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CORPORATE AND CAPITAL
MARKET LAWS
National Stock Exchange of India Limited
4th
Floor, Jeevan Vihar Building, Parliament Street, New Delhi – 110 001

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Table of Contents
Unit 1
Chapter 1 Company Incorporation in India 3
Chapter 2 Prospectus, Issue and Allotments of Shares 35
Chapter 3 Share Capital and Debentures 66
Chapter 4 Management & Control, and Winding up of companies 84
Chapter 5 Genesis and Development of Regulatory framework 115
of Indian Capital Market
Chapter 6 The Securities Contracts (Regulation) Act, 1956 126
Unit 2
Chapter 7 The Securities and Exchange Board of India Act, 1992 158
Chapter 8 Depositories 176
Unit 3
Chapter 9 SEBI (Prohibition of Fraudulent and Unfair Trade Practices 219
Relating To Securities Market) Regulations, 2003 &
SEBI (Prohibition of Insider Trading) Regulations, 1992
Chapter 10 SEBI (Portfolio Managers) Regulations, 1993 240
Chapter 11 SEBI (Underwriters) Regulations, 1993 261
Unit 4
Chapter 12 SEBI (Ombudsman) Regulations, 2003 274
Chapter 13 Compliances of Listing Agreement 289
Chapter 14 SEBI (Disclosure and Investor Protection) Guidelines, 2000 311

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Chapter 1
Company Incorporation in India
INTRODUCTION
As you are aware, India is one of the fastest growing economies and most attracted
investment destination of the world. It is important for you to know different types of business
entities that are allowed in India to do business. The following types of business entities are
available for Indian resident doing business by Indian legal framework:
 Proprietorship
 Partnership firm
 Limited Liability Partnership
 Private Limited Company
 Public Limited Company
In addition to the above legal entities, the following types of entities are available for
foreign investors/foreign companies doing business in India:
 Wholly owned Subsidiary Company
 Joint Venture Company
 Liaison Office/Representative Office
 Project Office
 Branch Office
Other forms of business entities which are beyond the realms of this guide are
 Co-operatives
 Joint Hindu Family Business
Although we have various types of business entities as mentioned above, we will
focus the kind of companies that can be promoted and registered under the Companies Act
1956, for the rest of course.There are three basic types of companies‘ viz. Private Limited
Companies, Public Limited Companies, and Producer companies. You could classify the
companies from the point of incorporation and liability. Let us classify the companies from
the point of incorporation:

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A. Classification on the basis of Incorporation: There are three ways in which
companies may be incorporated.
1. Chartered Companies: A company formed, incorporated and legitimised by the
grant of a charter by the Crown is called a Chartered Company. It is regulated by
that Charter. The East India Company, British South Africa Company, and the
Chartered Bank are examples of Chartered Companies.
2. Statutory Companies: A company formed and incorporated byspecial Act of
Parliament or State Legislature. The provisions of the Companies Act, 1956 do
not apply to them. Examples of these types of companies are Reserve Bank of
India (RBI), Life Insurance Corporation of India (LIC), and so on.
3. Registered Companies: The companies that are incorporated under the
Companies Act, 1956 by getting themselves registered with Registrar of
Companies (ROC) fall under this category.
B. Classification on the basis of Liability: Under this category, there are three types of
companies:
1. Unlimited Companies: In this type of company is being related uncommon. The
membersare liable for the company's debts in proportion to their respective interests in
the company and their liability is unlimited. These types of companies may or may not
have share capital. It may be either a public company or private company.
2. Companies limited by guarantee:Usually non-profit organisation such as charities,
community projects, clubs, societies and other similar bodies that need legal personality
would prefer to incorporate under this category. A company that has the liability of its
members limited to such amount as the members may respectively undertake, by the
memorandum, to contribute to the assets of the company in the event of winding-up, is
known as a company limited by guarantee. The members of a guarantee company are,
in effect, placed in the position of guarantors of the company's debts up to the agreed
amount. It does not have a share capital or shareholders, but members who act as a
guarantor. Further, they do not distribute their profits to their members, but they either
retain them within the company or use them for some other purpose.
3. Companies limited by shares: A company that has the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by
them is termed as a company limited by shares. Companies limited by shares are by far
the most common and may be either public or private.
C. Other Forms of Companies: in addition to the above, there are six types of companies
namely, Associations not for profit having licence under Section 25 of the Act;

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Government Companies; Foreign Companies; Holding and Subsidiary Companies;
Investment Companies; and Producer Companies.
In India, incorporation of a company is governed by the Companies Act 1956. It is the
most important part of legislation that empowers the central government to regulate the
formation, financing, functioning and winding up of companies. This act is applies to the
companies that are registered under this act. However, it does not apply to Universities, co-
operative societies, unincorporated trading, and other societies. The incorporation
procedures are same all over India. This act lays down the set of rules for the establishment
of private or public limited company in India. Let us discuss the definition of private and
public limited companies according to the Companies Act 1956.
Definition
In this section, let us discuss the broad definition of different types of companies.
PRIVATE LIMITED COMPANY: U/s 3(1), a private company means a company, which has
a minimum paid-up capital of Rs.100,000 (rupees one lakh only) or such higher paid-up
capital as may be prescribed, and its articles:
a. Restricts the right to transfer its shares, if any;
b. Limits the number of its members to 50 not including—
i. persons who, are in the employment of the company; and
ii. persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to
be members after the employment ceased;
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of,
the company; and
d. Prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.
PUBLIC COMPANY: U/S 3 (1) (iv), a public company means a company which-
a. Is not a private limited
b. Has a minimum of paid-up capital of Rs.5 lakh rupees or higher as it is prescribed
c. Private company which is a subsidiary of a company which is not a private company.
d. Should consist of not less than 7 members which is registered under the Act.

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e. Can invite the public to subscribe for any shares in, or debentures of, the company.
Moreover, the shares and debentures of a public limited company may be quoted on
a stock exchange.
LIMITED COMPANY: Section 2(23) defines 'Limited Company'. It means a company limited
by shares or by guarantee. In case of limited company, the liability of the members may be
limited to the nominal value of the shares held by them in the event of winding up of the
company. On the other hand, the liability of the members to the limited by guarantee may be
limited to the amount that they have guaranteed to contribute in the event of winding up of
the company.
Companies Limited by Shares: Under Section 12(2)(a), a company limited by shares is a
registered company. The members‘ liability is limited to the amount that is mentioned in the
Memorandum of Association. For example, the share price mentioned in the MoA is Rs.100.
Accordingly, no member of a company can be called upon to pay more than the face value.
However, if a member is paid fully, he/she has nothing more to pay. On the other hand, a
member is paid partly, the unpaid portion is payable at any time during the existence of the
company of a call being made, whether the company is a going concern or is being wound
up. This is the most common form of business entity in existence.
Companies Limited by Guarantee: As discussed above, usually no-profit organisations
are registered under this category.A special feature of this type of company is that the
liability of members to pay their guaranteed amounts arises only when the company has
gone into liquidation, not when it is a going concern.
UNLIMITED COMPANY:As per Section 12(2) (c) defines an unlimited company refers to a
company is not having any limit on the liability of its members. Therefore, the maximum
liability of the member of such a company might stretch up to the full extent of their assets to
meet the obligations of a company by contributing to their assets. However, the members of
an unlimited company are not liable directly to the creditors of the company, as in the case of
partners of a firm. Further, the liability of the members is only towards the company and in
the event of liquidation only, not during the existence. An unlimited company may or may not
have share capital. If it has a share capital, it has to be stated the numbers of members in
the articles of association and is to be registered u/s 27(1).Under Section 32, a company
registered as an unlimited company may subsequently convert itself as a limited company,
subject to the provision that any debts, liabilities, obligations or contracts incurred or entered

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into, by or on behalf of the unlimited company before such conversion are not affected by
such changed registration.
ASSOCIATION NOT FOR PROFIT: Under Section 13(1)(a), it is essential that the company
registered under the limited liability shall have the last words as ‗Limited‘. However, Section
25 permits the registration of associations not for profit with limited liability without being
required to use the word ‗Limited‘ or the words ‗Private Limited‘ after their names. This is of
great value to companies not engaged in business such as bodies pursuing charitable,
educational or other purposes of great utility. Typically, the licence for those companies shall
be granted by the Central Government. The Central Government may grant such a licence if:
1. it is intended to form a company for promoting commerce, art, science, religion,
charity or any other useful object; and
2. the company prohibits payment of any dividend to its members but intends to apply
its profits or other income in promotion of its objects.
The company is registered without paying any stamp duty on its Memorandum and Articles.
On registration, the Association enjoys all the privileges of a limited company, and is subject
to all its obligations, except, those in respect of which exemption by a special or general
order is granted by the Central Government. A licence may be granted by the Central
Government under Section 25 of the Act on such conditions and subject to such regulations
as it thinks fit and those conditions and regulations shall be binding on the body to which the
licence is granted. The Central Government may direct that such conditions and regulations
shall be inserted in the Memorandum, or in the Articles, or partly in the one and partly in the
other. This type of company cannot alter the provisions of its Memorandum with respect to
its objects except with the previous approval of the Central Government in writing.
GOVERNMENT COMPANIES: Section 617 defines a Government company as any
company in which not less than fifty one per cent of the paid-up share capital is held by the
Central Government, or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments. A subsidiary of a Government
company is also treated as a Government company.
The following are the exemptions to Government Companies from applicability of
Notified Sections/ Provisions of the Companies Act, 1956:
Section 620 of the Companies Act, 1956 empowers the Central Government to direct by
notification in the Official Gazette that any of the provisions of the Act shall not apply to
Government companies or apply only with such exceptions, modifications and adaptations,

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as may be specified in the notification. However, the provisions of Sections 618, 619 and
619A mandatorily apply to such companies.In exercise of its powers under the above
mentioned Section 620, the Central Government has issued notifications modifying the
operation of different provisions of the Companies Act to Government companies some of
which are as under:
1. Sections 17, 18, 19 and 186 shall apply to a Government company with the substitution
of the words ‗Central Government‖ for ―Court/CLB‖ wherever it occurs; and Section
166 shall apply with the substitution in the second proviso to Sub-section (1) of the words
‗Central Government‗ for the word ―Registrar, and in Sub-section (2) of Section 166
with the substitution of the words ―such other place as the Central Government may
approve in this behalf‖ for the words ―some other place within the city, town or village
in which the registered office of the company is situated".
2. Further Government companies are permitted to delete the word ‗Private‖ from their
name (Sections 21 and 23).
3. The Central Government has made various exemptions in the application of the
provisions of the Act to Government companies. Government companies have been
exempted from the following sections:
a. Sections 255, 256 and 257 of the Act pertaining to appointment and retirement of
directors in companies wholly owned by the Government.
b. Sections 198, 259, 268, 269, 309, 310, 311, 387 and 388 of the Act pertaining to
appointment of managing/whole-time directors and manager and their
remuneration.
c. Proviso to Sub-section (1) of Section 297 of the Act requiring the previous
approval of the Central Government in respect of contracts entered into by it with
any other Government company.
d. Section 187C requiring disclosure of beneficial interest in shares of a company.
e. Section 205A requiring transfer of unpaid dividend to a special dividend account
shall not apply to a Government company in which the entire paid-up share
capital is held by the Central Government or by any state Government or
Governments or by the Central Government or by any State Government or
Governments or by the Central Government and one or more State
Governments. This is in supersession of an earlier notification No. G.S.R. 231
dated the 31st January, 1978 [G.S.R. 580(E)].
f. Section 295 of the Act shall not apply to a Government company provided that
such company shall obtain the approval of the Ministry or Department of the
Central Government which is administratively in-charge of the company or, as the

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case may be, the State Government. This is in supersession of an earlier
notification No. S.O. 729 dated 24th May, 1978 [G.S.R. 581(E)].
g. Sections 43A*, 149(2A), 205B, 263 to 266, 307, 308, 316, 317 and 386 of the Act
shall not apply to a Government company in which the entire paid-up share
capital is held by the Central Government or by any State Government or
Governments or by the Central Government and one or more State Governments
[G.S.R. 577 (E)].
h. Sections 165, 187D*, 294 and Sub-sections (2) and (3) of Section 294AA of the
Act shall not apply to a Government company [G.S.R. 578(E)].
i. Section 108 of the Act shall not apply to a Government company [G.S.R. 579(E)].
j. It has further been notified that the following sections of the Companies Act, 1956
shall apply to Government companies with the modification that instead of Court
the application will be made to the Central Government.
i. Sections 100, 101, 102 and 103 of the Act regarding reduction of capital by a
company.
ii. Sections 391, 392 and 394 of the Act pertaining to amalgamation of companies.
b. Therefore, the legal status of a Government company is not affected because the
share capital of the company is contributed by the Central or State Government
and all its shares are held by the President of India or Governor of a State or
certain nominated offices of the Government.
When the Government engages itself in trading ventures, particularly as Government
companies under the company law, it does not do so as a State but it does as in essence as
a company. A Government company is not a department of the Government.
FOREIGN COMPANIES: A foreign company is a company which is incorporated in a
country outside India, under the law of that (other) country and has a place of business in
India. Sections 591 to 602 of the Act deal with such companies. Foreign companies are of
two classes namely:
1. Companies incorporated outside India, which have established a place of business in
India after April 1, 1956; and
2. Companies incorporated outside India, which established a place of business in India
before that date and continue to have an established place of business in India.
It is essential under section 592 of the Act that every foreign company which establishes a
place of business in India must file with the Registrar of Companies (ROC) at New Delhi and
also with the ROC of the respective state in which such place of business is suited. The
company should submit all the relevant documents such as MoA, registered address,
nationality and so on.The same requirements as regards accounts and their filing and as

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also the registration of the charges created in India are applicable to them, as to Indian
companies. No application form for shares or debentures can be issued in India without a
copy of the prospectus. Section 584 of the Companies Act, 1956 provides further that when
a foreign company, which has been carrying on business in India, ceases to carry on such
business in India, it may be wound up as an unregistered company under Sections 582 to
590 of the Act, even though the company has been dissolved or ceased to exist under the
laws of the country in which it was incorporated.
HOLDING AND SUBSIDIARY COMPANIES: „Holding‘ and ‗Subsidiary‘ companies are
relative terms. A company is a holding company of another if the other is its subsidiary.
According to Section 4 of the Companies Act, a company shall be deemed to be subsidiary
of another, if and only if:
(a) that other controls the composition of its Board of directors; or
(b) that other:
(i) where the first-mentioned company is an existing company in respect of
which the holders of preference shares issued before commencement of the
Companies (Amendment) Act 1960, have the same right in all respects as the
holders of equity shares, exercises or controls more than half of the total
voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than
half in the nominal value of its equity share capital, or
(c) the first mentioned company is a subsidiary of any company which is the other‗s
subsidiary.
To illustrate, company A Limited is a subsidiary of company B if, and only if:
1. company B (holding company) controls the composition of the Board of directors of
company A (subsidiary); or
2. company B (holding company) controls more than 50% voting power of company A
(subsidiary); or
3. Company B (holding company) holds more than half in the nominal value of equity
shares of company A (subsidiary); or
4. if company A (the subsidiary) is a subsidiary of company C which is subsidiary of
company B, then the company A is also a subsidiary of company B.
5. If Company D is the subsidiary of company A then D will be the subsidiary of
company C and also of company B.
INVESTMENT COMPANIES: The principal business of these types of companies consists in
acquiring, holding and dealing in shares and securities and thereby earning income by way

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of interest, dividend etc. In addition, they earn income not only through the acquisition and
holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at
higher prices and to sell with a view to buy later on at lower prices. If a company is engaged
in any other business to an appreciable extent, it will not be treated as an investment
company. The following two sets of legal opinions are quoted below as to the meaning of an
investment company:
According to one set of legal opinion, an "investment company" means company which
acquires and holds shares and securities with intent to earn income only from them by
holding them. On the other hand, another school of legal opinion holds that ―an Investment
Company means a company, which acquires shares and securities for earning income by
holding them as well as by dealing in such shares and other securities.According to Section
2(10A) of the Insurance Act, 1938, an investment company means a company whose
principal business is the acquisition of shares, stocks, debentures or other securities.
PRODUCER COMPANIES: Companies (Amendment) Act, 2002 had added a new Part IXA
to the main Companies Act, 1956 consisting of 46 new Sections from 581A to 581ZT.
According to the provisions as prescribed under Section 581A(l), a producer company is a
body corporate having objects or activities specified in Section 581B and which is registered
as such under the provisions of the Act. The membership of producer companies is open to
such people who themselves are the primary producers, which is an activity by which some
agricultural produce is produced by such primary producers.
Objects of Producer Companies:In terms of Section 581B (1) the objects of a producer
company registered under this Act may be all or any of the following matters:
A. Production, harvesting, procurement,
grading, pooling, handling, marketing, selling, export of primary produce of the
members or import of goods or services for their benefit.
B. Processing including preserving, drying,
distilling, brewing, venting, canning and packaging of the produce of its members.
C. Manufacturing, sale or supply of machinery,
equipment or consumables mainly to its members.
D. Providing education on the mutual assistance
principles to its members and others.
E. Rendering technical services, consultancy
services, training, research and development and all other activities for the promotion
of the interests of its members.

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F. Generation, transmission and distribution of
power, revitalisation of land and water resources, their use, conservation and
communications relatable to primary produce.
G. Insurance of producers or their primary
produce.
H. Promoting techniques of mutuality and
mutual assistance.
I. Welfare measures or facilities for the benefit
of the members as may be decided by the Board.
J. Any other activity, ancillary or incidental to
any of the activities referred to in clauses (a) to (i) above or other activities which may
promote the principles of mutuality and mutual assistance amongst the members in
any other manner.
K. financing of procurement, processing,
marketing or other activities specified in clauses (a) to (j) above, which include
extending of credit facilities or any other financial services to its members.
Further, under Section 581B(2) it has also been clarified that every producer company shall
deal primarily with the produce of its active members for carrying out any of its objects
specified above.
FINANCE COMPANIES: According to Rule 2(cc) of the Companies (Acceptance of
Deposits) Rules, 1975, a Financial Company‗ means a non-banking company which is a
financial institution within the meaning of clause (c) of Section 45-I of the Reserve Bank of
India Act, 1934 (2 of 1934). A Financial institution has been defined under Section 45-I of the
Reserve Bank of India Act, 1934 as follows:
Financial institution means any non-banking institution which carries on as its
business or part of its business any of the following activities:
(i) the financing, whether by way of making loans or advances or otherwise, or any
activity other than its own;
(ii) the acquisition of shares, stocks, bonds, debentures or securities issued by a
Government or local authority or other marketable securities of the like nature;
(iii) the letting or delivery of any goods to a hirer under hire-purchase agreement as
defined in clause (c) of Section 2 of the Hire-Purchase Act, 1972;
(iv) the carrying on of any class of insurance business;

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(v) the managing or conducting or supervising as foreman, agent or in any other
capacity, of chits as defined in any law which is for the time being in force in any
state, or any business, which is similar thereto;
(vi) collecting for any purpose or under any scheme or arrangement by whatever name
called, monies in lump-sum or otherwise, by way of subscription or by sale of units,
or other instruments or in any other manner and awarding prizes, gifts, whether in
cash or in kind or disbursing monies in any other way to persons from whom monies
are collected or to any other person, but does not include any institution, which
carries on as its principal business:
a. agricultural operations; or
Industrial activity; or
b. the purchase or sale of any goods (other than securities) or the providing of
any services; or
c. the purchase, construction or sale of immovable property, so, however, that
no portion of the income of the institution is derived from the financing of
purchases, constructions or sales of immovable property by other persons;
Explanation: For the purposes of this clause, ―industrial activity means any activity
specified in sub-clauses (i) to (xviii) of clause (c) of Section 2 of the Industrial Development
Bank of India Act, 1964 (18 of 1964).
d. firm means a firm as defined in the Indian Partnership Act, 1932 (9 of 1932);
e. non-banking institution‖ means a company, corporation or co-operative
society;
f. non-banking financial company means—
i. a financial institution which is a company;
ii. a non-banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
iii. Such other non-banking institution or class of such institutions, as the
bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
A non-banking institution has been defined in clause (e) of the said section to mean a
company, corporation, co-operative society or firm. Thus, a financial company is a company
or corporation or co-operative society or firm which is a financial institution within the
meaning of clause (c) of Section 45-I of the Reserve Bank of India Act, 1934.

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PUBLIC FINANCIAL INSTITUTIONS: Section 4A (1) of the Companies Act, 1956 provides that
the following financial institutions shall be regarded, for the purposes of this Act, as a public
financial institution:-
(i) the Industrial Credit and Investment Corporation of India Limited, a company formed
and registered under the Indian Companies Act, 1913;
(ii) the Industrial Finance Corporation of India, established under section 3 of the
Industrial Finance Corporation Act, 1948;
(iii) the Industrial Development Bank of India, established under section 3 of the
Industrial Development Bank of India Act, 1964;
(iv) the Life Insurance Corporation of India, established under section 3 of the Life
Insurance Corporation Act, 1956;
(v) the Unit Trust of India, established under section 3 of the Unit Trust of India Act,
1963;
(vi) the Infrastructure Development Finance Company Limited, a company formed and
registered under this Act.
Sub-section (2) of Section 4(A) of the Companies Act, 1956 empowers the Central
Government to specify any other institutions, as it may think fit, to be a public financial
institution by issuing a notification in the Official Gazette. However, no institution shall be so
specified unless:
(i) it has been established or constituted by or under any Central Act; or
(ii) not less than 51% of the paid-up share capital of such institution is held or controlled
by the Central Government.
Criteria for declaring an institution as Public Financial Institution: Earlier the Central
Government was declaring an institution as Public Financial Institution, if it meets any one of
clause (i) & (ii) of Sub-Section (2) of Section 4A of the Act. Now, Central Government has
framed the following criteria for declaring any financial institution as Public Financial
Institution under Section 4A of the companies Act, 1956 (MCA General Circular No. 34/2011
dated 02.06.2011):-
i. A company or corporation should be established under a special Act or the
Companies Act being Central Act;
ii. Main business of the company should be industrial/infrastructural financing;
iii. The Company must be in existence for at least 3 years and their financial statement
should show that their income from industrial/infrastructural financing exceeds 50%
of their income;
iv. The net worth of the company should be Rs.1000 Crore;

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v. Company is registered as Infrastructure Finance Company (IFC) with RBI or as an
Housing Finance Company (HFC) with National Housing Bank;
vi. In the case of CPSUs/SPSUs, No restrication shall apply with respect to financing
specific sector(s) and net-worth.
So far we have discussed the definition of different types of companies. Now let us
focus about Promoters.
PROMOTERS
Commencement of the business is possible only it receives the Certificate of
Incorporation. However, someone lays the ground work for the company before the
company gets incorporation. The person(s) who take the responsibility of starting the
company are called as Promoter (s).The Companies Act, 1956, does not define the word
'promoters' but the word promoter has been used in Sections 62, 69, 76, 478 and 519 of the
Companies Act, 1956. According to SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009, ―promoter includes:
(i) the person or persons who are in control of the issuer;
(ii) the person or persons who are instrumental in the formulation of a plan or
programme pursuant to which specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters:
In addition to the above, it is important you to know that
 Provided that a director or officer of the issuer or a person, if acting as such
merely in his professional capacity, shall not be deemed as a promoter:
 Provided further that a financial institution, scheduled bank, foreign
institutional investor and mutual fund shall not be deemed to be a promoter
merely by virtue of the fact that ten per cent. or more of the equity share
capital of the issuer is held by such person;
 Provided further that such financial institution, scheduled bank and foreign
institutional investor shall be treated as promoter for the subsidiaries or
companies promoted by them or for the mutual fund sponsored by them;

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Position of a Promoter:it may be difficulty to describe about promoter, but his legal position
is very clear. A promoter is neither an agent of, nor a trustee for, the company, because it is
not in existence. However, when he acts with the company in mind, he/she stands in a
fiduciary position towards the company. Lord cairns have correctly stated the position of a
promoter in Erlanger v. new sombrero phosphate co. (39 LT 269) ―The promoters of a
company stand undoubtedly in a fiduciary position. They have in their hands the creation
and shaping of the company. They have the power of defining how, and when, and in what
shape and under what supervision, it shall start into existence and begin to act as a trading
corporation.‖Similarly, it was observed in Lagunas Nitrate Co. v. Lagunas Syndicate, (1899)
2 Ch. 392 that "promoters" stand in a fiduciary relation to the company they promote and to
those persons whom they induce to become shareholders in it".
There are no provisions regarding the duties of promoters in Companies Act.
However, Section 62, 63 and 542 only impose liabilities on promoters for untrue statement in
the prospectus and fraudulent trading. There are two fiduciary duties of a promoter, namely:
1. A promoter cannot make either directly or indirectly, any profit at the expense of the
company he promotes, without the knowledge and consent of the company and that
if he does so, in disregard of this rule, the company can compel him to account for it.
In relation to disclosure, it may be noted that part disclosure is worse than none. A
promoter is not forbidden to make profit but he is barred from making any secret
profit. He/she may make a profit out of promotion with the consent of the company in
the same way as an agent may retain a profit obtained through his/her agency with
his/her principal's consent.
2. A promoter is not allowed to derive a profit from the sale of his own property to the
company unless all material facts are disclosed. If a promoter contracts to sell his
own property to the company without making a full disclosure, the company may
either repudiate the sale or affirm the contract and recover the profit made out of it by
the promoter. Either way the dishonest promoter is deprived of his advantage.
In case, therefore, the promoter wishes to sell his own property to the company,
he/she should either disclose the fact:
(a) To an independent Board of directors; or
(b) In the articles of association of the company; or
(c) In the prospectus; or
(d) To the existing and intended shareholders directly.

17. 17
It is essential to know that promoter‘s duties cannot depend on a contract. While he/she
begins the promotional activities, company is not incorporated and hence cannot contract
with its promoters. The promoter's duties must be the same as that of a person acting on
his/her behalf of another individual without a contract of employment. If he/she does make
any misrepresentation in a prospectus he/she may be held guilty of fraud under Section 17
of the Indian Contract Act and would be held liable for damages under Section 19 of that Act.
Liabilities of Promoters
A promoter is subject to the following liabilities under the various provisions of the
Companies Act, 1956.
1. Section 56 and Schedule II of the Act lays down matters to be stated and reports to
be set out in the prospectus. The promoter(s) may be held liable for the non-
compliance of the provisions of this Section.
2. Under Section 62, a promoter is liable for any untrue statement in the prospectus to a
person who has subscribed for any shares or debentures on the faith of the
prospectus. Such a person may sue the promoter for compensation for any loss or
damage sustained by him/her. In the event of a false statement in the prospectus the
following consequences will follow:
a. the allotment of shares may be set aside;
b. the promoter may be sued for damages;
c. he/she may be sued for compensation for misrepresentation under Section
62(1)(c) of the Act;
d. he/she may be sued for damages by shareholders who have suffered by
reason of his/her non-compliance with the statutory requirements as to the
contents of the prospectus;
e. He/she may become liable to criminal proceedings.
3. By virtue of Section 203, of the Companies Act, 1956 the Court may suspend a
promoter from taking part in the management of a company for a period of 5 years if:

18. 18
i. he is convicted of any offence in connection with the promotion, formation or
management of a company; or
ii. in liquidation it appears that he:
A. has been guilty of any offence for which he is punishable (whether he has
been convicted or not) under Section 542; or
B. While being an officer of the company, has otherwise been guilty of any
fraud or misfeasance in relation to the company or of any breach of his
duty to the company.
4. Under section 63, besides civil liability, the promoters are criminally liable for the
issue of prospectus containing untrue statements. This section imposes severe
penalty on promoters who make untrue and deceptive statements in prospectus with
a view to obtaining capital. The punishment prescribed, is imprisonment for a term
which may extend to two years or with fine which may extend to Rs. 50,000/- or with
both. A promoter can, however, escape the punishment if he proves:
 that the statement was immaterial; or
 that he had reasonable ground to believe, and did, up to the time of the issue
of prospectus, believe that statement was true.
5. Under section 478, a promoter may be liable to public examination like any other
director or officer of the company if the court so directs on a liquidator's report
alleging fraud in the promotion or formation of the company.
6. Under section 543, a company may proceed against a promoter on action for deceit
or breach of duty, where the promoter has misapplied or retained any property of the
company or is guilty of misfeasance or breach of trust in relation to the company.
Remuneration of Promoters
Promoters cannot claim remunerations from the company as a matter of right. Further,
he/she has no right to claim of promotional expenses for his/her services and preliminary
expenses unless there is a valid contract. But, a company before incorporation cannot enter
into a contract. After incorporation, he/she may be rewarded for his efforts that are in mercy
of the directors(Re English & Colonial Produce Co.). However the Articles of a company
generally contain a provision to this effect and authorise the directors to remunerate the
promoters.In practice, remunerations to a promoter for his services would be in any of the
following ways:
i. He/she may sell his/her own property to the company for cash or against fully paid
shares in the company at an over valuation after making full disclosure to a
disinterested Board of Directors or to the intended shareholders.

19. 19
ii. He/she may be given an option to buy further shares in the company at par.
iii. He/she may take commission on the shares sold.
iv. He/she may take a grant of some shares in the company.
v. He/she may be paid a lump-sum by the company.
vi. The articles may provide for a fixed sum to be paid to him. Such a provision has no
contractual effect and he cannot sue to enforce it, but if it is acted upon, the company
cannot recover its money.
Whatever be the nature of remuneration or benefit, it must be disclosed in the prospectus, if
paid, within 2 years preceding the date of the prospectus.
INCORPORATION OF COMPANIES
In order to incorporate a company, there are procedures that need to be followed
systematically. The following are the steps:
A. Deciding the types of company:Under the Companies Act, 1956 only three types
of companies can be registered, viz.
 Public companies;
 Private companies; and
 Producer companies.
In this study, we shall concentrate only on the steps of incorporating Public and Private
limited companies.
Section 12 of the Act provides that any seven or more persons, or where the company to be
formed will be a private company, any two or more persons, associated for any lawful
purpose may, by subscribing their names to the Memorandum of Association and otherwise
complying with the requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability.
These companies may further be classified as follows:
(i) Companies limited by shares;
(ii) Companies limited by guarantee with or without share capital; and
(iii) Unlimited companies with or without share capital.

20. 20
B. Application for Availability of Name of company:
1. A company is identified by the name in order of preference with which it is to be
registered upto a maximum of six names. According to Section 13 of the Act, the
name of the company should be mentioned in the Memorandum of Association.
As discussed earlier, the name of a company must end with the word "Limited" in
the case of a public company and the words "private limited" in the case of a
private company. The name of a company must end with the ‗Limited‘ or ‗private
limited‘ for a company obtaining a licence from the Regional Director under
section 25 of the Act.
2. According to Section 20 of the Act a company cannot be registered with the
name that resembles the name of any other already registered company. In
addition, a company does not violate the provisions of Emblems and Names
(Prevention of Improper Use) Act, 1950. Before deciding the name of the
company, the promoter can avail the services of checking name availability on
the portal. (to decide the availability of names, the Ministry of Corporate Affairs
has issued Name Availability Guidelines, 2011 w.e.f. 24th
July 2011)
3. The promoter will submit the application to the concerned Registrar of
Companies (ROC) in e-Form No. 1A according to the Companies (Central
Government's) General Rules and Forms (Amendment) Rules, 2011 vide Rule
4A. A fee of Rs. 1000 (w.e.f. 24.07.11) is to be paid along with e-Form 1A.
4. In case the proposed name is not available, the registrar may reject the same or
ask for resubmission of the application with new names or calls for further
information, ordinarily within three days of receipt of the application.
5. The applicant shall be given only upto two opportunities for re-submission of their
proposal against the fee paid in the first instance for name availability after the
original application is filed. After the name approval, the applicant can apply for
registration of the new company by filing the required forms (form 1, 18, and 32)
within 60 days from the date of name approval. The name allowed shall lapse
and no extension will be granted after expiry of sixty days from the date the name
is allowed.
C. Preparation of Memorandum and Articles of Association: This Memorandum of
Association is considered as the constitution of a company. It defines the area within
which the company can act. This document consists the objective of the company,
nature of business, liability, capital, location of registered office and so on. The other
important document is the Articles of Association which contains the rules and
regulations relating to the internal management of a company.

21. 21
D. Vetting of Memorandum and Articles, Printing, Stamping and Signing of the
same:The draft of the Memorandum and Articles should be prepared and typed
before printing the Memorandum and Articles of Association of a company and
submit the same to the Registrar of Companies for vetting the draft Memorandum
and Articles. Sometimes you may receive the changes from Registrar of Companies
which needs to be incorporated before going for the final printing. It is important to
note that there is no definite commitment from the Registrar in this regard vide
circular No. 128 (HCC) 64 date 27th
July 1964. The Memorandum and Articles have
to be stamped and the value of stamp differs from State to State as per respective
State Stamp laws. Further, section 15 stipulates that every Memorandum should be
signed by each subscriber who should add his address, description and occupation,
if any, in the presence of at least one witness who shall attest the signature and shall
likewise add his address, description and occupation, if any. Similarly, the Articles of
Association should also be signed separately by subscribers. The signatures of the
subscribers in the Articles of Association are also to be attested by a witness.
E. Power of Attorney: In order to carryout various formalities that are required for
incorporation of a company, the promoters may appoint an attorney empowering him
to carry out the instructions/requirements stipulated by the Registrar. To do so, it
requires execution of a Power of Attorney on a non-judicial stamp paper of a value
prescribed in the respective State Stamp Laws.
F. Additional documents required:As we discussed earlier, Form 1A application to
get approval for the name of the company to be registered. After that depending
upon the proposed company type, it required additional documents as given below:
i. Form 1 (Statutory Declaration): Section 33(2) requires that a declaration in e-Form
No. 1 of the Companies (Central Government's) General Rules and Forms
(Amendment) Rules, 2006 duly singed by an advocate of the Supreme Court or a
High Court, or an attorney or pleader entitled to appear before the High Court or a
Secretary or a Chartered Accountant practising in India who is engaged in the
formation of a company or by a person named in the Articles as a director or
manager, or secretary of a company, that all the requirements of the Companies Act,
1956 and the rules thereunder have been complied with in respect of registration and
matters precedent and incidental thereto to be filed with the Registrar. However, the
Registrar may accept such a declaration.It is important that the above declaration
should be on a non-judicial stamp paper of appropriate value with reference to the
State in which the office of the Registrar of Companies is situated.
ii. Form-18 (Registered Address): under section 146 requires that a declaration in e-
form about the location of the registered office of a company. This information should

22. 22
be submitted from the day on which it begins to carry on business or as from the 30th
day after the day of its incorporation whichever is earlier.
iii. Form 32 (Particulars of Directors): This form requires the details of a person who
acts as a director or manager or secretary as mentioned in Articles of Association.
This form is also to filled within 30 days of the registration of the company or
appointment of first director.
iv. Director‟s Identification Number (DIN): This concept has introduced by Ministry of
Corporate Affaris (MCA). This number is mandatory, unique, and life time
identification for all existing as well as prospective directors. This number is a
prerequisite for e-filing.As the number is required at the time of submitting e-form 32,
any individual who is a director or intends to be a director of a company shold apply
and obtained the same before commencing the procedure for incorporation of a
company.
v. Registration Fees: In addition to the above documents, the fee prescribed for
registration of company is required to be paid to the Registrar. The amount of
registration fees depends on the nominal capital of the company to be incorporated in
case of companies having share capital. The details have been prescribed in
Schedule X to the Act.
Certificate of Incorporation
If the Registrar of Companies is satisfied that all the aforesaid documents submitted
a company, he/she shall certify under his/her hand that the company is incorporated. From
the date of incorporation mentioned in the Certificate of Incorporation, members of the
company shall be a body corporate by the name contained in the Memorandum, capable
forthwith of exercising all the functions of an incorporated company and having perpetual
succession and a common seal, but with such liability on the part of the members to
contribute to assets of the company in the event of its being wound up as mentioned in the
Act (Section 34). From the date of incorporation, the company becomes a separate legal
entity notwithstanding the fact that there was only one governing director who also held a
majority of the shares of the company. The separate legal entity enabled a director who
representing the company, to enter into a contract of employment with himself in his
individual capacity. Two companies which are incorporated with the same set of
shareholders are nevertheless distinct and separate entities.
Let us discuss the contents of Memorandum and Articles of Association, because it helps to
understand the importance of the same.

23. 23
Memorandum of Association
This is one of the documents that have submitted with the RoC at the time of
incorporation of a company. Section 2(28) defines, ―the memorandum of association of a
company as originally framed or as altered from time to time in pursuance of any previous
company law or of this act.‖ It is a great challenge to understand about MoA by reading the
above definition. Let us discuss in detail, because it is an extremely important document in
relation to the affairs of the company.
This document sets out the constitution of the company and is therefore the foundation on
which the structure of the company is based. It contains the fundamental conditions upon
which alone the company is allowed to be incorporated. As discussed above, this is
essential document to get incorporation. This is evidenced in This is evidenced in Section 12
of the Act, which provides the mode of forming an incorporated company and states that in
the case of a public company, any seven or more persons, and in the case of a private
company, any two or more persons, associated for any lawful purpose, may by subscribing
their names to a memorandum and complying with the other requirements of this Act in
respect of registration, may form an incorporated company, with or without limited liability.
It is important that the company pursue the objects and exercise only such powers as are
conferred expressly in the documents. The purpose of the memorandum is to enable
shareholders, creditors and those who deal with the company to know the permitted range of
the company. Further, it defines as well as confines the powers of the company. Lord Cairns
in Ashbury Railway Carriage Co. V. Riche pointed out,‖ The memorandum is as it were, the

24. 24
area beyond which the action of the company cannot go; inside that area the shareholders
may make such regulations for their own government as they think fit.‖
Purpose of memorandum: The purpose of the MoA is twofold.
1. The intending shareholders who contemplate the investment of his/her capital shall
know within what field it is to be put at risk.
2. Anyone who shall deal with the company shall know without reasonable doubt
whether the contractual relation into which he/she contemplates entering with the
company is one relating to a matter within its corporate objects.
Sections 12 to 23 of the Act prescribe the particulars to be mentioned in a MoA and other
requirements. It is considered as the constitution of the company in its relation to the
outside world. The company cannot depart from the provisions of the MoA. If it enters
into contract or engages in any trade or business which is beyond the powers conferred
on it by the MoA, such a contract or the act will be ultra vires the company and hence
void.
Form of Memorandum of Association
Section 14 of the Companies Act provides that the memorandum of association should be in
any one of the Forms specified in Tables B, C, D and E of Schedule I to the Companies Act,
1956. The table may be applicable in relation to the type of company proposed to be
incorporated. The table and its type of companies are given below:
Table Types of Companies
B Companies Limited by Shares
C companies limited by guarantee
D companies limited by guarantee, not having a share capital
E companies limited by guarantee and having a share capital
A company may either adopt any of the model Forms of the MoA mentioned above, as may
be applicable to it, or it may prepare it in any other Form. Nevertheless the same should be
as near thereto as the circumstances may admit.
Contents of Memorandum:
According to section 13, MoA of every company must contain the following clauses:

25. 25
1. The name of the company with ‗limited‘ as the last word of the name in the case of a
public limited company and with ‗private limited‘ as the last word in the case of a
private limited company.
2. The state in which the registered office of the company is to be situated.
3. The objects of the company are classified as stated below:
a. The main objects of the company to be pursued by the company on its
incorporation, objects incidental to the attainments of the main objects, and
b. Other objects not included above
4. In the case of companies with object not confined to one state, the states to whose
territories the objects extend.
5. The liability of members is limited if the company is limited by shares or by
guarantee.
6. In the case of a company having a share capital, the amount of share capital with
which the company proposes to be registered and its division into shares of a fixed
amount.
Note that an unlimited company need not include items 5 and 6 in its memorandum.In the
case of a company limited by guarantee, its MoA shall state that each member undertakes to
contribute to the assets of the company, in the event of its being winding up while he/she is a
member or within or year afterwards for the payment of the debts and liabilities of the
company as well. Every member to the MoA shall take at least one share and shall write
opposite to his/her name the number of shares taken by him/her.It is to be noted that section
9 of the Companies Act, 1956 shall override the provisions in the memorandum of a
company, if the latter contains anything contrary to the provisions in the Act.
A brief discussion of the various clauses is as follows:
Name clause: In order to maintain its separate entity, it needs to be registered with any
name it likes. However, no company shall be registered by a name which, in the opinion of
the central government, is undesirable. In particular, a name which is identical or which too
nearly resembles the name of an existing company. Note merely that a few words are
common may not be considered the name too identical and thus undesirable (section 20). It
must that every public company must end with the word ‗limited‘ after its name and every
private limited company must end with the word ‗private limited‘ after its name. However, the
use of the word ‗company‘ is not compulsory. Companies, whose liabilities are unlimited, are
prohibited from using the word ‗limited‘. The words ‗limited‘ may be dispensed with in the
name of charitable companies, but companies formed to promote art, science, religion etc,
which do not propose to pay dividend, but intend to apply all its profits towards the working

26. 26
of the company, could be registered without the word ‗limited‘ under licenses granted by the
Central Government (Section 25)
In addition to the above, a company cannot adopt a name which violates the
provisions of the Emblems and Names Act, 1950. This act also prohibits the use of the name
and emblems of the united nation, and the world health organization, the official seal and
emblem of the central and the state governments, the Indian National Flag, the name and
pictorial representation of Mahatma Gandhi and the Prime Minister of India.If a limited
company makes a contract without using the word ‗limited‘, the directors who make the
contract on behalf of the company would be personally liable.
Every company is required to publish its name outside its registered office, and the
place where it carries on business, to have its name engraved on its seal and to have its
name on all business letters, bill heads, seal, notices and other official publications, as well
as in all negotiable instruments (section 147). Ministry of Company Affairs has clarified that
expression of its name in English only; in addition to the expression in the local language will
be a sufficient compliance with the requirements of the section.
Registered office clause:This clause states that name of the state in which the registered
office of the company is to be situated must be given in MoA. But the exect address of the
registered office is not required to be stated therein. This can be informed with the RoC
separately in e-Form 18 within 30 days of incorporation of the company. The clause is
important for two reasons.
 It ascertains the domicile and nationality of a company. This domicile holds to it
throughout its existence.
 It is the place where various registers relating to the company must be kept and to
which all communications and notices must be sent. A company need not to carry on
its business at its registered office.
Notice of situation of the registered office and every change therein must be submitted within
30 days from the date of incorporation of the company of after the date of change, as the
case may be.
Objects clause: The objects clause is the most important clause in MoA of a company. It
is not merely a record of what is contemplated by the subscribers, but it serves a two-told
purposes:
1. It gives an idea to the prospective shareholders for the purposes in which their
money will be utilized.

27. 27
2. It enables the persons who are dealing with the company to ascertain its powers.
In case of companies were existence before the commencement of the Companies Act,
1965, the objects of the company would be stated simply. But in case of companies are
registered after the amendment, the objects clause must divide their objects into two sub-
clauses, namely:
 Main objects. This sub-clause has to state the main objects to be pursued by the
company on its incorporation and objects incidental or ancillary to the attainment of
the main objects.
 Other objects: This sub-clause shall state other objects which are not included in
the above clause.
In the case of a non-trading company, whose objects are not confined to one state clause,
must be stated specifically the states to whose territories the objects extend. The
subscribers to MoA may choose and object or objects for their company. There are certain
restrictions which are given below:
1. The objects should not be against the policy of the constitution. For example, the
object should not be such as to encourage untouched ability which has been
abolished under our constitution.
2. The objects should not include anything which is illegal or against public policy. For
example, forming a company for dealing in lotteries or for trading with the alien
enemies.
3. The object must not be against the provisions of the companies act, as for example,
authorizing the company to purchase its own shares.
On its being registered, the company has power to do whatever is necessary to do for
attaining the objects stated in the memorandum, and to do whatever else is incidental to or
consequential upon the attainment of the main object. Therefore, It is clear that any act of
the company outside its stated, objects is ultra vires and therefore void and cannot be
ratified even by the whole body of shareholders.
Liability clause:This clause must state that the liability of the members of the company is
limited in the case of company limited by shares or guarantee. The members are liable only
to the amount of unpaid on the shares taken by them in the case of limited by shares. For
example, a face value of a share is Rs.100. The member has paid only Rs.50. The unpaid
amount is Rs.50. The member is liable to pay the unpaid amount of Rs.50 in the event of

28. 28
liquidation of a company. In case the member paid fully, the member cannot be called upon
to pay anything. In a company limited by guarantee, the members are liable to the amount
undertaken to be contributed in the event of liquidation of a company. The member cannot
be called upon to pay anything before the company goes into liquidation. However, this
liability clause is omitted from MoA of unlimited companies.If a company carries on business
for more than six months, while the number of members is less than 7 in the case of public
company and less than 2 in case of a private company, each member is liable for all the
debts contracted by the company after the period of six months has elapsed.
Capital clause: The MoA of a company limited by shares must state the amount of the
capital with which company is registered. The registered amount of capital is known as
authorised capital or nominal capital. It clause also states the different kinds of shares and
the nominal value of each share. The authorised capital is determined having regard to the
present and future requirements of the capital with reference to its objects. A company
cannot issue shares more than the amount lays down in the limit. However, the authorised
capital could be altered as provided by Section 94 of the Companies Act, 1956. If a company
receives applications for shares beyond the shares mentioned in the MoA, the excess
number of shares should be returned. A company may wish to issue the shares to the
number of shares mentioned in the capital fully or partially, it is known as issued capital. Out
of issued capital, the total amount of actual shares subscribed by the subscribers is known
as subscribed capital. The amount of subscribed capital again may be fully paid or partially
paid by the subscribers is known as paid-up capital. According to Section 148 of the Act, if
the amount of the authorised capital, of the company is stated in any notice, advertisement,
official publication, business letter, bill head or letter paper, it shall also contain a statement
in an equally prominent position and in conspicuous characters of the amount of the capital
which has been subscribed and the amount paid-up.
Association Clause and Subscription: TheMoA concludes with the subscription clause in
which there is a declaration of association. The subscribers to the memorandum declare:
―We, the several persons whose names and addresses subscribed, are desirous of being
formed into a company in pursuance of this memorandum of association, and we
respectively agree to take the number of shares in the capital of the company set opposite
our respective names. Then follow the names, address, occupations of the subscribers, and
the number of shares each subscriber has taken and his signatures attested by a witness.
The statutory requirements regarding subscription of memorandum are that:

29. 29
(a) MoA must be signed by each subscriber in the presence of at least one witness who
must attest their signatures;
(b) each subscriber must take at least one share;
(c) each subscriber must write opposite his name the number of shares which he/she
agrees to hold (Section 13).
Let us discuss the ways in which we can alter the above discussed clauses.
Alteration of Memorandum of Association
The memorandum of association of a company may be altered in the following
respects:
1. By changing its name clause (Sections 21 to 24).
2. By altering it in regard to the State in which the registered office is to be
situated or its objects clause (Section 17).
3. By altering its share capital clause (Section 94).
4. By reorganising its share capital (Sections 391 to 396).
5. By reducing its capital (Section 100).
6. By making the liability of the directors‘ unlimited (Section 322).
For the purpose of amendment different clauses of the memorandum are broadly classified
into two parts, namely,
A. Part relating to conditions, and
B. Part relating to other provisions.
Under section 16(1) of the Companies Act 1956 lays down the procedures to be
followed while changing the conditions of memorandum. The provisions relating to the name
clause, registered office clause, the objects clause, limited liability clause, subscriber‗s share
clause as provided in Section 13 of the Companies Act, 1956 or any other specific provisions
contained in the Act are to be regarded as the conditions contained in the memorandum
[Section 16(2)]. For the alteration of those conditions in the memorandum of association, a
rigid procedure is to be followed and strict compliance of the procedure is demanded by law.
Failure to comply with the express provisions made under the Act for the purpose of

30. 30
alteration of the conditions contained in the memorandum will be deemed as a nullity.Other
provisions which are found included in the memorandum including those relating to
appointment of a managing director or manager fall in the category of other provisions in the
memorandum [See Section 16(3)]. These may be generally altered in the same manner as
the articles of the company unless there are any specific directions as to the procedure to be
followed made in the Act. Thus, procedure to be followed as provided in the articles is
adhered to for this purpose.
Articles of Association (AoA)
Section 26 of the Companies Act, 1956 provides that a public company limited by
shares may at its option register its articles of association signed by the same subscribers as
to the memorandum, or alternatively it may adopt all or any of the regulations contained in
Table A of First Schedule of the Act. If articles are not registered, automatically Table A
applies, and if registered, Table A applies except in so far as it is excluded by the articles.
 To avoid any confusion, normally every public company delivers its articles alongwith
the memorandum for registration. Further it will be specifically stated therein that
Table‗A‗ will not apply.
 The articles of a private company must contain the four restrictions as contained in
Section 3(1)(iii).
 The articles of association of an unlimited company should state the number of
members with which the company is to be registered and if the company has a share
capital, the amount of share capital with which it is to be registered [Section 27(1)].
 In the case of a company limited by guarantee the articles shall state the number of
members with which it is to be registered [Section 27(2)].
 A company limited by guarantee or a private company limited by shares or an
unlimited company must register their articles. The companies limited by guarantee
or unlimited company might adopt any of the appropriate regulations of Table C, D
and E respectively in Schedule I (Section 29).

31. 31
Statutory Requirements: Section 30 requires that the articles must be printed, divided into
paragraphs, numbered consecutively, stamped adequately, signed by each subscriber to the
memorandum and duly witnessed and filed along with the memorandum. The articles must
not contain anything illegal or ultra vires the memorandum, nor should it be contrary to the
provisions of the Companies Act, 1956.
CONTENTS OF ARTICLES
The articles set out the rules and regulations framed by the company for its own
working. The articles should contain generally the following matters:
1. Exclusion wholly or in part of Table A.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialisation.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.

32. 32
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Provision regarding common seal.
33. Capitalisation of reserves.
Extra care must be exercised in the preparation of the AoAof a company. At the same time,
certain provisions of the Act are applicable to the company "notwithstanding anything to the
contrary in the articles". Therefore, the articles must contain provisions in respect of all
matters that are required to be contained therein, so as not to hamper the working of the
company later.
Provision in Articles As Regards Expulsion of a Member: Section 29 provides that
nothing in Section 29 shall be deemed to prevent a company from including any additional
matters in its Articles, in so far as they are not inconsistent with the provisions contained in
the Form in any of the Tables C, D and E, which might have been adopted by the company.
In the light of this provision, if there is a provision in the Articles empowering the Directors of
the company to expel any member of the company under any of the given conditions, then
such a provision shall be totally inconsistent with the provisions of Section 29 of the Act. But
the Stock exchanges, registered under the provisions of the Companies Act, can carry such
a provision in its Articles, because the Companies Act is a general law whereas the
Securities Contracts Regulation (SCR) Act is a special law. The regulation of stock
exchanges is done by SCR Act and SEBI Act and not by Companies Act. Hence, the Articles
of Stock Exchange may provide for additional matters as per SCR Act, which may not be
possible for inclusion in the Articles of a company as per the provisions of the Companies
Act.
Alteration of Articles of Association
A company has a statutory right to alter its AoA, but the power to alter is subject to the
provisions of the Act and to the conditions contained in the memorandum. Section 31
provides that subject to the provisions of the Act and the conditions contained in its
memorandum, a company may, by special resolution, alter its articles, and adds that any
alteration so made shall be as valid as if originally contained in the articles. However, no
alteration made in the articles which has the effect of converting a public company into
private company shall have effect unless such alteration has been approved by the Central

33. 33
Government [Section 31(1)]. However, in spite of the power to alter its articles, a company
can exercise this power subject only to certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum. In the event
of conflict between the memorandum and the articles, it is the memorandum that will
prevail.
2. The alteration must not be inconsistent with any provisions of the Companies Act or
any other statute.
3. The Articles must not include anything which is illegal or opposed to public policy.
4. The alteration must be bona fide for the benefit of the company as a whole.
5. The alteration must not constitute a fraud on the minority by a majority. If the
alteration is not for the benefit of the company as a whole, but for majority of
shareholders, then the alteration would be bad. In other words, an alteration to the
articles must not discriminate between the majority shareholders and the minority
shareholders so as to give the former an advantage over the latter
6. An alteration of articles to effect a conversion of a public company into a private
company cannot be made without the approval of the Central Government [Section
31].
7. Articles cannot be altered so as to compel an existing member to take or subscribe
for more shares or in any way increase his liability to contribute to the share capital,
unless he gives his consent in writing (Section 38).
8. By effecting alteration in its articles, a company cannot defeat escape from its
contractual obligation with any person. The company will always be liable in such a
case.
9. The Articles of Association cannot be altered so as to have retrospective effects. The
articles only operate from the date of the amendment
10. The alteration must not be inconsistent with an order of the Court under Sections 397
or 398 and 404.
11. In the case of listed companies, earlier articles cannot be altered except with the
approval of Stock Exchange(s) concerned.
12. Amendment of Articles relating to Managing, Whole-time director and non-rotational
directors requires Central Government‗s approval. (Section 268)
Subject to the foregoing conditions, the Articles in a company can be altered and no clause
can be included in the Articles that it is not alterable. Persons who become members of a
company have no right to assume that the Articles will always remain in a particular form.

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Distinction between Memorandum and Articles of Association
The key distinction between the MoA and AoA are given below:
1. Memorandum of association is the charter of the company and defines the
fundamental conditions and objects for which the company is granted incorporation.
Articles of association are the rules and regulations framed to govern this internal
management of the company.
2. Clauses of the memorandum cannot be easily altered. They can only be altered in
accordance with the mode prescribed by the Act. In some of the cases, alteration
requires the permission of the Company Law Board or the Court. In the case of
articles of association, members have a right to alter the articles by a special
resolution. Generally there is no need to obtain the permission of the Court or the
Company Law Board for alteration of the articles.
3. Memorandum of association cannot include any clause contrary to the provisions of
the Companies Act. The articles of association are subsidiary both to the Companies
Act and the memorandum of association.
4. The memorandum generally defines the relation between the company and the
outsiders, while the articles regulate the relationship between the company and its
members and between the members inter se.
5. Acts done by a company beyond the scope of the memorandum are absolutely void
and ultra vires and cannot be ratified even by unanimous vote of all the shareholders.
But the acts of the directors beyond the articles can be ratified by the shareholders.
So far, we have discussed different types of company, its definitions, and procedures to be
followed in incorporation of a company, relevant documents to be submitted, and contents of
the documents as well. Now let us move on how to raise the funds and its related regulatory
framework in the next chapter.

35. 35
CHAPTER 2
PROSPECTUS, ISSUE AND ALLOTMENTS OF SHARES
After the receipt of certificate of incorporation, a public limited company is ready for
raising funds by issuing shares to the public in order to carry out the business activities, a
company will issue a document called prospectus. It is an invitation to the public to subscribe
to the share capital of the company i.e. document facilitate the collection of money for a
company. The prospectus describes the purpose of the company and the reason why the
capital is required. Under section 2(36) of the companies Act, 1956 defines ―any document
described or issued as a prospectus and include any notice, circular, advertisement or other
documents inviting deposits from the public or inviting offer from the public or inviting offers
from the public for the subscription or purchase of any shares in, or debentures of, a body
corporate‖.
Generally it is known as an offer document. It means ‗prospectus‘ in case of a public
limited company (as stated above) or an offer for sale and ‗letter of offer‘ in case of right
issue. As this is the basic document of a company, it is circulated among the public in printed
pamphlets. This is the only source for the investors to know about the company such as
objectives, plans, and soundness. Therefore, legislation has aimed at securing the fullest
disclosure of all materials and necessary particulars and laying the same before all the
prospective buyers of shares. The following are the important requirements for issuing the
prospectus:
 Dating of Prospectus: According to Section 55, every prospectus must be dated.
This date is considered to the date of publication of prospectus, unless the contrary
proved.
 Registration of Prospectus: It is absolutely mandatory for a company to submit the
copy of the prospectus to the Registrar for registration. This should be done on or
before the prospectus is published. However, the prospectus must not be issued
more than 90 days after the date on which a copy of it is submitted to the Registrar
for registration.
 Approval of prospectus by various agencies: The prospectus has to beapproved
by various agencies before it is filed with the ROC of the respectiveState. The
various authorities who approve the prospectus are as follows:
a. All the lead managers to the issue.
b. Each of the stock exchanges where the shares of the company are listed and
where the shares/debentures are proposed to be listed.

36. 36
c. The lead financial institution underwriting the issue, if applicable.
 The lead financial institution underwriting the issue, if applicable: The
prospectus is vetted by SEBI to ensure adequacy of disclosures provided by the
company. However, vettingby SEBI does not account to the approval of prospectus.
SEBI does not take anyresponsibility for the correctness of the statements made or
opinions expressed inthe prospectus by the company.
The Ministry of Corporate Affairs, vide its circular 10/8/87-CL V No. 7/91, dated 28-2-
1991 advised the ROCs to ensure that in respect of every prospectus of public issues which
comes up for filing with them the merchant bankers to the issue, whether as lead managers,
co-managers, advisers or consultants are only those authorised by SEBI. Each merchant
bankers has been given a code number. It was also decided that ROC shall not register a
prospectus where prior to registration of the prospectus, the ROC before whom the
prospectus is filed for registration is informed by SEBI that the contents of prospectus filed
are in contravention of any law or statutoryrules and regulations.
From the above discussion, it clear that the prospectus is an essential document.
The information statutorily needing disclosure is stated fully and precisely so that the public
who wish to invest about the present and future prospectus of the company. The purpose of
issuing the document is to protect the members of the public again their being misguided by
partial truths or falsehoods that the law casts a liability on various person connected with the
issue of the prospectus to compensate every person (who subscribes on the faith of
theprospectus) for any loss or damage he may have sustained because of the inclusion of
any untrue statements in the prospectus [Section 62].
Although the prospectus is an essential document to be issued for raising fund,
section 56 of the Companies Act 1956, the issue of a prospectus is not necessary in the
following situations:
1. Subsection 5 states when shares or debentures are offered to the existing holders of
shares or debentures
2. Subsection 5 tells when the issue relates to shares or debentures uniform in all
respects with shares or debentures previously issued and dealt in or quoted in a
recognised stock exchange
3. Subsection 3 conveys where a person is bonafide invited to enter into an
underwriting agreement and/or where shares are not offered to the public

37. 37
Before proceeding further about prospectus, it is essential that one should know
about the concept of capital, various sources of capital, meaning shares and its types, and
provisions for issue the same. Let us now the same.
Meaning of Capital
Capital has variety of meanings. Capital refers to money that is used to do business.
According to company law, the capital is the share capital of a company. It is classified as
given below:
1. Nominal, Authorised or Registered Capital:This is the amount mentionedin the
MoA of a company limited by shares as the capital of the company. It is the
maximum amount that a company is authorized to mobilise the required funds by
issuing shares. The company had paid the registration fee at the time of registration
on the basis of authorised capital. As and when the registration fee is increased, a
company will have to be paid to the Registrar in accordance with table in Schedule X
appended to the Companies Act, 1956. The capital is divided into shares of uniform
denominations. For example, Rs.10, 000, divided into 1000 equity shares with the
face value of Rs.10 each.
2. Issued Capital:a company may issue the capital fully or part of authorised capital. If
a company issues fully, authorised capital and issued capital would be same.
Otherwise, the part of the authorised or nominal capital is called issued capital. This
is computed at the face or nominal value. Considering the above example, a
company is issued of 600 equity shares. It means that the authorised capital is
Rs.10, 000 and issued capital is Rs.6000.
3. Subscribed Capital:It is that portion of the issued capital at face value which has
been subscribed by the subscribers of shares in the company. It is clear that the
entire issued capital may or may not be subscribed.
4. Called up Capital:It is that portion of the subscribed capital which has been called
up or demanded on the shares by the company. Assume thatRs. 6 has been called
up on each of 600 shares of a nominal value of Rs. 10, the called up capital is
Rs.3600.

38. 38
5. Uncalled Capital:It is the total amount not yet called up or demanded by the
company on the shares subscribed, which the shareholders are liable to pay as and
when called. For example, in the above case, uncalled capital is Rs. 2400.
6. Paid-up-Capital:It is the part of the total called up amount which is actually paid by
the shareholder. For example, if only Rs. 2,900 is actually paid by the shareholders
the paid-up capital is taken as Rs. 2900 only.
7. Unpaid Capital:It is the total of the called-up capital remaining unpaid i.e., Rs. 700
i.e. the difference between called up and paid-up capital.
8. Reserve Capital: It is that part of the uncalled capital of a company. The limited
company has decided by special resolution in terms of Section 99 of the Companies
Act, 1956, not to call except in the event and for the purpose of the company being
winding- up. For instance, in the above example, out of the Rs. 4 per share uncalled
capital, Rs. 2 per share may be resolved to be kept as reserve capital. (Reserve
capital should not be confused with capital reserve, which is created out of profits).
9. Preference and Equity Share Capital:Section 86 of the companies Act, 1956 as
amended by the Companies (Amendment) Act, 2000 permits a company limited by
shares to issueonly two kinds of shares Viz. preference shares and equity shares.
Equity share capital may be with similar rights or with different rights as to dividend,
voting or otherwise in accordance with the Companies (Issue of Share Capital with
Differential Voting Rights) Rules, 2001.
Section 85(1) of the companies Act, 1956 provides that a preference share or
preference share capital is that part of share capital that fulfils the following
requirements:
a. With regard to payment of fixed amount of dividend or fixed rate of dividend,
which may be either free of or subject to income tax
b. With regard to preferential right of the repayment of capital in the event of
liquidation of company. With regard to payment of dividend, preference
shares may be cumulative or non-cumulative.
According to section 85, equity shareholders are entitled to the residue of the
divisible profits, if any, after the preference shareholders have received their fixed rate of
dividend.

39. 39
Let us discuss the types of preference shares.
Types of Preference Shares:it may be of various types, namely
1. Participating or Non-participating:Participating preference shares are those shares
that are entitled to a fixed preferential dividend. In addition, it carries a right to participate
in the surplus profits along with equity shareholders, after paying dividend at a certain
rate has been paid to equity shareholders. For example, after 30% dividend has been
paid to equity shareholders, the preference shareholders may share the surplus profit
equally with equity shareholders. Moreover, there are any surplus left after paying to the
equity shares in the event of liquidation of a company, preference shares holders get
additional share in the surplus assets of the company. Unless expressly sated,
preference shareholders get only the fixed preferential dividend and nothing more. The
right to participate may be given either in the memorandum or articles or by virtue of
their terms of issue.
2. Cumulative and non-cumulative shares:Preference shares may be classified as
cumulative or non-cumulative on the basis of dividend payment. A holder of cumulative
preference shares has a right to claim fixed dividend of the past and the current year out
of profits. The preferential dividend keeps on accumulating until it is fully paid by the
company. On the other hand, the non-cumulative preference share gives right to its
holder to get the preference dividend on a fixed percentage out of the profits of each
year. If a company has not make profits, they get nothing, they cannot claim in
subsequent year as well. Preference shares are cumulative unless expressly stated to
be non-cumulative.
3. Redeemable and irredeemable Preference Shares: Subject to an authority in the
articles of association, a public limited company may issue redeemable preference
shares to be redeemed either at a fixed date or after a certain period of time during the
life of the company provided the company. However a company complied with the
following conditions lay down in section 80 of the Act.
a. the articles must have a provision for the issue of such shares;
b. they may be redeemed only out of profits available for dividend or out of the
proceeds of a fresh issue of shares made for the purpose of redemption;
c. if premium is payable on redemption, it must have been provided for out of
profits or out of company‗s securities premium account, before the shares are
redeemed;

40. 40
d. no such shares can be redeemed unless they are fully paid;
e. Where the shares are redeemed otherwise than out of the proceeds of the
fresh issue, a sum equal to the nominal amount of the shares redeemed shall
be transferred out of profits which would otherwise have been available for
dividend, to the ―Capital Redemption Reserve Account. This fund may also
be applied by the company in paying up unissued shares of the company to
be issued to the members of the company as fully paid shares.
Sweat Equity Shares
Sweat equity shares means equity shares that are issued by a company to its
employees or directors at a discount or for consideration, other than cash for providing
know-how or making available right in the nature of intellectual property rights or value
addition, whatever name they called.Section 79A of the Companies (Amendment) Act, 1999
permits to issue of such equity shares to employees or directors in recognition of their
contribution for providing know-how etc. as stated above. As the contribution made by
employees/directors results in increased profits to the company for a number of years, a
company provides sweat equity shares. It is considered as a new form of return. For the
purpose of issue of sweat equity shares, ‗company‗ means a company which is incorporated,
formed and registered under this Act and includes its subsidiary company incorporated
outside India. The intellectual property rights and value additions refers to -
 the exclusive property rights that can be prevented from use by others without the
authorization of the owners and include patents for invention, industrial designs,
copyrights in literacy/scientific and so on matters, registered or pending trademarks
etc.
 the increase in value of company‗s products etc. in economic termsthat is attributable
to the efforts of an employee or a director, in any manner.
Notwithstanding anything contained in Section 79, a company can issue sweat equity
shares, of a class of shares already issued, if the following conditions are satisfied:
(i) The issue has been authorised by a special resolution passed by the
company in the general meeting.
(ii) the following are clearly specified in the resolution:
(a) number of shares
(b) current market price
(c) consideration, if any
(d) Class or classes of directors or employees to whom such equity shares
are to be issued.

41. 41
(iii) as on the date of issue, atleast one year should have elapsed from the date
on which the company was entitled to commence business.
(iv) A company whose shares are listed on a recognized stock exchange issuing
sweat equity shares should comply with the regulations made in this behalf
by SEBI.
(v) A company whose shares are not so listed should issue sweat equity shares
in compliance with the rules made in this behalf.
Employee Stock Option Scheme (ESOP)
Section 2 (15A) of the Companies Act, 1956 defines ‗the option given to the whole-
time directors, officers or employees of a company, which gives such directors, officers or
employees the benefit or right to purchase or subscribe at a future date, the securities
offered by the company at a pre-determined price‘.
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999 defines ‗a scheme under which the company grants option to its
employees and option means a right but not an obligation granted to an employee in
pursuance of ESOS to apply for shares of the company at a pre-determined price‘.
The following points are essential and to be followed while issue of ESOP:
1. The issue of ESOPs would besubject to approval by shareholders through a
special resolution. In addition, ESOP is more than 1 per cent, it is essentialfor
a company to have a specific disclosure and approval from the annual
general meeting.
2. A minimum period of one year between grant of options and its vesting has
been prescribed. After one year, the period during which the option can be
exercised are determined by the company.
The operation of the ESOP Scheme would have to be under the superintendence and
direction of a Compensation Committee of the Board of Directors. The composition of
Compensation Committee would be a majority of independent directors. If a company would
cover its subsidiary or a holding company, it needs the specific approval of the shareholders.

42. 42
Raising Capital
Assume that you are a finance manager of a company which was started privately by
promoters. Your management has decided to introduce a new product in the market which
needs to Rs.500 crores. The responsibility is given to you. You know that there are many
ways to raise funds viz. common stock, preferred stock, bonds, and bank borrowings. Bonds
and preferred stocks are fixed obligation to the business, whereas shares are the ownership
in the business that offer an unknown growth potential to the investors. In the first case,
investors get fixed benefits over the investment horizon. On the other hand, investor gets
benefits only if company makes profits.
As a private limited company, one can raise the funds from the promoters, friends
and relatives by private placement. Note that you cannot issue preference shares and
bonds. You know that it may not be sufficient for introducing the new product. Therefore, you
decide to invite the public to contribute towards the required capital. For raising capital from
the public by issuing shares, a company has to comply with the provisions of the Companies
Act, 1956, the Securities Contracts (Regulation)Act, 1956, SEBI (ICDR) Regulations 2009
the rules made thereunder and the guidelines and instructions issued by the concerned
government authorities, the stock exchanges etc. management of public issue involves
coordination of activities and cooperation of a number of agencies such as underwriters,
brokers, registrar to the issue, printers, financial institutions, auditors and other
government/statutory agencies. The entire process of public issue could be classified into
two: viz.
(i) Pre-issue activities and
(ii) Post issue activities.
All activities beginning with the planning of capital issue till the opening of the
subscription list are called pre-issue activities. All activities subsequent to the opening of the
subscription list are called post-issue activities.
Let us discuss the meaning of each term and then discuss the detailed procedures involved
in each of these issues.

43. 43
Public Issue refers to the company‘s shares that are sold to the public through stock
exchange. As per the Companies Act 1956, the allotment should be more than 50 persons.
The public issue are further classified into two categories namely Initial Public Offer (IPO)
and Follow on Public Offer (FPO).
Initial Public Offering (IPO) refers to the company‘s shares that are sold to the
general public through stock exchange for the first time. By doing this, a private
limited company become a public limited company. Note that all public limited
companies are not publically traded companies. A company can raise funds through
public; however, they may not prefer their company shares are to be traded in the
secondary market. Those companies are called unlisted companies. Conversely,
there are companies who prefers their shares to be traded in the secondary market
opts for listing. Listing is the process whereby shares are offered to the public,
become eligible for trading in the stock market. Those companies‘ shares are called
listed companies. Those companies‘ shares are available for buying and selling at
any point in time. Listing refers to the process whereby shares are offered to the
public through an IPO become eligible to be traded in the secondary market (BSE or
NSE). Generally there is a gap about 12 -15 days between the closing and listing
date of an IPO. (Note that SEBI is planning to reduce from 12 days to 6 days). There
are two methods to issue the IPOs:
Issues
Rights Private Placement Bonus
Qualified Institutions
for listed companies
For un-listed
companies
Follow on Public
Offer (IPO)
Initial Public Offer
(IPO)
Public
Preferential issues for
listed companies
Offer for saleFresh Issue

44. 44
a. fresh issue, and
b. An offer for sale: it refers to the process of offload/dilute the promoters
holding in the listed companies to the public for the first time.
For a moment assume that your company is a public limited company and listed in
the stock exchanges. After careful analysis, you have decided to mobilise funds
through equity. You can issue the securities to the public or offer for sale to the
public, through an offer document. It is known as Follow on Public offer. Note that a
company issues shares through an offer for sale is permitted only if your company
satisfy the listing or continuous listing obligations of the stock exchanges.
On the other hand, you are interested to issue the shares only to the existing shareholders
on a pro-rata basis as on a record date. It is known as Rights Issue. The right issue helps to
maintain the ownership stake of its existing shareholders as they have.
Suppose you are interested to invite the select set public instead of to the general public. It is
known as private placement. The allotment of shares should be less than 50 persons under
section 81, of the Companies Act 1956. It is neither rights issue nor a public issue. You are a
listed company and want to go for preferential allotment for a select set of people.
Buyers/investors may be an individual or institutions. Your company has to comply with the
requirements contained in Chapter VII of SEBI (Issue of Capital and Disclosure
Requirements) Regulations 2009. If it is qualified institutions‘, the institution should be a
qualified buyer on the basis ofSEBI (Issue of Capital and Disclosure Requirements)
Regulations 2009. It is known as Qualified Institutional placement.
You have mobilised the required fund and launched the new product in the market. It gives
more profit to the company. The company has decided to give the dividend to the
shareholders. However they do not have adequate cash in their hands. They are permitted
to issue of shares equivalent to the dividend at predetermined price on pro-rate basis to the
existing shareholders on record date. Generally it is issued out of the general reserve or
share premium account. This issue is known as Bonus Issue.
Before proceeding further, let us now understand who are eligible to make an offer to the
public?
1. The company should have at least Rs.3 crores of net tangible assets for the past
preceding three years (each year consists of 12 months) from the year of issue. Of
which, the company should held less than 50 per cent of amount held in monetary
assets. If the company has more than 50 per cent held in monetary assets, they

45. 45
have to give the commitment to use those excess monetary assets in its
business/project.
2. The company has a track record of distributing dividend to their shareholders at least
three out of the immediately five years, excluding ex-ordinary items, as per the
section 205 of Companies Act 1956.
3. The company has a net worth of Rs. 1 cores of net worth
Issue of shares at a Premium or Discount
Issue at a Premium:A company may issue securities at a premium when it is able to sell
them at a price more than their nominal value. For example, the nominal value of a share is
Rs.100, but it is priced at Rs. 110. The difference of nominal value and issued value is called
as a share premium i.e. Rs. 10 per share. This is possible for a company irrespective of the
fact whether the securities are listed on Stock Exchange or not (Section 78). In this regard,
the Companies Act does not stipulate any conditions or restrictions regulating the issue of
securities by a company. However, the Companies Act imposessome conditions for
utilisation of the amount of premium amount collected on securities which is given bellow:
1. This amount cannot be treated as profit and should not distribute as dividend to
their shareholders. However, this amount can be used for specific purposes
mentioned in section 78(2).
2. It should be maintained as a separate account in the name of ‗Securities
Premium Account‘. The premium amount may be received in the form of cash or
in any kind.
3. The amount of premium is to be maintained with the same sanctity as the share
capital.
Typically share premium account must be disclosed in the annual balance sheet as a
separate item. In case the amount is deposed partially or wholly, it should indicate how it is
disposed of or exhausted. [See Schedule VI Part I]. Further, shareholder does not have any
preferential rights in the event of liquidation of a company. Section 78(2) of the Act indicates
the way in which this fund could be utilised. It is given below:
a. Issuing fully paid bonus shares to members;
b. Writing off the balance of the preliminary expenses of the company;
c. Writing off commission paid or discount allowed, or the expenses incurred on
issue of shares or debentures of the company; and
d. For providing for the premium payable on redemption of any redeemable
preference shares or debentures of the company.