the act of the parties. By the act of parties / by operation of law
Registration Transfer of Property Act,
1882.
By the act of parties – Requires Registration
By operation of law – No registration required
Term Fixed May be in perpetuity
Transfer transfer of an interest in
specific immovable
property
Not a transfer, it is only a right to receive
payment out of a particular property
Transferee gets the property free from charge
if purchased with value and with no notice of
charge
Validity against
subsequent transferees
Good Good against notice
Personal Liability unless excluded by express
contract.
No personal liability is created.
Except: In case of result of a contract
Charge compared with Pledge:
Both are the result of voluntary act of parties
Both create security but the nature of the security is different
Pledge Charge
- A bailment of personal property
- Delivery of goods: A debtor (owner/his agent) to his
creditor [Redelivered on fulfillment]
- As security for debt / engagement / other obligation
- Till the debt is repaid (+ interest)
- Redeemable on certain terms
- The title not being changed during the continuance of
the pledge
- An implied power of sale on default
- Not a transfer of property
- A right created in favour of one
“The lender” - immovable property of
another
“The borrower” - as security for
repayment evidencing charge
Sahasri Singar Academy 4.36
Registration:
Non-Applicability: In RBI consultation
Additional / Advalorem Fees:
Period of delay Small Companies and One
Person Company
Other Companies
Up to 30 days of Delay (up to 60
days from the date of Creation)
3 x normal fee 6 x normal fee
More than 30 days and up to 90
days delay (up to 120 days from
the date of Creation)
3 x normal fees + An advalorem
fee - 0.023 per cent (secured
amount/ max ₹ 1L)
6 x normal fees + An advalorem
fee - 0.05 per cent (secured
amount/ max ₹ 5L)
Note:
1. Sec77 restricts the ability of the company to register charge after expiry of 120 days
2. Defeats the transparent information to the public
3. This situation also deprives genuine lenders to recover their dues. This also gives wrong picture
of charges on the property of the company, when third party takes search of MCA for registration
of charges.
4. Subsequent Registration will not prejudice the right of the former charge holder in creation of the
subsequent charge
Sahasri Singar Academy 4.37
Illustration: Date of Creation: Dec 1, 2019 | Amount Secured: ₹ 500 Crores
Particulars Date Fees (assuming normal fees – ₹ 400
Small Company| OPC Others
Upto 30days December 30, 2019 ₹ 400 ₹ 400
More than 30
days
and up to 60
days
Dec 31, 2019 to Jan 29,
2020
Additional fees
3 x ₹ 400 = ₹ 1200 6x ₹ 400 = ₹ 2400
More than 60
days
and up to 120
days
Jan 30, 2020 to Mar 29,
2020
Additional + Advalorem
fees
₹ 1200 + ₹ 1L* = ₹ 1,01,200
*0.025% x ₹ 500 crores = ₹
12.5 L
(subject to ₹ 1L)
₹ 2400 + ₹ 5L* = ₹
5,05,400
*0.05% of ₹ 500 crores =
₹ 25L
(subject to ₹ 5L)
Application for registration of charge by the charge-holder (Financing Institution):
Case – Where the company didn’t register within 30 days
File form to Registrar [CHG 1 / CHG 9]
Registrar sends notice to the company
The company may either register itself or show sufficient cause for non - registration
On failure from the company side, Registrar allows registration within 14 days from the date of notice
Recover the fee (+ Additional / Advalorem fee)
Certificate of Registration / Modification of Charge [Sec 77(2), Rule 6]:
Registrar issues: Certificate of registration – Form No.CHG-2 | Certificate of modification of charge in
Form No.CHG-3
Nature: Conclusive evidence [Compliance - Chapter VI, Rules]
Liquidator (Companies Act / IBC, 2016) takes into account only the registered charge
However, this does not prejudice any contract or obligation for the repayment of the money secured
by a charge
Modification of Charge: [Registration as per Sec77]: Variation
- Terms
- Rate of interest
- Increase / decrease – borrowings
- Change / swap of security
- Extension of time for repayment (Mutual agreement / operation of law)
- Rights of a charge holder assigned to a third party
Acquiring Property subject to a Charge:
- Follows Sec 77 as it is, (w.r.t. the same time limit also), even if the charge is already registered
- New creation / modification
- Modification of terms as per SERFASAI
[Securitization and Reconstruction of Financial Assets and Enforcement of Interest Act, 2002]
Sahasri Singar Academy 4.38
Verification of Instruments [Rule3(4)]:
A copy of every instrument evidencing any creation / modification / filed with Registrar
The copy of the instrument / deed shall be verified by a certificate issued w.r.t. Property
i. Outside India - Company (with seal) / Director / CS / authorised officer of CH / other person
interested in Mortgage or charge.
ii. In India (wholly / partly) - Director / CS / authorised officer of CH
Satisfaction of Charge [Sec 82]:
File Form No CHG 4 (+ Fee) | within 30 days | on payment
Delay filling -300 days | Company / Charge Holder | Additional Fees
SCN - If filed by the Company, the Registrar issues a notice to the holder of the charge not exceeding
fourteen days
If cause not shown - Deemed satisfaction | If cause shown – Takes note
And the Registrar intimates to the company, its status
No SCN: If mandatory attachment (Letter from the CH w.r.t. Payment) made with CHG 4
Power of registrar to make entries of satisfaction in absence of intimation from the company:
Tin case of failure for the company to send intimation to the Registrar on satisfaction of the charge,
The registrar may on receipt of satisfactory evidence of satisfaction register memorandum of
satisfaction.
The evidences may be
- (a) The debt for which the charge was given has been paid or satisfied in whole or in part
- (b) Part of the property or undertaking charged has been released from the charge
- (c) Part of the property or undertaking ceased to form part of the company’s property or
undertaking.
The Registrar may enter in the register of charges a memorandum of satisfaction. Section 83(2) states
that the Registrar shall inform affected parties within thirty days of making the entry in the registrar
of charges.
Certificate of registration of satisfaction of charge [Sec 82 / 83, Rule 8 ]: Form No.CHG-5
Notice of Charge [Sec 80 follows from Sec 77]:
- Any person acquiring such property, assets, undertakings or part thereof or any share or
interest
- Deemed / Complete knowledge of charge from the date the charge is registered
Register of Charges Maintained in ROC’s Office [Sec81]:
RoC maintains charge particulars of every company
Particulars maintained in MCA portal – Deemed Register
Open for Inspection on payment of fee [Physical mode at Registered Office– before MCA 21]
Details – Creation, Modification and Satisfaction
Intimation of appointment of receiver or manager [Sec 84]: File CHG.6 (+ fee)
- Within 30 days from the order of appointment
- Notice to the company and Registrar
- Registrar registers
- particulars of the receiver, person or instrument in the register of charges
- The appointed person (ceases to hold office) – Notice to the company and Registrar
Sahasri Singar Academy 4.39
Company’s Register of Charges [Sec 85, Rule 10]:
- Form No. CHG.7
- Updated entries w.r.t. creation, modification and satisfaction
- Authentication – Director / Secretary / authorised person
- Preserved permanently | Instrument creating a charge or modification – 8 years + Copy of
instrument
Contents:
i. Sl. No
ii. Charge ID
iii. Date of creation of charge / Acquisition
of property subject to charge
iv. Date of registration of creation of charge
v. Short description of the property charged
vi. Period and amount secured by the charge
vii. Names and addresses of the charge holder
viii. Particulars of the terms and conditions
ix. Description of the instrument creating /
modifying the charge
x. Date of modification of charge
xi. Date of registration of modification of charge
xii. Particulars of modification
xiii. Date of satisfaction and its registration
xvi. Facts and date of condonation of delay, if any
xvii. Reasons for delay in filing for registration of
creation, modification / satisfaction, if any
Inspection of Charges [Sec 85(2)]:
- Any member or creditor - without fees
- Other person | Fee | Reasonable restriction (AOA)
- Liquidator or any other creditor take into account the unregistered charges
Consequences of Non-Registration of Charge: Void as against the liquidator / CR
Case Law: ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd
- the ONGC had not been able to point out whether the so called charge, on the basis of which it
was claiming preference as a secured creditor, was registered or not.
- It was held that in the light of this failure, ONCG could not be treated as a secured creditor in
view of specific provisions of section 125 and the statutory requirement under the said section.
- This does not, however, mean that the charge is altogether void and the debt is not
recoverable.
- So long as the company does not go into liquidation, the charge is good and may be enforced.
Void against the liquidator:
- The liquidator on winding up of the company can ignore the charge and can treat the
concerned creditor as unsecured creditor.
- The property will be treated as free of charge i.e. the creditor cannot sell the property to
recover its dues.
Void against any creditor of the company:
- If any subsequent charge is created on the same property and the earlier charge is not
registered, the earlier charge would have no consequence and the latter charge if registered
would enjoy priority. In other words, the latter charge holder can have the property sold in
order to recover its money.
Case Law: Independent Automatic Sales Ltd. v. Knowles &Foster (1962) 32 Comp Cas
- Thus, non-filing of particulars of a charge does not invalidate the charge against the company
as a going concern.
Sahasri Singar Academy 4.40
- It is void only against the liquidator and the creditors at the time of liquidation.
- The company itself cannot have a cause of action arising out of non-registration
Punishment for Contravention [Sec 86]:
1. Contravention of Ch VI | Company: ₹ 5L | Officer: Fine - ₹ 50,000
2. Wilfully furnishing - False / incorrect information / knowingly suppresses any material information
| Attracts Sec 447
Particulars of Charges: To file with the Registrar
(a) date and description of instrument creating charge
(b) type of charge
(c) total amount secured by the charge
(d) date of the resolution authorising the creation of the charge (in case of issue of secured debentures
only)
(e) general description of the property charged
(f) in case of acquisition of property subject to charge, details relating to the existing charge on the
property so acquired
(g) a copy of the deed/instrument containing the charge duly certified or if there is no such deed, any
other document evidencing the creation of the charge to be enclosed
(h) principal terms and conditions and extent and operation of the charge and name and address of
the charge holder particulars of all joint charge holders is mandatory if number of charge holder is
more than one.
(i) In case the e-Form is to be filed for modification of charge, enter the charge identification number
allotted at the time of registration of the charge and such charge ID entered for modification should
be open charge ID and not satisfied
(j) Details relating to involvement of consortium finance is involved, joint charge is involved pari
passu ranking if applicable the charge holder(s)
(k) In case the asset charged is an immoveable property, the details like a ‘Plot Unit’ or ‘Dwelling
Interest’ and furnish the related details viz.,
– Evaluated Price of Asset as on Security Interest Creation date
– Nature of Property
– Plot ID number
– All other location related field details
– The fields for latitude and longitude are mandatory in the Charge Forms
Rectification by Central Government In Register Of Charges [Sec 87]:
- Power Delegated to Regional Director
- On satisfaction of
(a) Omission of intimation to the Registrar
(b) Omission / Misstatement – previous filling and entry made w.r.t. Sec 82 , 83
- Accidental / due to inadvertence / other sufficient cause
- it is not of a nature to prejudice the position of CR / SHs or shareholders of the company,
On the application of the company / person interested – Direct to extend the time for giving the
intimation and further rectified
Sec 87, Rule 12:
- Form CHG 8 | Apply to CG
Sahasri Singar Academy 4.41
- Direct – Rectification w.r.t. sec 82, 83 | Extension of time for satisfaction of charge, if not made
within 300 days
Case Law: Times Bank Ltd vs Shri Sharda Parmeshwari textiles Ltd.
The Central Government is empowered to permit rectification only in respect to mis-statement /
commission of particulars and No power to determination of validity of a charge / Consequent
deletion of a charge
Procedure for Registration of Creation / modification / Satisfaction of charges
A. Authorisation of the Board: Ensure
- SR
- Sec 180(1)(a) – to sell / lease / dispose – undertakings in favour of FIs / Banks / Lenders on
agreement
[Not applicable for Private company, Follow AOA]
- Borrowings in limits [NA – Private Company]
- BR passes
- Authorise Director / MD – to execute, sign, file and Register the charge documents
B. Filling of Forms:
E Form MGT 14 - for Resolution
SR (Sec 180(1)(a) & (c))[NA: Private Co. | if borrowings within the limits and approved by the
company]
BR (Sec 179 (3)) [NA: Private Co]
E form for Charge Creation / Modification:
CHG 1 – Other than Debuntures | CHG 9 – Debuntures within 30 days
[The order passed by the CG is to be filled in Form No. 28]
Attachments: certified True copy – Instrument evidencing a charge
Instruments – subject to charge
CHG 4 – On Satisfaction within 30 days
CHG 8 – Apply to CG [] Rectification / Extension of time – Reg]
Make entries in the Register
Registration of Charges under the SARFAESI Act, 2002 by Banking Company:
The Central Registry – A Central Registration System, Ch IV - SARFAESI Act.
Object:
- To create a public data base
- Encumbrances created on properties
- To secure loans and advances – Banks / FIs / Transactions of SARFAESI Act
Mandatory and Additional Compliance for registration of securitisation, asset reconstruction or
creation of security interest by the securitisation company or reconstruction company or the secured
creditor
Particulars of creation, modification or satisfaction of security interest on the CERSAI portal:
1. Immovable property - Mortgage other than mortgage by deposit of title deeds
2. Hypothecation - Plant and Machinery, stocks, debts including book debts or receivables, whether
existing or future.
3. Intangible assets – know - how, patent, copyright, trademark, license, franchise or any other
business or commercial right of similar nature
Sahasri Singar Academy 4.42
4. Any ‘under construction’ residential or commercial or a part thereof by an agreement or instrument
other than mortgage.
Note: Sec 20(4) - Registration with Central Registry is not in derogation of the provisions of the Act
and has no effect on priority and validity of the charge.
Sahasri Singar Academy 4.43
4.12. General Meetings Introduction:
Gathering / Assembly / Get together of persons for lawful business
SHs Meeting
A compulsory meeting
A right of the SH
A platform to express their will in regard to the management of the affairs of the company
Primary purpose: Opportunity | participate in the Meeting | Decision making (vesting
powers)
Every gathering / meeting is NOT a Company meeting
Intentional Missed out, invalidates the meeting
To take approval of certain businesses
General Meetings – “In Detail” – “3Cs & 2Ps”
Properly Called Properly Convened Properly Conducted
Proper Authority
Proper Notice
Proper Quorum
Proper Chairman
Proper Business
Proper Minutes
1. Called with Proper Authority and Proper Notice
(a) Proper Authority
BOD - AGM/ EGM
Member - EGM
Tribunal - AGM/ EGM
Not by single director /
individual
Sanctioned by BOD
(b) Proper Notice
21 clear days (48 hours)
Sec.8 Companies - 14 clear days
Contents: Date/ Place/ Day/ Time
Short notice – 95% consent from member
To Whom: Director/ Member [ LR/ OA] Auditor(s)
Invalidate– Intentionally [Accidental / Non-receipt]
2. Convened with Proper Quorum and Proper Chairman
a. Proper Quorum
Private – 2
Public (depending on number of members)
Number of members Upto 1000 1000 to 5000 More than 5000
Quorum 5 15 30
Sahasri Singar Academy 4.44
Note:
No Quorum necessary for Adjourned AGM
Quorum counts the Member present
EGM (by members) – Cancelled, if no Quorum
Representatives
• Representative - President / Governor
• Body corporate - BR authorization
Proxy - to attend & vote
Nature - Agent
Need not be a member (except Sec.8 company)
Upto 50 members & Aggregate > 10% share capital
Time limit - 48 hours before meeting
Notice with proxy form (member - Writing / Signed)
Non- Applicable: Company have no share capital
Do’s - Attend meeting
Don’ts – Not to speak, Vote on show off hands
Valid Revocation - Proxy not vote
Inspection: 3 days notice | hours before meeting till the start
b. Proper Chairman
AOA
Show off hands
Demand for poll
Chairman continue till then
3. Conducted with Proper Business
a. Proper Business
Business
Voting - Show off hands / Poll / Postal ballot (E-voting)
Resolution
Types of Business
i. Ordinary
Adoption of A/c’s
Dividend
Appointment / Re-Appiontment of director
Appointment of Auditor / Statutory Auditor
ii. Special – other than Ordinary
Explanatory statement
Compensate the benefit -
Director / Officer / Member /
KMP > 2% Paid up Capital
Sahasri Singar Academy 4.45
iii. Resolutions requiring Special Notice
As per Act / AOA
1% Voting power (or) > 5,00,000 Paid-up Capital
Notice by members to the company [Not earlier than 3 months but b/f 14 days]
Company to give notice to members b/f 7 days
Cases:
Appointment of Auditor other than retiring auditor
Not reappointing the retiring auditor
Removing a director before the term ends
Appointing a director at which the director is removed
Poll
1 Share = 1 Vote
Different votes may be casted
Chairman - Suo moto
Demand - 1/10th (atleast) / Paid-up share capital > 5,00,000
Scrutinizers
Resolution: Ordinary Resolution – Majority | Special Resolution - 3:1 [MGT-14 with 30 days]
Postal Ballot:
- By post / e mode / No voting personally
- Provide facility to the members
- NA: Ordinary Business | Directors / Auditor’s right to be heard at the meeting
- In the form of resolution (+explanatory statement)
- Prior notice – To receive assent / dissent
Special Cases:
- Object clause MOA alter
- Insert / Remove – AOA
- Change of reg office outside the local limits
- Change in objects (if money raised thro public and is untilised)
- Shares with Differential rights - Vote / Dividend
- Variation – w.r.t. voting / dividend – shares / debuntures
- Buy-back
- Small shareholder director
- Sale of whole / Part of Undertaking
- Loans / Guarantee / providing security -
- Exceeding 60% (paid-up share capital + FR + SP ) or 100% (FR +SP)
- Non – applicable - OPC / upto 200 members
Sahasri Singar Academy 4.46
Chairman’s Extra Vote: In the case of Tie-up
b. Proper Minutes
Summary
Including of all except chairman – defamatory / Immoral / Interest
Within 30 days (meeting held / Postal ballot)
Pages to be numbered
Presumption
ICSI – SS 2 [NA: OPC / notified companies]
Sign - Chairman / Death or disability – BOD
Penalty - 25,000 / Officer – 5,000 / Tampering - 2 years or 25,000 to 1,00,000
Annual General Meeting [AGM]
First AGM
• Within 9 months from the end of FY
• No need - in the year of
Incorporation
• Extension by Registrar
• Exempt OPC holding AGM
Subsequent AGM
• Within 6 months
• Every year
• Gap - 15 months
• Extension - 3 months
• No extension 1st AGM
When? Time: 9am to 6pm
• Not on a National Holiday
• Tribunal calls for AGM
• Penalty - 1,00,000 / 25,000 day
Sahasri Singar Academy 4.47
Extra-Ordinary General Meeting [EGM] shall be called by
BoD Member Tribunal
To execute the business:
By themselves
By Requisition of SHs
– 1/10th of paid-up share capital or 1/10th
voting power
1/10th Paid-up capital or 1/10th
Voting power
Propose a date (21 clear days)
To be held within 45 days
Not 45 days within 3 months
Member, Director -
Apply
Except: OPC
Miscellaneous:
1. Class Meeting
A SH meeting
To a particular class of SH
Rules of GM apply
Conducted to alter the changes of that respective class
Supported by Special Resolution
Mentioning in the AR is a must
2. Circulation of members’ resolution – Sec 111
On requisition in writing to the members
Proposed resolution
Signed by the requisitionist (2 or more copies) deposited at Reg Office
- If requires notice of resolution - not less than six weeks b/f meeting
- Other cases- Not less than 2 weeks.
Sum – deposited / tendered to meet the expenses of the Company
Call an AGM within 6 weeks (Although not deposited, deemed to be properly deposited)
NA: If CG declares a right | publicity on defamatory
Default attracts fine - company and office
Sahasri Singar Academy 4.48
4.13. Distribution of Profits – Dividend
Introduction:
Divisible profit - Profit / portion of profit | Legally distributed | Profits available for dividend to SHs
Note: All profits are not Divisible profit
Dividend –
A reward to a SHs | A share of the after- tax profit | A right and not an obligation
Distributed w.r.t. number / class of shares held by them
BoDs - Decides / recommends | Amount / timing | Current Earnings / Reserves (past earnings)
Requires SHs approval
Profit that shares with the SHs
Declared out of profit [If declared in absence, Director’s own pocket]
Distribution of Company’s Earnings
Inherits from the Company – Not from the act / MOA / AOA (it only regulates)
Right to claim arises only after declared
Not a dividend - Distribution of discount coupons [SS3]
Waiver of right to receive dividend – (Not in Act) AOA | full / part
Declared Dividend – Debt to a company | No revocation possible
Dividend Warrant – Warrant used to encash
Unpaid Dividend – Dividend not paid / claimed | Warrant not encashed
Interest and Dividend
Nature Interest Dividend
Meaning / Nature Money - Charge against profit Percentage / Appropriation of profit
To whom paid to Lenders, Crs , DH SH – Equity / Preference
Mandatory of profits Yes No
Rate Fixed Depends
Definition:
Dividend:
- Companies Act, 2013 [Sec 2(35)]: Includes Interim dividend
- SS3 – Distribution of any sums to members out of profits and wherever permitted out of free
reserves
Free Reserves [Sec 2 (43)]: Reserves available for distribution of dividend
Not a FR : unrealised gains | Notional gains | Revaluation of assets | Changes in carrying amount of
an A/L on measurement fair values
Sahasri Singar Academy 4.49
Types
I. Basis - Time
a. Final Dividend
- Dividend recommended by BoDs and declared by members at AGM [SS3]
- Declared dividend is a debt, which becomes enforceable
- Sec 134(3)(k) – State in Directors’ report
b. Interim Dividend
- Declared by BoDs between two AGMs [SS3]
- Follows same provisions as Final Dividend
II. Basis – Shares
a. Preference Shares
- Preferential right on payment of dividend
- Fixed amount / Fixed rate
- Not a debt – Not to sue for payment [Except: As per AOA, if company’s profit apply]
i. Cumulative Preference Shares:
- Fixed amount / rate
- Payable out of future profit if current year profits are insufficient
- Accumulates dividend
ii. Non – Cumulative Preference Shares:
- Fixed amount of dividend
- No accumulation of dividend
b. Equity Shares
- Any amount – based on level of profit and Company’s needs
- varies from year to year
- depends on Dividend policy & profits
- Paid after satisfying the rights of Preference SH.
Declaration of Dividend [Sec 123]:
Sec 51 – Pay dividend in proportion to the amount paid up on each share, if AOA authorizes
SS3 – Declared on recommendation of BoD at BM
Sahasri Singar Academy 4.50
Reg 43, SEBI (LODR) Regulations, 2015 – Listed Entity | To declare & Disclose – as per share basis
only
A. Sources of Dividend [Sec 123(10]:
a. Profits - related
- Out of profits (CY) after providing depreciation
- Out of Profits (PYs) after providing depreciation and undistributed
- Both of CY and PY
Note: In computation – Exclude
- unrealised gains
- Notional gains
- Revaluation of assets
- Changes in carrying amount of an A/L on measurement fair values
b. Money – CG /SG – in pursuance of Guarantee
[SS3 – Declaration of dividend only on repayment of deposits withinterest]
No declaration of dividend, if default (includes extended time given by Tribunal) exists in
- Redemption – Debuntures / Creation of DRR
- Redemption – preference Shares / Creation of CRR
- Payment of CYs / PYs declared dividend
- Repayment of Term loan – Bank / FIs
B. Transfer percentage of Profits to Reserves: CY | B/f declaration
C. Absence / Inadequacy of Profits: PYs Accumulated profits transferred to FR
Conditions:
1. Rate of dividend < Avg (rates of 3 PYs dividend)
2. Drawing from Accumulated profit < 1/10th (paid-up capital + FR as per latest financials)
3. Utilisation of drawn amount – To set off the losses
Note:
1. Balance of Reserves not to fall below 15% (paid-up capital) after withdrawal
2. NA – Govt Company
D. From FR only
E. Declaration of Dividend by set off of previous losses and depreciation against the profit of the
Company for the CY
F. Manner of providing depreciation: Schedule II of the Act
G. Declaration of interim dividend:
- Out of Surplus in P/L A/C
- Profits of FY –
Sahasri Singar Academy 4.51
- Profits in FY till the quarter preceeding the date of declaration (If incurred losses, Rate of
dividend < Avg (rates of 3 PYs dividend))
SS3: BoD to consider the financial results to satisfy the position w.r.t.
a. Full Year’s Depreciation
b. Tax including deferred Tax
c. Other anticipated loss
d. Dividend for preference shares
e. Loss – during CY and the immediate preceding quarter
Interim Dividend:
Rate of Dividend < Avg (Rate of 3 preceding years)
Not to be issued in case of loss / inadequacy of profit
H. Deposit in Special Account of a Schedule Bank [Sec 123 (4)]:
- includes Interim Dividend
- within 5 days
- NA – Govt Company, if holds entire share capital
SS3 – Deposit within 5 days and pay within 30 days | Intervening holidays to be included
I. Only to registered SHs [Sec 125(5)]: Paid to Registered SH | Banker | “to his order” | Pay in Cash
Note: Nidhi Company – Credit in Members A/c if not claimed within 30 days from the date of
declaration.
J. Payment of Dividend: Deposit in 5 days in Scheduled Separate Bank A/C | Pay within 30 days |
Include intervening holidays
K. Capitalization of Profits: Does not affect issue of Fully paid up Bonus Shares / paying up any
unpaid amount
L. Mode of Payment: In Cash / Cheque / Warrant / E mode
M. NA [Declaration / Payment] [Sec 123 (6)]: Non – Repayment of deposits: On failure of Sec 73 and
74
Sahasri Singar Academy 4.52
Unpaid Dividend A/C [Sec 124]:
A special A/C opened by the company in any Scheduled Bank [Sec 124(1)]
- “Unpaid Dividend A/C of Company Limited / Company (Private) Limited”
- Transfer
- Not paid / claimed dividend
- Within 30 days from the date of declaration
- Within 7 days (from 30 days)
Apply for payment of money [Sec 124 (4)]: To the company by that person
Details on Website [Sec 124(2)]:
- Within 90 days of transfer to unpaid dividend A/C
- Statement – Names / Last known address / Amount
- Website - Company’s / approved by CG
Effect of Non- Transfer [ Sec 124 (3)]: Interest @ 12% p.a.
Dividend and IEPF
Investor Education and Protection Fund [Sec 125]:
- CG’s establishment
- Credit [Sec 125(2)]:
a. Amount by CG – grants (after due appropriation made by Parliament by law)
b. Donations – CG / SG(s) / Company / Other Institution
c. Amount from Unpaid Dividend A/C as per Sec 124
d. Amount in CG’s General Revenue A/C (Sec 205A (5), The Companies Act 1956) and
remaining unpaid / Unclaimed
e. Amount in IEPF – Sec 205C, The Companies Act, 1956
Sahasri Singar Academy 4.53
f. Interest / other Income from Investments made from this fund
g. Amount received under Sec 38 (4)
h. Application money (for allotment) but due for refund
i. matured deposits with companies other than banking companies
j. matured debentures with companies
k. Interest accrued on the amounts referred to in clauses (h) to (j)
l. Sale proceeds - Fractional shares | Bonus Issue / Merger and amalgamation | 7 or
more years;
m. Unpaid / Unclaimed (7 or more years) Redemption amount on preference shares
n. such other amount as may be prescribed
- Rule 6(5), IEPF (Accounting, Audit, Transfer & Refund) Rules, 2016
i. Sec 125 (2) – Clauses (a) to (n)
ii. Shares as per Sec 124(6)
iii. Resultant benefits as per Clause (b)
iv. Grants / Fees / Charges received by the authority
v. Sums from other sources (by Govt’s decision)
vi. all Earned income of the Authority
vii. Amount
– Sec 10B (3), Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970,
– Sec 10B, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
- Sec 38A(3), SBI Act, 1955
- Sec 40A, SBI (Subsidiary Bank) Act, 1959
viii. all other sums of money collected by the Authority as envisaged in the Act
Not a part of the fund – Clauses (h) to (j) | Unless remained unclaimed/ unpaid for a period of
seven years from the date it became due for payment.
Utilisation of IEPF [Sec125(3)]:
a. Refund – Unclaimed dividends / matured deposits / matured debentures / application
money due for refund
b. Protection of Investor’s Education, Awareness and Protection
c. Distribution of any disgorged amount among eligible and identifiable applicants
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- Shareholders / Debenture-holders / Depositors
- suffered losses
- due to wrong actions by any person,
- orders made by the Court
d. Reimbursement of legal expenses | Class action suits | Sec 37 and 245 | members,
debenture-holders or depositors | Sanctioned by the Tribunal
e. Incidental purpose in accordance with Rule 3, IEPF Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016
Transfer to IEPF:
Money - [Sec 124 (5)]:
- Fund – Sec 125 (1)
- Money in Unpaid Dividend A/C + Interest
- Unpaid / unclaimed for 7 years
- Statement to the Fund’s Administrative Authority
- Evidence – Receipt
Shares – [Sec 124 (6)]:
- Transfer (Money + Shares) in the name of IEPF
- Form IEPF – 4, Rule 6(5), IEPF (Accounting, Audit, Transfer & Refund) Rules, 2016
- Claimant to follow procedure and submit documents for claiming
Offence & Penalty [ Sec 124 (7)]: Company – ₹ 5L- ₹ 25L | Officer ₹ 1L to ₹ 5L
Procedure for Transfer: Rule 5, IEPF (Accounting, Audit, Transfer & Refund) Rules, 2016
1. Remitted online | IEPF 1 | within 30 days becoming due
2. Transferred amount as per Sec 205C, 1956 Act, if failed to file the statement (even if not in excel
format)
- File Form No IEPF 1A + Excel template | within 60 days of notification
3. May also be remitted by EFT, as specified by CG
4. The authority enters the details in the Register (Physical / Electronic) | Each company, every Year |
Reconciles on monthly basis
5. Abstract of Receipts – By designated bank | Monthly | within 7 days
6. Maintain the record file (Rule 5(1)) | Same format | with Supporting documents | Authority’s
power to inspect
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7. Identification of Unclaimed amount
- WEE (Within 60 days of AGM / date of AGM to be held) and every year till the completion of 7
years period
- Furnish IEPF 2 and upload on its website – Own / Authority / specified by CG | Seperately for
each of the 7 years
- Contents: Names and Address | Nature of amount | Amount | Due date of transfer to IEPF |
others
Right to Dividend, Rights Shares and Bonus Shares to be held in Abeyance Pending Registration
of Transfer of Shares [Sec 126]:
Instrument of transfer delivered to company and shares not registered, shall
a. Transfer the dividend to Unpaid Dividend A/C , unless authorized by the registered holder in
writing to the transferee
b. Keep in abeyance, any offer of Right Shares (Sec 62 (1)(a)) and Issue of fully paid – up bonus shares
(Sec 123(5)(proviso 1))
Punishment for failure to distribute the dividends [Sec 127]:
- Unpaid / warrant not issued - declared dividend
- Within 30 days from the date of declaration
- Director: Imprisonment – 2 years | Fine ₹ 1000 / day | If continues- SI @ 18% p.a.
- Exceptions:
a. Reason for operation of law
b. Cannot comply the SH’s Directions (the same is communicated)
c. Dispute regarding the right to dividend
d. Lawful adjustment against any sum due
e. Not a company’s default
Nidhi Company – Dividend < ₹ 100 | Announced in Newspaper – Local language | Displayed in the
notice board
Dividend and Beneficial Owner (BO):
Sec 89 (9) – Dividend to member and not BO
Paid to BO on SHs instruction (Sec 123 (5) includes “to his order”)
Case Law: “Rameswar Lal Sanwarmal vs Commissioner of IT, Assam” – Deemed Dividend
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Dividend & other type of Companies:
Sec 8 Company – Sec 8(1) | Prohibited
Nidhi Company -
- Rule 18, Nidhi Rules, 2014 | < 25% or higher amount as approved by RD (recorded reasons
in writing)
- Conditions:
- Transfer equal amount to GR
- No default in repayment – Matured deposits + Interest
- In compliance with Nidhi’s Rules
Producer Company – Dividend as “Limited Return”
- Sec 581A (c), 1956 Act (not repealed by 2013 Act)
- Max rate of dividend as per AOA
- Sec 581E, 1956 Act: Patronage Bonus to members who are in participation of the business |
Cash / Shares / as decided in AGM
Patronage Bonus – Bonus issued after making the provision of payment of limited return and
reserves
Company limited by Guarantee: A company for Non-profit purpose
- Profits are reinvested and used for promoting its non-profit activities
- Act does not prohibit
- AOA provides that all the income of the company shall be applied for promotion
- No portion is paid / transferred as dividend / bonus / by way of profits to the members
Claiming of Unclaimed / Unpaid Dividend:
Apply to the company | within 7 years | Else dividend + shares transferred to IEPF
Procedure for declaration and Payment of Interim Dividend
1. Verify for authorisation – AOA, else alter
2. Issue Notice for BM– Not less than 7 days / shorter notice – urgent business
Content: Time / Date / Venue / Details of business
3. Listed Company – Notify SEs atleast 2 working days in advance (excluding the date of intimation &
meeting)
[Reg 29, SEBI (LODR) Regulations, 2015]
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4. @BM
a. - Satisfy the financial position | Earned adequate profits (after providing full year’s
depreciation)
- Personal liability for wrong declaration (proforma of P/L A/C )
- Provisions made for working expenses and depreciation
- In case of loss – Dividend < Avg (3 years dividend)
b. Quantum of dividend
c. entitilement
d. Closure of RoM for dividend payment and record date
e. Notice in Newspaper - atleast 7 days | reg closure
f. Open Separate Bank A/C
g. Printing of dividend warrants
h. Authority to sign the warrants
j. Pass a resolution – Equity Shares
k. Interim dividend - Preference Shares (generally paid annually)
5. Listed Company – Imm within 30 mins of BM | after close of market hours | + Financial position
[Reg 30, SEBI (LODR) Regulations, 2015]
5. Listed Company
- Publish notice (atleast 7 days before) of book closure in Newspaper
- Notice in advance
- Recommend / Declare dividend atleast 5 working days before the record date
- Time gap between 2 Book Closure dates: atleast 30 days
- On per share basis only
7. Close – RoM and Share Transfer Register
8. BM – Approve Registration of Transfer / transmission (lodged prior to book closure) and dispatch
share certificates to the transferees
9. Round off to nearest rupee
10. Open “Interim Dividend A/C of _____” and deposit within 5 days | Give authority to bank to
honor warrants
11. Listed company – Pay thro RTI & STA | ECS (Local / Regional / National), NEFT
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Maintain Details
- Relevant bank details from the depositories and investors
- Physical Payment Instructions (In case of failure / unavailability of MICR, IFSC) | Mandate –
Bank A/C details
12. Make arrangements with other banks (as determined by SEs) for payment of dividends at par
13. Prepare a statement of SH – Name | Ledger Folio No | No of shares | Dividend payable
14. w.e.f. AY 2021-2022, Dividend from Domestics Company is taxable in the hands of the SHs | NO
DDT
15. Dividend Warrants
Printing – Sufficient no (in consultation with Banker) | Approval from RBI for MICR facility
Signing authorized person
16. No RBI approval is required for payment of dividend to shareholders abroad, in case of
investment made on repatriation basis.
17. List of Members - Two copies [1. Self - sticking labels | 2. To secure receipt from the Post Office] |
Names & Addresses
18. For the shares for which transferred before book closure but not registered, keep in “Unpaid
Dividend A/C ___” unless authorization
19. Dispatch Dividend warrants within 30 days | Joint SHs – first named
20. Send sufficient number of cancelled dividend warrant forms with MICR code allotted by the RBI,
to the bank for circulation to the branches where the dividend warrants will be payable at par.
21. Instructions to all the specified branches of the bank that dividend should be paid at par should be
sent by the Bank
22. Publish a Company notice in a newspaper – to give effect for dividend warrants |To get in touch
in 15 days if not received
23. In case of receipt after expiry of currency / lost in transit, Issue bank cheques and / or cheques
(after satisfying that it is not encashed)
24. Arrangements for transfer to “Unpaid dividend A/C of _______” within 7 days after expiry of 30
days.
25. Confirm interim dividend in the next Annual General Meeting.
Procedure for Declaration and Payment of Final Dividend
1. Issue Notice for BM - Contents: Time / Date / Venue / Details of business
2. Listed Company – Notify SEs atleast 2 working days in advance (excluding the date of intimation &
meeting)
[Reg 29, SEBI (LODR) Regulations, 2015]
3. Hold BM
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a. Approve the annual accounts
b. Recommend – Quantum / Source of dividend
c. AGM – Time / Date / Venue
d. Approve Notice of AGM | Authorize CS / competent person to issue notice
e. Closure of RoM / Share transfer Registers [Sec91 and SEBI (LODR) Reg, 2015]
Listed Company – the date should follow a holiday | not to clash with clearance program (& consult)
5. Transfer to reserves (% as it considers appropriate)
6. Listed Company – Intimate to SE | Imm within 30 mins of BM | Dividend + Appropriation +
Sources
[Reg 29 & 30, SEBI (LODR) Regulations, 2015]
7. Listed Company
- Publish notice (atleast 7 days before) of book closure in Newspaper
- Notice in advance
- Recommend / Declare dividend atleast 5 working days before the record date
- Time gap between 2 Book Closure dates: atleast 30 days
- On per share basis only
8.Declare and disclose the dividend on per share basis only.
[Reg 43, SEBI and Sec 51 – Not to forfeit unclaimed dividends b/f the claim becomes debarred by law,
shall be annulled in appropriate cases]
9. Listed Company – Top 500 listed entities | market capitalization
- Formulate a dividend policy | Disclose in ARs and websites
- Include parameters:
- Circumstances that SHs may or may not expect dividend
- Financial parameters
- Internal / Extetrnal factors
- Policy to use retained earnings
- parameters to adopt with various classes of shares
[In case of change / addition of above – disclose in the AR and website]
10. Close – RoM and Share Transfer Register
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11. Amount of Dividend – Directors’ Report - As appropriation of Profits | B/S – “Proposed
Dividend” (“Current Liabilities & Provision – “Provisions”)
12. BM – Approve Registration of Transfer / transmission (lodged prior to book closure) and mail
share certificates to the transferees
13. Hold AGM | Pass OR | SHs cannot declare the higher dividend than the Board’s
recommendation.
Note:
- No further declaration of dividend at an EGM (even though no provisions exists on the same)
- Pro-rata basis
[A method of dividing something between a number of participants in proportion to some factor]
- Preference Shares – fixed rate
- Paid proportionately to the amounts paid / credited as paid on the shares. But shall rank for
dividend [Sch I, Table F, Article 83(3)]
14. Prepare a statement of SH – Name | Ledger Folio No | No of shares | Dividend payable
15. w.e.f. AY 2021-2022, Dividend from Domestics Company is taxable in the hands of the SHs | NO
DDT
16. Round off to nearest rupee
17. Open “Dividend A/C of _____” and credit within 5 days
18. Listed company – Pay thro RTI & STA | ECS (Local / Regional / National), NEFT
Maintain bank details from the investors
19. Dividend Warrants
Printing – Sufficient no (in consultation with Banker) | Approval from RBI for MICR facility
Signing authorized person
20. No RBI approval is required for payment of dividend to shareholders abroad, in case of
investment made on repatriation basis.
21. List of Members - Two copies [1. Self - sticking labels | 2. To secure receipt from the Post Office] |
Names & Addresses
22. For the shares for which transferred before book closure but not registered, keep in “Unpaid
Dividend A/C ___” unless authorization
23. Dispatch Dividend warrants within 30 days | Joint SHs – first named
24. Send sufficient number of cancelled dividend warrant forms with MICR code allotted by the RBI,
to the bank for circulation to the branches where the dividend warrants will be payable at par.
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25. Instructions to all the specified branches of the bank that dividend should be paid at par should be
sent by the Bank
26. Publish a Company notice in a newspaper – to give effect for dividend warrants |To get in touch
in 15 days if not received
27. In case of receipt after expiry of currency / lost in transit, Issue bank cheques and / or cheques
(after satisfying that it is not encashed)
28. Arrangements for transfer to “Unpaid dividend A/C of _______” within 7 days after expiry of 30
days.
Procedure for declaration of dividend out of reserves
1. BM
- Issue notice
- Take decision because of inadequacy / absence of profits
- Fix – Date / Time / venue for AGM
- Authorize CS / other Competent person
2. Ensure compliance of Companies (Declaration and Payment of Dividend), Rules 2014
3. Calculation purpose – Net profit after tax is alone considered
4. Computation Purpose: Include: Development Rebate Reserve | Exclude – All items of Capital
Reserves (Revaluation Reserve)
5. Listed Company – Inform SE within 30 mins of closure of BM
6. Issue notice of AGM – 21 clear days | Hold the meeting and pass resolution
7. Listed Company – Forward notices copies and AGM proceedings to SE
8. Open separate bank account and credit the amount within 5 days of declaration of dividend
9. Issue dividend warrants within 30days from the date of declaration of dividend
10. Follow other steps from the declaration of final dividend