Compliance Checklist
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Memorandum of Association is charter document of a company, a proof of the company’s identity. It defines the very purpose of a company’s existence. Every company whether for business or charitable purposes has to be incorporated with memorandum of association. Every member to the memorandum is assumed to have read the contents of the memorandum. A company cannot assume any business outside the purview of its memorandum. The memorandum contains the clause relating to the name of the company, registered office, objects, liability, capital and subscription.

In the lifetime of a company, it may so happen that there is a need to change the name of the company. Change of name of the company would be required due to change in business activity or operations of the company, change association with the holding company, change in name of the holding company (in India or abroad), etc. Under the Companies Act, 2013 (the Act), there is a specific procedure for changing the name of the company. This article provides a comprehensive compliance checklist for the procedure for change of name of the company (not by conversion of public company into private company or vice versa).

In Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington Ltd.[1], it was held that on a change of its name of a company, it does not stand dissolved nor any new company comes into existence. It follows that after change of its name, if any legal proceeding is commenced or instituted by a company in its old name, it would be a case of mere misdescription and not a case of initiation of a proceeding by a person not in existence.

In Wasava Tyres v. Printers (Mysore) Ltd.[2], it was held that the consequences of plaintiff company becoming a public limited company was of no consequence insofar as the rights and obligations of the company were concerned, nor did it render defective any legal proceedings by or against it, by virtue of the provisions of Section 23(3) of the Companies Act, 1956.

  1. Applicable provisions with respect to the name of company.—According to Section 4 of the Act, the name of the company should be, with the last word “limited” in the case of a public limited company, or the last words “private limited” in the case of a private limited company. However, the said provisions are not applicable to a company registered under Section 8 of the Act. A company shall not be registered with a name which contains: (a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or (b) such word or expression, as may be prescribed—unless the previous approval of the Central Government has been obtained for the use of any such word or expression.
  2. Applicable provisions w.r.t. change of name of company.—Any change in the name of a company shall be subject to the provisions of sub-sections (2) and (3) of Section 4 of the Act and shall not have effect except with the approval of the Central Government (powers delegated to Registrar of Companies) in writing. However, no such approval shall be necessary where the only change in the name of the company is the deletion therefrom, or addition thereto, of the word “private”, consequent on the conversion of any one class of companies to another class in accordance with the provisions of this Act.
  3. Application for name availability.—A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as—(a) the name of the proposed company; or (b) the name to which the company proposes to change its name. Upon receipt of the said name application, the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of 20 days from the date of approval or such other period as may be prescribed. In case of an application for reservation of name or for change of its name by an existing company, the Registrar may reserve the name for a period of 60 days from the date of approval.

     According to Rule 9 of the Companies (Incorporation) Rules, 2014, an application for reservation of name shall be made through the web service available at <www.mca.gov.in> by using web service SPICe+ (Simplified pro forma for incorporating company electronically plus: INC-32), and for change of name by using web service RUN (Reserve Unique Name) along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014, which may either be approved or rejected, as the case may be, by the Registrar, Central Registration Centre after allowing resubmission of such web form within 15 days for rectification of the defects, if any.

  1. Board approval.—The agenda for change of name of the company shall be first approved or transacted by the Board of Directors of the company. A Board meeting shall be duly convened in accordance with the provisions of Section 173 of the Act after giving proper notice, ensuring presence of quorum and passing of the resolution with requisite majority. According to Rule 29 of the Companies (Incorporation) Rules, 2014, the change of name shall not be allowed to a company which has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. However, the change of name shall be allowed upon filing necessary documents or payment or repayment of matured deposits or debentures or interest thereon as the case may be. Along with the application, the Board may submit the said declaration to that effect.
  2. Application for name reservation.—After confirming the above conditions and passing a Board resolution to the effect, the Board of Directors shall make an application through the reserve unique name (RUN) facility provided by the Ministry of Corporate Affairs on its portal. Depending upon the reasons for change of name of the company, the company shall submit an application for change of name, resolution passed by Board of Directors for change of name, declaration w.r.t. compliance of Rule 29 of the Companies (Incorporation) Rules, 2014, details of change of name of holding company (if applicable), revised certificate of incorporation of holding company (if applicable), resolution of joint venture company (if applicable), NOC/resolution of person own the trade mark of the new name, note for change of name of the company (e.g. change in regulations under SEBI/ IRDA), etc.
  3. Some important pointers for making name application.—(a) the name stated in memorandum shall not be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; (b) the chosen name shall not constitute an offence under any law for the time-being in force; (c) the name is not undesirable in the opinion of the Central Government (powers delegated to Registrar of Companies); (d) the name should not contain any words or expressions which give an impression that the company is connected with or receives patronage from the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time-being in force; (e) the name should not be prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950; (f) the name should not include a registered trade mark in its name, unless the owner of the trade mark has consented to usage of the same; (g) the name should not be identical to the name of LLP; and (h) the Board of Directors shall ensure compliance of Rules 8, 8-A, 8-B of the Companies (Incorporation) Rules, 2014.
  4. Name approval from Central Government.—An application for change of its name by an existing company, the Registrar may reserve the name for a period of 60 days from the date of approval. In this period, the company shall obtain the approval of the shareholders. In closely held private companies or public companies, the shareholders’ meeting can be called by passing a circular resolution or in other cases, a Board meeting may be called and convened. The name approval letter shall be placed before the Board and the shareholders’ meeting shall be called in accordance with the provisions of the Act and articles of association of the company.
  5. Shareholder Approval.—Any alteration in the memorandum of association requires the approval of the shareholders by way of a special resolution. Such approval may be sought either at an extraordinary general meeting or an annual general meeting. The said special resolution shall be filed through e-form MGT-14 within 30 days of passing of the resolution with the Registrar of Companies. The attachments to e-form MGT-14 shall be: (i) notice and explanatory statement of the shareholders’ meeting; (ii) shorter notice consent of shareholders, if applicable; (iii) an application, highlighting the reasons for change of name; (iv) name approval letter received from the MCA; (v) declaration by chairman, where the shareholder meeting was held through video conferencing and other audio visual means (if applicable); and (vi) copy of memorandum of association.
  6. Application to Central Government.—After filing e-form MGT-14 with the MCA, the company shall then file e-form INC-24 with the MCA. The said e-form relates to “application for approval of Central Government for change of name”. The attachments to e-form MGT-14 shall be: (i) notice and explanatory statement of the shareholders’ meeting; (ii) shorter notice consent of shareholders, if applicable; (iii) name approval letter received from MCA; (iv) certified true copy of minutes of the general meeting of the members where the special resolution was passed for change of name of the company; (v) declaration with respect to the compliance of Rule 29 of the Companies (Incorporation) Rules, 2014; and (vi) copy of any approval order obtained from the authorities concerned (such as RBI, IRDA, SEBI, etc.) or the Department concerned.
  7. Registration of the new name of the company.—After perusal of the e-forms and attachments, the Registrar of Companies shall register the new name of the company and will issue a fresh certificate of incorporation in form INC-25 for the company. The change in the name of the company shall be complete and effective only on the issue of such a certificate.
  8. Compliances post change of name.—After the name change procedure is complete i.e. after receiving the certificate of incorporation with the new name, following compliances shall be conducted; (i) each and every copy of the memorandum of association should reflect the change of name as approved by the Registrar of Companies; (ii) the company should print its new name along with the old name on all letterheads, bills, documents and records; (iii) new name along with old name needs to be displayed outside the registered office; (iv) all relevant bank accounts, licences from different authorities need to be updated with the new name; and (v) in case of a listed company, the old name and the new name should be displayed for a continuous period of 1 year from the date of name change on its website.

Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[This article was first published in the Practical Lawyer Magazine, March Issue 2021. Republished with the kind permission of Eastern Book Company.]

[1] 1984 SCC OnLine Cal 171

[2] 2006 SCC OnLine Kar 679.

OP. ED.Practical Lawyer Archives

The objects clause of the memorandum of association defines the contours of the company’s business activities. It gives powers to undertake the business activities which as indicated, whereas those activities not part of the objects, cannot be undertaken by the Company, even if all the shareholders give consent to undertake such activity.

In Bhutoria Brothers (P) Ltd., In re[1], it was noted,

“11. Stating the objects of the Company in the memorandum is not a mere legal technicality, but is a necessity of great practical import. It is essential that the public who are called upon to subscribe to the capital of the company by purchase of its share should know clearly what are the objects for which they are paying and which they want to encourage. To give this necessary information, the statement of objects should be clear. It must not be too vague and too general and too wide for in that case it will defeat its very purpose and object. That is why it is not regarded permissible in law to have one solitary clause in the memorandum of association saying, “The Company will carry on all kinds of business” without stating what the kinds of business are.”

Subject to the compliance of Companies Act, a company can change or alter its object clause. Such change in object clause of the company would be increase the scope of business activity of the company/expand business operations, include an object clause of the company (which is not there), statutory purpose (for certain Insurance Regulatory and Development Authority (IRDA)/SEBI registered intermediaries, etc.). Such alteration would also include deletion of obsolete and redundant objects included in the memorandum of association of the company. This article relates to the compliance checklist for altering the object clause of the memorandum of association of the company.

1. Applicable provisions.— Sections 4, 10 and 13 of the Companies Act, 2013 (Act) and relevant provisions of the Companies (Incorporation) Rules, 2014 relates to object clause or changes in object clauses of the memorandum of association of the company.

  1. Contents of the “object clause”.—Under Section 4 of the Act, the object clause shall contain the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. Here, the relevant provisions are Schedule I to Act which Tables A, B, C, D and E.
  2. Approval of the Board of Directors.—The directors of the company shall primarily approve the proposal for altering object clause of the company. Such approval shall be subject to the approval of the shareholders and Central Government (in case of Section 8 companies). The necessary authorities shall also be specified in the resolution. The directors shall then call for shareholders meeting and authorise the director(s) or company secretary to issue notice to the shareholders. The resolution passed shall be accordingly drafted. The notice shall be issued in accordance with the Act, Rules made there under and the provisions of the articles of association of the company. The company shall ensure compliance of Sections 101 and 102 of the Act (according to the applicability and provisions in articles of association of the company). In case of public companies or private companies that are subsidiary of public companies, if the amendment to the object clause amounts to diversification of business activity, then in such cases, such companies shall file e-Form MGT-14[2] with the Registrar of Companies.
  3. Approval of shareholders.—The resolution for amending the memorandum of association for the objects of the company shall be placed before the shareholders of the company. Such approval can be obtained in general meeting or electronic voting or both, as the case may be. The approval of shareholders by passing a resolution by postal ballot may be obtained for alteration of the object clause in the memorandum of association and in the case of the company in existence immediately before the commencement of the Act (i.e. 1-4-2014), alteration of the main objects of the memorandum of association[3].
  4. Explanatory statement.—A statement setting out the following material facts concerning each item of special business (i.e. amendment to memorandum of association) to be transacted at a general meeting, shall be annexed to the notice calling such meeting, namely: (i) Nature of concern or interest, financial or otherwise, if any, in respect of each items of every director and the manager, every other key managerial personnel; and relatives of the said persons; and (ii) Any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon. Where any item of business refers to any document (i.e. memorandum of association, in this case), which is to be considered at the meeting, the time and place where such document can be inspected shall be specified in the explanatory statement.
  5. Section 8 companies.—A company registered under Section 8 of the Act shall not alter the provisions of its memorandum of association or articles of association (for any clauses) of the company, except with the previous approval of the Central Government (the powers have been delegated to the Registrar of Companies). An application for such alteration for Section 8 company may be filed by e-Form GNL – 1. Such application to the Central Government (i.e. ROC) can be made by obtaining the approval of Board of Directors. After the approval of Central Government (i.e. ROC), the amendment to the memorandum of association shall be placed before shareholders for their approval. The company shall then file e-Form MGT-14 with the Registrar of Companies[4];
  6. Change of name (for listed entities).—According to Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed entity shall be allowed to change its name subject to compliance with the following conditions: (i) time period of at least 1-year has elapsed from the last name change; (ii) at least 50% of the total revenue in the preceding 1-year period has been accounted for by the new activity suggested by the new name; or (iii) the amount invested in the new activity/project is atleast 50% of the assets of the listed entity. SEBI has clarified that if any listed entity has changed its activities which are not reflected in its name, it shall change its name in line with its activities within a period of 6 months from the change of activities in compliance of provisions as applicable to change of name prescribed under the Act[5].
  7. Registration of alteration.—The Registrar of Companies shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of 30 days from the date of filing of the special resolution. The Registrar of Companies issues a certificate for registering the alteration of the object clause of the company.
  8. Validity of registration.—The alteration made under Section 13 of the Act shall not have any effect until it has been registered in accordance with the provisions of the Act.
  9. Compliances (post-alteration of object clause.—Each and every copy of the memorandum of association shall have the revised/new object clause of the company.

Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1] 1957 SCC OnLine Cal 229 : AIR 1957 Cal 593.

[2] S. 179(3)(h) read with S. 117(3)(g) of the Act.

[3] R. 22 of the Companies (Management and Administration) Rules, 2014.

[4] Under S. 117 of the Act.

[5] Regulation 45 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

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The articles of association (articles) of the company are often termed as the “bye-laws”. The articles contain regulations for the overall internal management of the company. It contains basic rules for calling and conducting Board meetings, voting at Board meeting, transfer and transmission of securities, voting rights of shares, calling and conducting of general meetings, etc. The article may have a detailed provision for appointment, role and responsibilities of Managing Director, whole-time Director, Executive Directors, etc. Certain provisions of the Companies Act, 2013 (Companies Act) are not applicable to private companies, Section 8 companies if there are certain provisions in its articles. The articles regulate the day-to-day functioning of the company. A shareholder of the company is expected to be familiar with the contents.  A company is expected to act within the contours of its article of association. In Naresh Chandra Sanyal v. Calcutta Stock Exchange Assn. Ltd.[1]1, it has been held,

“14. Subject to the provisions of the Companies Act, the company and the members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the company.”

The “articles of association” have been defined under Section 2(5) of the Companies Act as “it means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act”. “Previous company law” has also been defined in Section 2(67) of the Companies Act. According to Section 5 of the Act, the articles of a company shall contain the regulations for management of the company.

This article relates to procedure and checklist for amending the articles of companies of private companies and unlisted public companies. For listed companies, it shall be necessary to comply with the provisions of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as well.

1.Contents of AOA.—The articles shall also contain such matters, as may be prescribed i.e. in accordance with Rule 11 of the Companies (Incorporation) Rules, 2014. The model articles as prescribed in Tables F, G, H, I and J of Schedule I to the Companies Act may be adopted by a company as may be applicable to the case of the company, either in totality or otherwise.

(i) Table F relates to AOA of company limited by shares.

(ii) Table G relates to AOA of company limited by guarantee and having a share capital.

(iii) Table H relates to AOA of company limited by guarantee and not having a share capital.

(iv) Table I relates to AOA of unlimited company and having a share capital.

(v) Table J relates to AOA of unlimited company and not having a share capital.

Nothing prevents a company from including such additional matters in its articles as may be considered necessary for its management. Such inclusion of additional matters can be done at the time of incorporation of the company or by amending the articles of the company.

2. Entrenchment Related Provisions in AOA of Company.—The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

3. Manner of Inclusion of Entrenchment Related Provisions in AOA of Company.—The inclusion can be made at the time of incorporation of the company or subsequently by amending the articles of the company. Such provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

4. Notice to Registrar of Companies.—Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed i.e. e-Form INC-7 or e-Form INC-32 Simplified Proforma for Incorporating Company Electronically (SPICe) of the Companies (Incorporation) Rules, 2014 and e-Form MGT-14 of the Companies (Management and Administration) Rules, 2014 in case of subsequent amendment.

4. Occasions for Amending AOA of the Company.—The articles of the company may be amended for ensuring proper compliance of the Companies Act, 2013, availing certain exemptions under the Ministry of Corporate Affairs (MCA) notifications for private company, Section 8 companies, etc., or specifying roles and responsibilities of the directors and key managerial personnel (KMP), or inclusion of certain points of shareholders agreement or investment agreement in the articles of the company, etc. In recent years, companies have adopted an entire new set of articles under the Companies Act, 2013 for the articles of Companies Act, 1956. The amendment of articles would also be required for conversion of a company from private to public or vice versa.

5. Conversion of Companies.— According to Section 14 of the Act, subject to the provisions of the Act and the conditions contained in its memorandum of association, if any, a company may, by a special resolution, alter its articles by including alterations having the effect of conversion of: (i) private company into a public company; or (ii) public company into a private company. However, where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under Companies Act, the company shall, as from the date of such alteration, cease to be a private company. Any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government (powers delegated to Regional Director) on an application made in such form and manner as may be prescribed (i.e. e-Form RD-1). The company shall ensure compliance of Rule 41 of the Companies (Incorporation) Rules, 2014.

6. Section 8 Companies.—A company registered under Section 8 of the Act shall not alter the provisions of its memorandum of association or articles of association of the company, except with the previous approval of the Central Government (powers have been delegated to the Registrar of Companies). Such application for altering the articles of association of Section 8 company may be filed by e-Form GNL-1. Such application to the Central Government [i.e. Registrar of Companies (ROC)] can be made by obtaining the approval of Board of Directors. After the approval of Central Government (i.e. ROC), the amendment to the articles of association shall be placed before shareholders for their approval. The company shall then file e-Form MGT-14 with the Registrar of Companies under Section 117 of the Act.

7. Approval of the Board of Directors.—The directors of the company shall primarily approve the proposal for altering the articles of the company. Such approval shall be subject to the approval of the shareholders and Central Government (in some cases, discussed above). The resolution passed in the meeting of Board of Directors shall be accordingly drafted. The necessary authorities shall also be specified in the resolution.

8. Approval of Shareholders.— The resolution for amending the articles of the company shall be placed before the shareholders of the company. Such approval can be obtained in general meeting or electronic voting or both, as the case may be. The approval of shareholders by passing a resolution by postal ballot may be obtained for alteration of articles of association in relation to insertion or removal of provisions which, under sub-section (68) of Section 2 of the Act, are required to be included in the articles of a company in order to constitute it a private company [Rule 22 of the Companies (Management and Administration) Rules, 2014].

9. Explanatory Statement.—A statement setting out the following material facts concerning each item of special business (i.e. amendment to articles of association) to be transacted at a general meeting, shall be annexed to the notice calling such meeting, namely: (i) nature of concern or interest, financial or otherwise, if any, in respect of each items of every director and the manager, every other key managerial personnel; and relatives of the said persons; and (ii) any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon. Where any item of business refers to any document (i.e. articles of association, in this case), which is to be considered at the meeting, the time and place where such document can be inspected shall be specified in the explanatory statement.

10. Registration of Alteration.— Every alteration of the articles under Section 14 of the Act and a copy of the order of the Central Government approving the alteration (i.e. in case of conversion of public company into private company) shall be filed with the Registrar of Companies, together with a printed copy of the altered articles of association, within a period of 15 days, who shall register the same. The company shall then file e-Form MGT-14 with the Registrar of Companies under Section 117 of the Act.

11. Validity of Registration.— Any alteration of the articles of association registered shall, subject to the provisions of the Companies Act, be valid as if it were originally in the articles.


Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1]  (1971) 1 SCC 50, 56 : (1971) 41 Comp Cas 51.

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A company acts through the decisions made by its Board of Directors. The only way to prove that the decision was taken by the Board of Directors is by presenting the minutes of meetings. Minutes are to be maintained in accordance with Section 118 of the Companies Act, 2013 (Act) which states, every company shall maintain minutes prepare and maintain minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every Board meeting or committee meeting.

As held in Escorts Ltd. v. Sai Autos[1]

  1. …the only way to prove that a particular resolution was passed at a meeting of the Board of Directors of a company is that the minutes book in which the said resolution was recorded as having been passed should be produced in court as that alone can form evidence of the fact under Section 194[2]

Section 173 of the Act permits directors to participate in meetings through videoconferencing or other audio-visual means. The manner of participation should be such as to enable recording and recognise participation of the directors, with the facility to record and store the proceedings of the meeting, with date and time. In times of the pandemic, these provisions have assumed greater importance. This article is a checklist for preparation, signing and maintenance of minutes of Board meeting conducted through videoconferencing.

1 Applicability.—The provisions of Section 118, read along with Companies (Meetings of Board and its Powers) Rules, 2014 should be referred for Board meeting to be conducted through videoconferencing. These provisions are applicable to all companies.

  1. Content to be Included in Minutes of Board Meeting through VC.—The minutes of the Board may contain the following aspects:

(a) Presence of sufficient security and identification procedures to safeguard integrity of the meeting.

(b) Availability of proper videoconferencing or other audio visual equipment or facilities for providing transmission of the communications for effective participation of the directors and invitees of the meeting.

(c) Process for recording the proceedings and preparing the minutes.

(d) Confirmation that no person other than the director or intended invitee was attending the meeting through videoconference. The said confirmation can be part of the roll call. An exception may be made for differently abled persons.

(e) Confirmation that participants attending the meeting through audio visual means can hear and see clearly during the proceedings of the meeting.

(f) Noting of the communication received from the director prior to the meeting to attend such meeting through videoconferencing.

(g) Noting in the minutes of meeting of first quarter of calendar year about the receipt of declaration of the director communicating his intention to attend all the meetings for the calendar year through videoconferencing mode. (This is not mandatory compliance.)

(h) Noting or approval resolution of the election or appointment of the Chairperson of the meeting (in accordance with the articles of association of the company).

(i) Noting of the confirmation by Chairperson that adequate quorum was present to initiate the proceedings of meeting.

(j) Manner of roll call taken by the Chairperson wherein each director has stated the following information for record purposes:

(i) Name of director.

(ii) Location from where he is participating.

(iii) He has received the agenda and all the relevant material for the meeting.

(iv) No one other than the director concerned is attending or having access to the proceedings of the meeting at the location mentioned.

(k) Recording of the names of persons present at the meeting apart from the directors and invitees, with the due permission of the Chairperson. Invitees may include CEO, CFO, Consultants, Head of Departments, etc.

(l) Where a director was interested in any of the business items, he has been excluded for the purposes of quorum for that business item.

(m) The place of the meeting shall be deemed to be the venue as mentioned in the notice of the meeting and the recording of the meeting shall be deemed to have been made at such location.

(n) Noting of the consent by the directors to sign the statutory registers as placed in the meeting at the scheduled venue.

(o) Identification by the members of the meeting before speaking on any matter of the meeting for record purposes.

(p) Repetition was sought where the statement of a director was unclear or interrupted by the Chairperson or Company Secretary.

(q) Manner of voting on every resolution (with necessary reference to the articles of association of company).

(r) Where a requirement for voting arose due to objection to any motion, the noting/approval procedure of calling the roll by the Chairperson, and noting the vote, after each director identifies himself before casting his vote for the record has been followed.

(s) After each agenda item, the Chairman summarised the decision along with noting the names of directors who dissented from the decision.

  1. Restrictions on Board of Directors to Discuss Certain Agenda Items in Board Meeting through Videoconferencing.—The following matters shall not be dealt with in any Board meeting held through videoconferencing[3]:

(a) Approval of the annual financial statements.

(b) Approval of the Board’s report.

(c) Approval of the prospectus.

(d) Audit committee meetings for consideration of financial statement including consolidated financial statement if any, to be approved by the Board.

However, where there is quorum presence in a meeting through physical presence of directors, any other director may participate conferencing through video or other audio-visual means.

  1. Circulation of Minutes.—Ensure that the draft minutes are circulated within 15 days of the meeting to every director who attended the meeting for his confirmation or comments on the content or accuracy of the draft minutes, either in physical or electronic mode, as is decided by the Board in its meeting. Every director attending the meeting should provide his comments on the draft minutes within 7 days or some reasonable period as specified.
  2. Minutes Book.—A company may maintain a distinct minute book for each type of meeting, namely: (i) general meetings of the members; (ii) meetings of the creditors; (iii) meetings of the Board of Directors; and (iv) meetings of each of the committees.
  3. Date of Entry.—The minutes of proceedings of each meeting shall be entered in the books maintained for that purpose along with the date of such entry within 30 days of the conclusion of the meeting;
  4. Signing and Initials of Minutes of Meeting.—The minutes shall be signed or initialled on every page and signed and dated on the last page by the Chairman of the meeting or the Chairman of the succeeding Board meeting.
  5. Place of Maintenance of Minutes of Board Meeting.—The minute books of Board meetings shall be kept at the registered office of the company or at such other place as may be authorised by the Board. The same shall be preserved permanently and kept in the custody of the Company Secretary or any director duly authorised by the Board.
  6. Compliance with Secretarial Standards issued by Institute of Company Secretaries of India (ICSI).—Every company shall ensure compliance of the Secretarial Standards with respect to general and Board meetings specified by the ICSI, and approved by Central Government.

* Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1] 1990 SCC OnLine Del 184 : (1991) 72 Comp Cas 483.

[2] Under Companies Act, 1956, corresponding to S. 118 sub-s. (7).

[3] For the period beginning from the commencement of the Companies (Meetings of Board and its Powers) Amendment Rules, 2020 and ending on 31-12-2020, the meetings on the said matters may be held through videoconferencing or other audio-visual means.

OP. ED.Practical Lawyer Archives

Introduction

The Board’s report is a communication by the Board of Directors of the company to its shareholders. Generally, the Board of Directors communicate about the company’s financial performance in the reporting period, impact of economic policies on the company and industry. Generally, the directors, in the report, also share their perspective and vision for the next financial year. Section 134 of the Companies Act, 2013 (“the Act”) relates to “Financial Statements and Board’s report, etc.”. The provisions lay down minimum disclosures by the companies in the Board’s report. Rules 8 and 8-A of the Companies (Accounts) Rules, 2014 also provide for certain disclosures in the Board’s report. This article is checklist for preparation of Board’s report for small company & One-person company (OPC).

1. Meaning of Small Company.— Pursuant to Section 2(85) of the Act, “small company” means a private company having paid-up share capital of which does not exceed Rs 50 lakhs[1]; and turnover of which as per P&L A/c for the immediately preceding financial year does not exceed Rs 2 crores[2]. However, small company shall not include holding company, subsidiary company, company registered under Section 8 of the Act or a company or body corporate governed by any special Act.

2. Meaning of One Person Company (OPC).—OPC means a company which has only one person as a member. OPC shall have minimum 1 director and can have maximum of 15 directors. Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate OPC and shall be a nominee for the sole member of an OPC. A natural person shall not be member of more than one OPC at any point of time and the said person shall not be a nominee of more than one OPC.

3. Applicability of Relevant Provisions.—Taking into consideration the limited operations and volume of small company and OPC, Ministry of Corporate Affairs (MCA) has prescribed limited disclosures for such companies. Rule 8-A, Companies (Accounts) Rules, 2014[3] relates to such disclosures. However, such companies shall also comply with the relevant provisions of Section 134 of the Act.

4. Disclosures by Small Company & OPC.—The Board’s report of OPC and small company shall be prepared based on the standalone financial statement of the company, which shall be in abridged form. The Board’s report shall contain the following disclosures:

(a) State of the Company’s Affairs.—In this clause, the directors may explain the performance and operations of the company in the financial year. They can also provide comparative statistics of the company’s performance with earlier financial year. In the Board’s report prepared for the financial year 2019-2020, it is desirable that directors discuss the impact of Covid-19 and lockdown on company’s operations and some guidance for the financial year 2020-2021.

(b) Financial Summary or Highlights.—Generally, there is a mention of the total sales, net profit (before tax and after tax), declaration of dividend, transfer to general reserves and some important developments in the company. At the time of preparation of the report, it is necessary to refer the financial statements are prepared and audited by the auditors of the company.

(c) Details of Directors who were Appointed or have Resigned during the year.—For including the same in the Board’s report, it is necessary to refer and rely upon the minutes of Board meeting, minutes of general meeting, e-forms filed with the MCA and register of directors and key managerial personnel. It is also necessary to confirm the date of appointment or resignation with the documents submitted or necessary disclosures made by the directors. The company may also mention the vacation of office of director, disqualification, etc. Ensure that the Board is duly constituted after such change i.e. requisite number of directors, resident director, women director, independent director (depending upon the applicability). Due to the change in directors, ensure the committees (if any) are also reconstituted. If there is no such appointment or resignation, it is necessary to disclose the same.

(d) Number of Meetings of the Board.—For including the same in the Board’s report, it is necessary to refer and rely upon the notice, attendance sheet of the minutes of Board Meeting. It is necessary to mention only number of meetings, however, some companies may prefer to disclose the dates of meeting and other details.

(e) Director’s Responsibility Statement.—The Board’s report shall include the following statements:

(i) In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures – Confirm with the financial statements of the company and also refer the audit report of the company.

(ii) The directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period-Confirm with the financial statements of the company and also refer the audit report of the company.

(iii) The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities – Confirm with the financial statements of the company and also refer the audit report of the company.

(iv) The directors had prepared the annual accounts on a going concern basis – Confirm with the financial statements of the company and also refer the audit report of the company. This is a very important point in the present Covid-19 and lockdown situation as operations of many sectors, companies is affected.

(v) The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively – Confirm with the representative of the company and also check the system adopted by the company for ensuring compliance with the provisions of all application laws.

(f) Details in Respect of Frauds Reported by Auditors (other than those which are reportable to the Central Government).—In order to confirm the same and include necessary information in the Board’s report, check the auditors report, communication between the company and auditor and minutes of Board meetings. If there is no such event, it is necessary to disclose the same.

(g) Explanations or Comments by the Board on Every Qualification, Reservation or Adverse Remark or Disclaimer made by the Auditor in his Report.—In order to confirm the same and include necessary information in the Board’s report, check the auditors report for any qualification, reservation, adverse remark or disclaimer. It is necessary that the directors explain/reply/comment on such remark in the Board’s report. It is desirable that the directors also explain the steps taken to rectify the particular default or non-compliance. If there is no such remark or comment, it is necessary to disclose the same.

(h) Material Changes from the Date of Closure of the Financial Year in the Nature of Business and their Effect on the Financial Position of the Company.—For this year, this clause will be very important in the Board’s report as it will cover material changes and impact of lockdown on the company from 31-3-2020 till the financial statements of the company are finalised and signed. Considering the fact that the lockdown and Covid-19 has affected every person and every business, such disclosure in the Board’s report for 31-3-2020 is mandatory.

(i) Details or Significant and Material Orders Passed by the Regulators or Courts or Tribunals Impacting the Going Concern Status and Company’s Operations in Future: In order to confirm the same and include necessary information in the Board’s report, it is necessary to confirm the same with the management and also refer to the minutes of the Board meeting. The notes/explanation to financial statements may also disclose such information. If there is no such event, it is necessary to disclose the same in the Board’s report.

(j) Web Address, if any, where Annual Return has been Placed.—The Board’s report shall mention the web address, if any, where annual return has been placed.

(k) Particulars of Contracts or Arrangements with Related Parties under Section 188 in the Form AOC-2.—In this clause, it is necessary to mention the following points:

(i) Details of contracts or arrangements or transactions not at arm’s length basis.

(ii) Details of contracts or arrangements or transactions at arm’s length basis.

       The disclosures are made in Form AOC-2 and the same shall be signed by the persons who have signed the Board’s report.

(l) Any other Disclosures.—The directors may make any other disclosures in the Board’s report.

5. Approval of Financial Statements.—The financial statement (including consolidated financial statement, if any) shall be approved by the Board of Directors before they are signed on behalf of the Board by the Chairperson of the company (where he is authorised by the Board) or by 2 directors (out of which one shall be managing director, if any), and the CEO, the CFO and the CS of the company, wherever they are appointed. In the case of OPC, only by one director. After the approval by the Board of Directors, the financial statements shall be submitted to the auditor for his report thereon. The audit report shall be attached to the financial statements. Ensure that the necessary approval and authority is given in the meeting of the Board of Directors and the same is recorded in the minutes of meeting. Till 30-9-2020, MCA has allowed companies to conduct Board meetings through videoconferencing or other audio-visual means for approval of annual financial statements, approval of Board’s report, etc.

6.  Signing of Board’s Report.—The Board’s report and any annexures thereto shall be signed by its Chairperson of the company (if he is authorised by the Board of Directors). Where the Chairperson is not so authorised, the same shall be signed by at least 2 directors, one of whom shall be Managing Director, or by the director where there is one director. Ensure that the necessary authority is given in the meeting of the Board of Directors and the same is recorded in the minutes of meeting.

7. Circulation/Publishing of Financial Statements and Board’s Report.—A signed copy of every financial statement shall be issued, circulated or published along with a copy each of any notes annexed to or forming part of such financial statement, auditor’s report; and the Board’s report.


Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1] Or such higher amount as may be prescribed which shall not be more than Rs 10 crores.

[2] Or such higher amount as may be prescribed which shall not be more than Rs 100 crores.

[3] Inserted by the Companies (Accounts) Amendment Rules, 2018, w.e.f. 31-7-2018.

OP. ED.Practical Lawyer Archives

Introduction

Meetings have a very important role to play in the functioning of company where decisions are taken and recorded. In case of companies, whether Board meetings or shareholders’ meetings, there is an exchange of idea, proposal, problems and decision on the further of action. In case of companies, a meeting of members, directors, debenture holders, class shareholders, creditors can be called and conducted. This article is a checklist for preparation and sending of the notice of shareholders’ meeting by a private company or unlisted public company under Sections 101 and 102 of the Act read with the Rules.

  1. Applicability of Provisions.—The said provisions are applicable to annual general meeting or extraordinary general meeting of the members of private company or unlisted public company. A listed company shall also comply with the provisions of the Act and Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2018.
  2. Contents of the Notice of Meeting.—Every notice of a general meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting. The statement of business includes the resolutions that are proposed for the voting of the shareholders of the company. Ordinary business (as referred to in Section 102 of the Act) means: (i) consideration of financial statements and the reports of the Board of Directors and auditors; (ii) declaration of any dividend; (iii) appointment of Directors in place of those retiring; and (iv) appointment of, and the fixing of the remuneration of, the auditors. Any other business shall be considered as “special business”. Necessary reference of type of business (ordinary or special) and type of resolution (ordinary or special) shall be given in the notice of the general meeting.
  3. Contents of the Notice of General Meeting through Videoconferencing (VC).—Ministry of Corporate Affairs has allowed companies to hold the general meeting through VC or other audio-visual means (OAVM). In addition to any other requirement provided in the Act or the Rules, the notice for the general meeting shall make disclosures with regard to the manner in which framework provided in the MCA Circular (i.e. General Circular No. 14/2020 [F. No. 2/1/2020-CL-V] dated 8-4-2020) shall be available for use by the members and also contain clear instructions on how to access and participate in the meeting. The company shall also provide a helpline number through the registrar and transfer agent, technology provider, or otherwise, for those shareholders who need assistance with using the technology before or during the meeting. A copy of the meeting notice shall also be prominently displayed on the website of the company and due intimation may be made to the exchanges in case of a listed company.
  4. Explanatory Statement.—A statement setting out the material facts concerning each item of “special business” to be transacted at a general meeting, shall be annexed to the notice calling such meeting. The statement shall set out the nature of concern or interest, financial or otherwise, if any, in respect of each item of every director, key managerial personnel, manager and their relatives. The explanatory statement shall also include information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.
  5. Length of Notice of Meeting.—A general meeting of a company may be called by giving not less than clear 21 days’ notice. In case of private company, the articles of association may provide for a shorter period for the length of notice of general meeting. In case of companies incorporated under Section 8 of the Act, a general meeting of a company may be called by giving not less than clear 14 days’ notice.
  6. Mode of Sending Notice of General Meeting.—The notice of general meeting can be given either in writing or through electronic mode in such manner as may be prescribed.
  7. Sending of Notice through Electronic Mode.—Rule 18 of the Companies (Management and Administration) Rules, 2014 prescribes detailed procedure for sending notice in electronic mode[1]. A notice may be sent through e-mail as a text or as an attachment to e-mail or as a notification providing electronic link or uniform resource locator (URL) for accessing such notice. The e-mail shall be addressed to the person entitled to receive such e-mail as per the records of the company or as provided by the depository. The subject line in e-mail shall state the name of the company, notice of the type of meeting, place and the date on which the meeting is scheduled. If notice is sent in the form of a non-editable attachment to e-mail, such attachment shall be in. PDF or in a non-editable format together with a “link or instructions” for recipient for downloading relevant version of the software. The company should ensure that it uses a system which produces confirmation of the total number of recipients e-mailed and a record of each recipient to whom the notice has been sent and copy of such record and any notices of any failed transmissions and subsequent resending shall be retained by or on behalf of the company as “proof of sending”. The company’s obligation shall be satisfied when it transmits the e-mail and the company shall not be held responsible for a failure in transmission beyond its control. The company may send e-mail through in-house facility or its registrar and transfer agent or authorise any third-party agency providing bulk e-mail facility. The notice of the general meeting of the company shall be simultaneously placed on the website of the company, if any, and on the website as may be notified by the Central Government.
  8. Opportunity for E-mail Address Registration.—The company shall provide an advance opportunity at least once in a financial year, to the member to register his e-mail address and changes therein. Such request may be made by only those members who have not got their e-mail id recorded or to update a fresh e-mail id and not from the members whose e-mail ids are already registered. If a member entitled to receive notice fails to provide or update relevant e-mail address to the company, or to the depository participant as the case may be, the company shall not be in default for not delivering notice via e-mail.
  9. Shorter Notice Consent for Shareholders Meeting.—A general meeting may be called after giving shorter notice than clear 21 days’ notice (or any other period as mentioned in the articles of association of the company), if consent, in writing or by electronic mode, is accorded thereto:

(i) In Case of an Annual General Meeting (Company with Share Capital or without Share Capital).—By not less than 95% of the members entitled to vote thereat.

(ii) In the Case of Extraordinary General Meeting (for Company with Share Capital).—By members of the company holding majority in number of members entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting.

(iii) In the Case of Extraordinary General Meeting (for Company without Share Capital).—By members of the company having, if the company has no share capital, not less than 95% of the total voting power exercisable at that meeting.

  1. Recipients of Notice of Shareholders’ Meeting.—The notice of every meeting of the company shall be given to: (a) every member of the company, legal representative of any deceased member or the assignee of an insolvent member; (b) auditor(s) of the company; and (c) every director of the company.
  2. Accidental Omission to Give Notice of General Meeting.—Any accidental omission to give notice to, or the non-receipt of such notice by, any member or other person who is entitled to such notice for any meeting shall not invalidate the proceedings of the meeting.

*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com

[1] Here, “electronic mode” means any communication sent by a company through its authorised and secured computer program which is capable of producing confirmation and keeping record of such communication addressed to the person entitled to receive such communication at the last electronic mail address provided by the member.

OP. ED.Practical Lawyer Archives

Buy-back is one of the preferred ways by which a company provides an exit route to the shareholders of the company i.e. the requisite number of shares are extinguished, agreed amount is paid to the shareholders. Buy-backs of shares may be preferred for improving certain financial ratios of the company, improving valuation of companies, providing tax-effective means of rewarding the shareholders, providing an exit to shareholders, etc. This article is a compilation of a checklist for buy-back of equity shares by private company or unlisted public companies. Section 68 of the Companies Act, 2013 (“the Act”) and the Rules made thereunder are the relevant provisions. The provisions provide for buy-back of shares or any specified securities. Here ‘specified securities’ includes ESOPs or other securities as may be notified by the Central Government from time to time.

  1. Sources of buy-back: A company may purchase its own shares or other specified securities out of: (a) its free reserves, (b) securities premium account, or (c) proceeds of the issue of any shares or other specified securities. However, buy-back of any kind of shares or other specified securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. The company shall not utilise any money borrowed from banks or financial institutions for the purpose of buying back its shares.
  2. Authority to buy-back shares: A company can buy-back its own shares if the same is authorised by its articles of association. All the shares for buy-back are fully paid-up.
  3. Buy-back – from whom? The buy-back may be: (a) from the existing shareholders or security holders on a proportionate basis, (b) from the open market, (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. In case the number of shares or other specified securities offered by the shareholders or security holders is more than the total number of shares or securities to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.
  4. Limits on buy-back (board approval): Buy-back of shares may be authorised by the board of directors by means of a resolution passed at its meeting. In such case, the buy-back shall be 10% or less of the total paid-up equity capital and free reserves of the company. The said decision cannot be taken by the board of directors by passing a circular resolution.
  5. Limits on buy-back (shareholders’ approval): Buy-back of shares may be authorised by passing a special resolution at a general meeting of the company. In such case, the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company. Also, in respect of the buy-back of equity shares in any financial year, the reference to 25% shall be construed with respect to its total paid-up equity capital in that financial year. In case of shareholders’ approval, the notice of the meeting shall be accompanied by an explanatory statement stating: (a) full and complete disclosure of all material facts, (b) necessity for the buy-back, (c) class of shares or securities intended to be purchased under the buy-back, (d) amount to be invested under the buy-back; and (e) time-limit for completion of buy-back. The company shall make further disclosures as stated in Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.
  6. Debt-equity ratio (post buy-back): The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and its free reserves. For government companies which carry on non-banking finance institution activities and housing finance activities, the debt to capital and free reserves ratio shall be 6:1.
  7.  Declaration of Solvency: Where a company proposes to buy-back its own shares or other specified securities, it shall, before making such buy-back, file with the Registrar of Companies and SEBI (if company is listed), a declaration of solvency (Form No. SH-9) signed by at least 2 directors, one of whom shall be Managing Director, if any, and verified by an affidavit to the effect that the board of directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the board of directors.
  8.  Offer letter: The letter of offer shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document. The company which has been authorised by a special resolution shall, before the buy-back of shares, file the letter of offer in Form No. SH-8 with the Registrar of Companies. The letter of offer shall be dated and signed on behalf of the board of directors of the company by not less than 2 directors of the company, one of whom shall be the Managing Director, where there is one.
  9. Offer period: The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar but not later than 20 days from its filing with it. The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer. However, where all members of a company agree, the offer for buy-back may remain open for a period less than 15 days.
  10. Post buy-back activities: (i) The company shall complete the verifications of offers received within 15 days from the date of closure of offer and shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of the offer; (ii) The company shall immediately after the date of closure of the offer, open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back; (iii) The company shall within 7 days of the time: (a) make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or (b) return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance; (iv) The company shall confirm in its offer the opening of a separate bank account adequately funded for this purpose and to pay the consideration only by way of cash.
  11. Time-limit for completion of buy-back: Every buy-back shall be completed within a period of 1 year from the date of passing of the special resolution, or as the case may be, the resolution passed by the board of directors of the company.
  12. Maintenance of Register: Where a company buys back its shares under Section 68 of the Act, it shall maintain a register (in Form No. SH-10) of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities. Such register shall be maintained at the registered office of the company and shall be kept in the custody of the company secretary or any other person authorised by the board in this behalf. The entries in the register shall be authenticated by the company secretary or by any other person authorised by the board for the purpose.
  13. Return of completion of buy-back: A company shall, after the completion of the buy-back under Section 68 of the Act, file with the Registrar of Companies and SEBI (if the company is listed) a return (in Form No. SH-11) containing such particulars relating to the buy-back within 30 days of such completion, as may be prescribed. There shall be annexed to the return, a certificate (in Form No. SH-15) signed by two directors of the company including Managing Director, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the Rules made thereunder.
  14. Certain restrictions on buy-back of shares: The offer of buy-back shall not be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back, if any. The company shall not withdraw the offer once it has announced the offer to the shareholders.
  15. Destruction of share certificate: Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of buy-back.
  16. Restriction on further issue of shares post-buy-back of shares: Where a company completes a buy-back of its shares, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under rights issue [clause (a) of sub-section (1) of Section 62 of the Act] within a period of 6 months. However, such restriction is not applicable to bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
  17. Buy-back for listed companies: The buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by SEBI in this behalf.

*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com

Compliance Checklist
OP. ED.Practical Lawyer Archives

Introduction

Section 62 of the Companies Act, 2013 (“the Act”) relates to ‘further issue of share capital’. According to the said provisions the shares can be offered to: (i) existing shareholders on proportionate basis of their shareholding, (ii) employees under ESOP scheme, (iii) any other person, (iv) conversion of debentures or loan into shares. This article is a checklist for issue of shares on rights basis by a private company or unlisted public company under Section 62 of the Act. A listed company shall also comply with the provisions of the Act and the SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018.

  1. Applicability of provisions: The provisions of Section 62 of the Act are applicable to all companies except Nidhi Companies [1].
  2. Recipients of rights offer: According to the provisions, where at any time, a company proposes to increase its subscribed capital by the issue of further shares (i.e. equity shares, preference shares), such shares shall be offered to the existing shareholders of the company, who at the date of the offer, are equity shareholders and such offer is in proportion (i.e. pro rata basis), as nearly as the circumstances admit, to the paid-up share capital of the company.
  3. Determination of cut-off: The board of directors shall determine the cut-off date for determining the list of shareholders and their shareholding for making an offer of shares under Section 62 of the Act.
  4. Approval process: In case of rights issue, the approval of board of directors is required. With respect to the approval process, the board of directors shall discuss the following points in its meeting: (i) Need for requirement of funds, (ii) Need for offering shares to existing shareholders of the company, (iii) Cut-off date, (iv) Offer Price, (v) Approving and signing offer letter, (vi) Appointing intermediaries, if required, (vii) Authorising an officer or director for signing agreements with intermediaries, (viii) Authorising officer or director for issuing offer letter to existing shareholders of the company, (ix) Authorising officers or directors to take necessary action in relation to rights issue. As offer is made to all shareholders, approval of shareholders is not required.
  5. Offer letter: Under the Act or the Rules, there is no specific provision prescribing the detailed contents of the offer letter for rights issue. However, the board shall make necessary disclosures to the shareholders. The contents of the offer letter under rights issue may be similar to an offer letter under private placement of securities, with a specific reference to offer on proportionate basis, right of renunciation and offer period.
  6. Offer price: Under the Act or the Rules, there is no specific provision for determining price of shares to be offered under the rights issue. The board may decide the price of shares or obtain the valuation certificate under the Income Tax Act, 1961 or the Foreign Exchange Management Act, 1999 as applicable. If the valuation certificate is obtained, then it shall be noted by the board of directors in its meeting and necessary reference is made in the offer letter.
  7. Offer period [2] : The offer shall be made by notice specifying the number of shares offered and limiting a time not being less than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined. Further in case of specified IFSC public company or private companies, the periods lesser than those specified (i.e. 15 days/30 days) shall apply if 90% of the members have given their consent in writing or in electronic mode. The notice to the shareholder shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least 3 days before the opening of the issue.
  8. Right of renunciation: Unless the articles of association of the company otherwise provide, the rights offer shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person. The notice/offer letter shall contain a statement of this right of renunciation.
  9. Completion of offer period: After the expiry of the time specified in the notice, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the board of directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company. Such shares are issued but unsubscribed and the board of directors may allot to few promoters or directors or any other person. The objective is to ensure that the funding requirement of the company is achieved.
  10. Allotment of equity shares: After receipt of share application money, the board of directors shall pass a resolution for allotment of shares and refund of share application money, if any. The board shall also authorise directors for completing post-allotment compliances. In case of unlisted public companies, the demat account of the shareholders shall be credited with requisite number of allotted shares.
  11. Post-allotment compliances: After the allotment of shares, the company shall, within 30 days thereafter, file with the Registrar a return of allotment in e-Form PAS-3, along with the fee as specified in the Companies (Registration of Offices and Fees) Rules, 2014. The company shall issue share certificates within 2 months from the date of allotment. After allotment of shares, the company secretary of the company or any other authorised person by the board of directors shall make necessary entries in the register of members within 7 days from the date of allotment.

*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1] MCA Notification No. GSR 465(E) [F.NO.2/11/2014-CL.V], dated 5-6-2015.

[2] The Companies Amendment Bill, 2020 (as introduced in Lok Sabha) proposes to change the offer period for all companies i.e. the offer period may be open for less than 15 days.

OP. ED.Practical Lawyer Archives

Introduction

Generally, a person whose name appears in the register of members is presumed to have a beneficial interest in the shares registered in his name. However, in certain cases, the person whose name appears in the register may be holding shares on behalf of or for the benefit of some other person i.e. the “beneficial interest” may belong to someone else.

“Beneficial interest” in shares of a company is a very important aspect from the perspective of the shareholders and person holding beneficial interest. Section 89 of the Companies Act, 2013 (the Act) relates to the declaration of beneficial interest in shares. Also, understanding the provisions of Section 89 of the Act is also important from the perspective of complying with the provisions of Section 90 (relating to “register of significant beneficial owners in a company”). This article is a checklist w.r.t. beneficial interest in shares, disclosures and compliances.

1. Identification of “Registered Owner”.—Registered owner of the shares means a person whose name is entered in the register of members of a company, but such person does not hold any beneficial interest in such shares. 

2. Identification of “Beneficial Owner”.—Beneficial owner of the shares means a person who holds “beneficial interest” in the company. “Beneficial interest” refers to the rights or entitlements of a person in the shares. Section 89(10) of the Act defines “beneficial interest” in a share as it includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to: 

(i) exercise or cause to be exercised any or all of the rights attached to such share; or

(ii) receive or participate in any dividend or other distribution in respect of such share.

3. Reporting Obligation of “Registered Owner”.—The person who is a registered owner of shares shall make a declaration (Form No. MGT-4) within 30 days from the date on which his name is entered in the register of members of the company. In the declaration, the registered owner shall specify the name and other particulars of the person who holds the beneficial interest in such shares. Where any change occurs in the beneficial interest in such shares, the registered owner shall, within 30 days from the date of such change, make a declaration (Form No. MGT-4) of such change to the company.

4. Reporting Obligation of Beneficial Owner.—The person who holds or acquires a beneficial interest in share of a company shall make a declaration (Form No. MGT-5) within 30 days after acquiring such beneficial interest in the shares of the company. In the declaration, the beneficial owner shall specify the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed. Where any change occurs in the beneficial interest in such shares, the beneficial owner shall, within 30 days from the date of such change, make a declaration (Form No. MGT-5) of such change to the company.

5. Duty of the Company.—Where any declaration under Section 89 of the Act is made to a company, the company shall make a note of such declaration in the register of members. The company shall file, within 30 days from the date of receipt of declaration by it, a return (e-Form MGT-6) with the Registrar of Companies in respect of such declaration with such fees or additional fees as may be prescribed. However, private company or unlisted public company which is licensed to operate by Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) or Intercultural Development Research Association (IDRA) from International Financial Services Centre (IFSC) located in an approved multi-services Special Economic Zones (SEZs) set up under Special Economic Zones Act, 2005 (i.e. specified IFSC private company), shall file e-Form MGT-6 within 60 days from the date of receipt of declaration with the Registrar of Companies.

6. Non-Applicability of Provisions of Section 89 of the Act.—The provisions of Section 89 of the Act and Rule 9 of the Companies (Management and Administration) Rules, 2014 are not applicable to a trust which is created, to set up a mutual fund or venture capital fund or such other fund as may be approved by SEBI. Also, the provisions of Sections 89 and 90 of the Act are not applicable to government companies.

7. Consequences of Failure to Declare Beneficial Interest.—Failure to declare beneficial interest results into loss of right in relation to any share in respect of which a declaration is required to be made under Section 89 of the Act but not made by the beneficial owner, and such right cannot be enforced by him or by any person claiming through him.

8. Payment of Dividend.—Section 89 of the Act does not prejudice the obligation of a company to pay a dividend to its members under the Act and the said obligation, on such payment, stands discharged.


Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.
OP. ED.Practical Lawyer Archives

Introduction

The Managing Director of a company directs and controls the company’s operations. He gives strategic guidance and direction to the Board of Directors and other key managerial personnel (KMP) to ensure that the company achieves its objectives. He is also involved in the day-to-day affairs of the company. He directs and controls the resources of the company and supervises various functions or departments, like, manufacturing/production, sales, advertisement, legal, finance and accounting, administration, etc. The Companies Act, 2013 (“the Act”) defines “managing director” and “manager”. This article provides an analysis of relevant provisions of the Act and Rules made thereunder along with detailed checklist w.r.t. appointment of Managing Director or Manager in a company.

1. Director Identification Number (DIN).—Every individual intending to be appointed as Director of a company shall make an application for allotment of director identification number  to the Central Government (under Section 153 of the Act).

2. Modes of Appointment of Managing Director.— Managing director means a director who, by virtue of the articles of association of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company. Therefore, there are four ways for a company to appoint a managing director. The articles of association of company may also provide for appointment in a particular manner.

3. Approval of Board of Directors.—W.r.t. the appointment of Managing Director or Manager by Board of Directors, the notice convening the meeting of Board of Directors shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.

4. Appointment Letter or Agreement.—As defined in the Act, the managing director includes a director occupying such position, by whatever name called. Therefore, any director who is entrusted with substantial powers of management of the company but not designated or appointed as Managing Director, then such director may be a managing director. The Act has not explicitly defined substantial powers of management. The terms of appointment shall specifically state the powers, functions, roles, responsibilities and duties of the appointee. According the provisions, “substantial powers of management” does not include the power to do administrative acts of a routine nature when so authorised by Board, which includes the power to affix company’s common seal to any document or to draw and endorse any cheque on company’s bank account or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of transfer of shares. Therefore, in order to elaborate and define substantial power of management, it is desirable that an appointment letter is issued by the Board of Directors or an agreement is executed that defines the terms and conditions of appointment. Generally “substantial powers of management” may include power to invest funds of the company, power to borrow on behalf of the company, power to appoint functional heads, power to sue on behalf of the company, power to negotiate and sign agreements on behalf of the company.

5. Appointment of Joint Managing Director.—A company may appoint two or more Managing Directors. There is no specific restriction under the Act. The appointee may be designated as the Joint Managing Director or Deputy Managing Director. In order to avoid conflict of duties, it is necessary to elaborate “substantial powers of management of the company” in the appointment letter or resolution or agreement. The provisions of the Act and the Rules made thereunder shall apply to all appointees.

6. Appointment of Managing Director and Manager at Same Time.—A private company or public company shall not appoint Managing Director or Manager at the same time. However, the company may appoint Managing Director after completion of the term of manager or vice-versa. The company may also appoint whole-time director along with appointed Managing Director or Manager.

7. Tenure.—A private company or public company shall appoint or reappoint any person as its Managing Director or Manager for a maximum term of 5 years. However, the reappointment shall not be made earlier than 1 year before the expiry of his term. According to the provisions of the articles of association of the company, such reappointment can be subject to the approval of the Board of Directors and/or shareholders of the company.

8. Age Criteria.—In case of private company or public company, a company shall not appoint or continue the employment of any person as Managing Director or Manager who is below the age of 21 years or has attained the age of 70 years. However, the appointment of a person who has attained the age of 70 years may be made by passing a special resolution. In such case, the explanatory statement annexed to the notice of general meeting shall indicate the justification for appointing such person.

9. Other Criterias and Qualifications (As Prescribed in Section 196 of the Act).— In case of private company or public company, the appointee shall not be an undischarged insolvent or has not at any time been adjudged as an insolvent. The appointee has not at any time suspended payment to his creditors or makes, or has at any time made, a composition with them. The appointee has not at any time been convicted by a court of an offence and sentenced for a period of more than 6 months. In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee.

10. Other Disqualifications under Section 164 of the Act.— The appointee shall not be disqualified to be a director under Section 164 of the Act (i.e. the appointee shall be of sound mind, solvent, not convicted for a particular offence, etc.). In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee. With reference to certain provisions, the appointee shall inform to the company about his disqualification under sub-section (2) of Section 164, if any, in Form DIR-8 before he is appointed or reappointed.

11. Consent.—In case of private company or public company, the proposed appointee shall give his consent to hold the office as Managing Director or Manager of the Company.

12. Compliance of Criteria Specified in Part I to Schedule V of the Act.— In case of public companies only, the provisions of Part I to the Schedule V of the Act are applicable. Accordingly, a person shall be eligible for appointment as Managing Director or Manager, if he satisfies the following conditions: (i) he has not been sentenced to imprisonment for any period, or to a fine exceeding Rs 1000, for the conviction of an offence under 19 prescribed statutes; (ii) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; (iii) he has completed the age of 21 years and has not attained the age of 70 years; and (iv) he is resident of India. In order to ensure compliance of the said provisions, the company shall obtain a declaration from the managing director or manager.

13. Shareholders’ Approval.— In case of public companies, the terms and conditions of such appointment and remuneration payable to the managing director or manager shall be first approved by Board of Directors and then by the shareholders at the next general meeting of the company. The notice convening the general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any. Subject to the provisions of the Act, where an appointment of a managing director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.

14. Central Government’s Approval, in Certain Cases.— The approval of the Central Government shall be obtained if there is a variance in the terms of appointment (i.e. criteria specified in Part I to Schedule V of the Act) of Managing Director or Manager.

15. Number of Directorships.— A person shall not hold office as a director in not more than 20 companies, including alternate directorship (under Section 165 of the Act). The appointee and the company in which he is appointed as Managing Director shall confirm the same.

16. Filing of E-Form and Returns.— (i) The company shall file e-Form DIR-12 for the appointment of Managing Director or Manager; (ii) the company shall file e-Form MGT-14 for the appointment of Managing Director. Filing of such e-form is required for any resolution relating to the appointment, reappointment or renewal of the appointment, or variation of the terms of appointment, of Managing Director; and (iii) in case of public companies, it shall file e-Form MR-1 within 60 days of such appointment of Managing Director or Manager.

17. Entry in the Register of Directors and KMP and their Shareholding.—The company shall make necessary entry of the requisite particulars in the register of directors and key managerial personnel and their shareholding (under Section 170 of the Act).

18. Disclosure of Concern or Interest.—The appointed director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in Form MBP-1 (under Section 184 of the Act). Such disclosure shall be made at the first board meeting in which he participates as a director and thereafter at the first board meeting in every financial year or whenever there is any change in the disclosures already made, then at the first board meeting held after such change. Such disclosure made by the Managing Director shall be noted in the minutes of the board meeting. 


*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com


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OP. ED.Practical Lawyer Archives

Introduction

Under the Companies Act, 2013 (the Act) there are two kinds of equity shares: (i) equity shares with voting rights; and (ii) equity shares with differential voting rights. Equity shares with differential voting rights (DVRs) are as to dividend, voting or otherwise in accordance with such rules as may be prescribed. If the investment is made by a private equity (PE) fund or venture capital fund or any strategic investor, a company will prefer to issue equity shares with DVRs. This instrument may be preferred by companies when certain investors prefer to participate in the decision-making of the company (i.e. voting) over dividend payment or vice versa.

This article is a checklist for private companies and unlisted public companies for the issue of DVRs under the Act and the Rules made thereunder. The listed companies shall comply with the Securities and Exchange Board of India (SEBI) Regulations in addition to the provisions of the Act.

(1) “Eligible Company” to Issue DVR Shares —A private company or public company can issue equity shares with DVR. Following are some important conditions:

(i) The company has not defaulted in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares.

(ii) The company has no subsisting default in the payment of a declared dividend to its shareholders.

(iii) The company has no subsisting default in the repayment of its matured deposits.

(iv) The company has no subsisting default in the redemption of its preference shares.

(v) The company has no subsisting default in the redemption of its debentures.

(vi) The company has no subsisting default in payment of interest on such deposits or debentures or payment of dividend.

(vii) The company has not defaulted in payment of the dividend on preference shares.

(viii) The company has not defaulted in payment of repayment of any term loan from a public financial institution or State level financial institution or scheduled bank that has become repayable or interest payable thereon.

(ix) The company has not defaulted in payment of dues with respect to statutory payments relating to its employees to any authority.

(x) The company has not defaulted in crediting the amount in investor education and protection fund to the Central Government.

(xi) The company has not been penalised by court or tribunal during the last 3 years of any offence under Reserve Bank of India (RBI) Act, 1934, SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act (FEMA), 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

(2) Authority—Issue of shares with DVRs shall be authorised by the articles of association of the company. There should be an explicit clause, w.r.t. voting rights, dividend rights, etc.

(3) Limit on Issue of Shares with DVRs—The voting power in respect of DVR shares of the company shall not exceed 74%, of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.

(4) Approval of Board of Directors—A company can issue equity DVR shares after obtaining the approval shareholders by passing an ordinary resolution. Therefore, in such cases, the Board of Directors shall accord its in principle approval for such issue. The points that shall be discussed in the Board meeting and which shall also be part of the minutes of the meetings are necessary provision of articles of association, justification for such issue, number of shares proposed to be offered and allotted, nature of DVRs, issue price, basis of valuation. The Board of Directors may also note the pre-issue and post-issue shareholding pattern of the company.

(5) Approval of the Shareholders—After obtaining the approval of the directors, the company shall obtain shareholders’ approval by passing an ordinary resolution. The explanatory statement to be annexed to the notice of general meeting shall contain the particular prescribed under the Companies (Share Capital and Debentures) Rules, 2014.

(6) Mode of Issue of DVR Shares—The DVR shares can be issued by way of private placement or preferential allotment (i.e. Section 42 of the Act read with Section 62(1)(c) of the Act) or by a public issue (i.e. under Chapter III Part I of the Act).

(7) Conversion/Reconversion—The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.

(8) Other Rights of Shareholders—The holders of the equity shares with DVRs shall enjoy all other rights such as bonus shares, rights shares, etc. which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.

(9) Allotment of Sweat Equity Shares—After the approval of the shareholders, the company shall make a necessary offer (private offer or public offer). After receipt of share application money, the Board of Directors shall allot the DVR shares. The Board shall also authorise directors/authorised for completing post-allotment compliances.

(10) Post-Allotment Compliances—After allotment of DVR shares, the company shall, within 30 days thereafter, file with the Registrar a return of allotment in e-Form PAS-3, along with the fee as specified in the Companies (Registration of Offices and Fees) Rules, 2014. The company shall issue share certificates within 2 months from the date of allotment. After allotment of DVR shares, the company secretary of the company or any other authorised person by the Board of Directors shall make necessary entries in the register of members within 7 days from the date of allotment.

(11) Maintenance of Register of Members—Where the company issues equity shares with DVRs, the register of members maintained that shall contain all the relevant particulars of the shares so issued along with details of the shareholders.


*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

Compliance Checklist
OP. ED.Practical Lawyer Archives

1.Introduction

There are several ways in which a company can raise long-term capital, e.g. issue of equity shares, preference shares, debentures or accept money by way of deposits. Generally, such capital is utilised for expansion purpose e.g. purchase of non-current assets, such as property, plant and equipment, tangible assets, intangible assets, etc. Sometimes, the companies are in need of short –term and immediate funding requirements. In closely held companies (generally “private companies”), the directors and/or shareholders provide such short-term finance. Under the Companies Act, 2013 (“Act”), there are some important provisions for raising such short-term finance.

This article is an analysis of various provisions of the Act and relevant Rules and provides for compliance checklist for acceptance of unsecured loans from directors and shareholders by private companies.

2. Acceptance of Deposits by Private Company from Members

In case of a private company, the provisions and restrictions w.r.t. issuance of circular to its members, filing copy of the circular with the Registrar of Companies, etc. are not applicable in following cases:

(i) Such private company which accepts from its members monies not exceeding 100% of aggregate of paid-up share capital, free reserves and securities premium account. In this case, there is a restriction on the amount for acceptance of deposits by a private company from its members. Following are the compliances:

(a) The details are noted by the Board of Directors in its meeting i.e. the details shall be part of agenda for the meeting and the necessary reference shall be given in the minutes of the meeting;

(b) such private company shall file the details of such monies accepted to the Registrar of Companies in a prescribed manner; and

(c)?the company shall monitor the monetary limit on a regular basis.

(ii) Start-up company [registered with DIPP (Department of Industrial Policy and Promotion)], for 5 years from the date of its incorporation. In this case, there is no restriction on acceptance of deposits by start-up company. From the perspective of compliances, the same shall be noted by the Board of Directors in its meeting i.e. the same shall be part of agenda for the meeting and the necessary reference shall be given in the minutes of the meeting; and

(iii) A private company which satisfies the following conditions:

(a) Such company is not an associate company or subsidiary company of any other company;

(b) if the borrowings of such private company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or Rs 50 crore, whichever is lower; and

(c) such private company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits. In this case, there is no restriction on the amount for acceptance of deposits by a private company from its members. However, such private company shall comply with all 3 conditions (as mentioned in this point). From the perspective of compliance, the fact is noted by the Board of Directors in its meeting i.e. the same shall be part of agenda for meeting and necessary reference shall be given in the minutes of the meeting.

3.Acceptance of Deposits by Private Company from Directors or Relative of Directors

A private company can accept money as deposit or loan from a person who, at the time of the receipt of the amount, was a director of such private company or a relative of the director of private company. However, in such cases, the following conditions shall be satisfied:

(a) The said person furnishes to the company, at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others; and

(b)  the company shall disclose the details of money so accepted in the Board’s Report.

Every private company shall disclose in its financial statement, by way of notes, about the money received from the directors, or relatives of directors. Such amount falls under the category of “exempted deposits” i.e. under Rule 2(1)(c) of Companies (Acceptance of Deposits) Rules, 2014. In such case, the company shall file a return in e-Form DPT-3 (along with prescribed fees) on or before the 30th day of June, of every year with the Registrar of Companies and furnish the information contained therein as on 31st day of March of that financial year.

4.Acceptance of Deposit/Loans by Private Company from Director Who is Also A Shareholder:

In closely held private companies, usually, the directors and shareholders are same. Considering the compliances and monetary limits, it is desirable that the person discloses the capacity in which the money is given to such companies (i.e. whether the amount is given in the capacity of shareholder or director). Based on this, the company shall ensure compliances, as explained above.

The compliances w.r.t. the acceptance of unsecured loans from directors and shareholders of private company is very critical as the person or company has requisite compliances and disclosures. The unsecured loans accepted by a private company from directors and shareholders are considered to be “exempted deposits” under the Companies (Acceptance of Deposits) Rules, 2014. Recently the Ministry of Corporate Affairs has introduced reporting of such “exempted deposits”. The companies/compliance officers of companies shall ensure compliance of the provisions of the said Rules.


*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

OP. ED.Practical Lawyer Archives

Introduction to “shares” and “share certificate”

According to the provisions of the Companies Act, 2013 (“the Act”), “share” means a share in the share capital of a company and includes stock. [Section 2(84) of the Act]. A share is a part or portion of a larger amount which is divided among or contributed by number of people. It is one of the equal fractional parts into which the share capital of the company is divided.

The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of association of the company (Section 44 of the Act). According to the definition of the “private company”, the articles of association shall contain a provision that restricts the right to transfer its shares.

Share certificate is a document issued by company evidencing that the person named in the certificate is owner of number of shares of company as specified in the share certificate. Share certificate is not a negotiable instrument or warranty of title by the company. According to the provisions of the Act, share certificate issued a company shall specify the shares held by any person and the share certificate shall be prima facie evidence of the title of the person to such shares [Section 46(1) of the Act]. Where a share is held in depository form, the record of the depository is the prima facie evidence of the interest of the beneficial owner.

This article is an analysis of various provisions of the Act and provides a compliance checklist for issuing share certificates to the shareholder of the company.

  1. Authority to Issue Share Certificate —Where a company issues any share capital, the share certificate of any share(s) held in the company shall be issued in pursuance of a resolution passed by Board of Directors [Rule 5(1) of the Companies (Share Capital and Debentures) Rules, 2014];
  2. Distinctive Number for each Share —Every share in a company having a share capital shall be distinguished by its distinctive number (Section 45 of the Act). However, the said provisions are not applicable where the shares are held in dematerialised form;
  3. Details on the Share Certificate —The share certificate shall have following details: (i) name of company, (ii) name of shareholder, (iii) registered office address of the company, (iv) corporate identification number, (v) website of company, if any, (vi) e-mail id of company, if any, (vii) registered folio number, (viii) share certificate number, (ix) distinctive numbers of the shares, (x) paid-up amount per share, (xi) date of issue. Every certificate of share(s) shall be in Form No. SH.1 or as near thereto as possible
    [Rule 5(2) of the Companies (Share Capital and Debentures) Rules, 2014];
  4. Stamp Duty on Share Certificate—The share certificate shall bear requisite stamp duty as per Stamp Act of the State/Union Territory. The amount of stamp duty payable on share certificate shall be determined with reference to the rate indicated in the relevant article specified in the Schedule to the Stamp Act.
  5. Signatures on Share Certificate (for companies other than One Person Company) —The share certificate, issued under the common seal, if any, shall be signed by two Directors or by a Director and the Company Secretary, wherever the company has appointed a Company Secretary. In case the company has a common seal it shall be affixed in the presence of persons required to sign the certificate. [Section 46(1) of the Act read with Rule 5(3) of the Companies (Share Capital and Debentures) Rules, 2014];
  6. Signatures on Share Certificate (in case of One Person Company) —For OPCs, it shall be sufficient if the share certificate is signed by a director and the company secretary or any other person authorised by the Board for the purpose [Rule 5(3) of the Companies (Share Capital and Debentures) Rules, 2014];
  7. Director’s Facsimile Signature on Share Certificate—A director shall be deemed to have signed the share certificate if his signature is printed thereon as facsimile signature by means of any machine, equipment or other mechanical means such as engraving in metal or lithography or digitally signed, but not by means of rubber stamp. However, the Director shall be personally responsible for permitting the affixation of his signature and the safe custody of any machine, equipment or other material used for the purpose;
  8. Corresponding reference in Register of Members—The particulars of every share certificate (as discussed above) shall be entered in the Register of Members;
  9. Maintenance of Share Certificate Forms and related Books and Documents —(i) All blank forms to be used for issue of share certificates shall be printed and the printing shall be done only on the authority of a resolution of the Board of Directors, (ii) blank form shall be consecutively machine numbered and the forms and the blocks, engravings, facsimiles and hues relating to the printing of such forms, (iii) blank forms shall be kept in the custody of the Company Secretary (or such other person as the Board may authorise for the purpose). The said person shall be responsible for rendering an account of these forms to the Board of Directors, (iv) committee of the Board of Directors or appointed Company Secretary or duly authorised Director shall be responsible for the maintenance, preservation and safe custody of all books and documents relating to the issue of share certificates, including the blank forms of share certificates;
  10. Preservation of Books and Documents relating to Issue of Share Certificates —The books and documents relating to the issue of share certificates (including blank forms of share certificates) shall be preserved in good order for not less than 30 years. However, in certain disputed cases, said documents shall be preserved permanently. All certificates surrendered to a company shall immediately be defaced by stamping or printing the word “cancelled” in bold letters and may be destroyed after the expiry of 3 years from the date on which they are surrendered. Share certificate shall be destroyed under the authority of a resolution of the Board of Directors and in the presence of a person duly appointed by Board of Directors [Rule 7(2) of the Companies (Share Capital and Debentures) Rules, 2014];
  11. Duplicate Share Certificate —A duplicate certificate of shares may be issued, if: (i) such share certificate is proved to have been lost or destroyed; or (ii) such share certificate has been defaced, mutilated or torn and is surrendered to the company. The company shall comply with the following conditions w.r.t. ( in writing ) the issue of renewed or duplicate share certificate [Rule 6 of the Companies (Share Capital and Debentures) Rules, 2014]:

(i)  In case of sub-division, consolidation, replacement (if share certificates are defaced, mutilated, torn or old, decrepit, worn out), the duplicate share certificate shall be issued after the original share certificate is surrendered to the company.

(ii)  Company may charge certain fees for issue of such share certificate;

(iii) Company shall make necessary reference (e.g. “duplicate”, “subdivided”, “replaced”, “consolidated”, etc.) on the face of the fresh share certificate and in the Register of Members;

(iv) Prior consent of the Board of Directors and payment of minimum fees (as decided from time to time) is required for issue of duplicate share certificate in lieu of certificates that are lost or destroyed. The Board of Directors shall direct the shareholder to furnish supporting evidence(s), indemnity and the payment of out-of-pocket expenses incurred by the company in investigating the evidence produced;

  1. Maintenance of Register of Renewed and Duplicate Share Certificates —(i) The company shall maintain Register of renewed and duplicate share certificates (with suitable cross-references to the Register of Members) at its registered office or at such other place where Register of Members is kept. (ii) Register of renewed and duplicate share certificates shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose. For such authority, the Board shall pass necessary resolution. (iii) All entries made in the said Register of renewed and duplicate share certificates shall be authenticated by the Company Secretary or an authorised person. For such authority, the Board shall pass a resolution;
  2. Timelines for Issue of Share Certificate —Unless prohibited by any provision of law or any order of Court, Tribunal or other authority, every company shall deliver the certificates of all securities within following timelines:

(i)  To subscribers of memorandum of association—within 2 months from the date of incorporation,

(ii)  To allotees (shares)—within 2 months from the date of allotment,

(iii) To transferee—within 1 month from the date of receipt of instrument of transfer or intimation of transmission,

(iv) To allotees (debentures)—within 6 months from the date of allotment.

If the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on its allotment [Section 56(4) of the Act].

14. Timelines for Issue of Duplicate Share Certificate —In case unlisted companies, the duplicate share certificates shall be issued within 3 months from the date of submission of complete documents with the company. In case of listed companies, the duplicate certificate shall be issued within 45 days from date of submission of complete documents with the company. [Rule 6(2)(c) of the Companies (Share Capital and Debentures) Rules, 2014]


*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

OP. ED.Practical Lawyer Archives

Generally, social entrepreneurs and professionals have a very basic concern w.r.t. the type of entity for engaging in activities relating to charity i.e. whether such activity should be in the form of a trust or society or a company with charitable objects. The decision is taken based on the nature of activities, persons involved in decision-making process, accounting aspects, taxation aspects, etc. This article focuses on incorporation of company with charitable objects.

According to the provisions of Section 8 of the Companies Act, 2013 (the Act), following are the 3 conditions or restrictions on its activities of such company:

(i) the company’s objective shall include activities for promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(ii) the company intends to apply its profits, if any, or other income in promoting its objects (as stated above); and

(iii) the company intends to prohibit the payment of any dividend to its members.

The Central Government issues a licence on such terms and conditions as it deems fit. Based on the licence, the company can be incorporated under Section 8 of the Act without addition to its name of the word “limited” or “private limited” as the case may be. This article provides a detailed compliance checklist for incorporation of companies with charitable objects (i.e. companies incorporated under Section 8 of the Act). The applicable provisions are Rules 8, 12 and 19 of the Companies (Incorporation) Rules, 2014 read with Section 8 of the Act. The entrepreneurs and professionals shall ensure compliance of the following provisions:

  1. Minimum number of directors.—If the company (under Section 8 of the Act) to be incorporated is a private company then minimum directors should be 2 and in case of public company, the minimum directors should be 3.
  2. Minimum number of members.—If the company (under Section 8 of the Act) to be incorporated is a private company then minimum members should be 2 and in case of public company, the minimum members should be 7. A partnership firm may be a member of company incorporated under Section 8 of the Act.
  3. Application for name.—The name of proposed company shall be considered undesirable, if: (i) it attracts the provisions of Section 3 of Emblems and Names (Prevention of Improper Use) Act, 1950; (ii) it includes the name of a trade mark registered or trade mark which is subject of an application for registration under Trade Marks Act, 1999 (unless the consent of owner or applicant for registration, of trade mark, as the case may be, has been obtained and produced by the promoters); (iii) it includes any word or words which are offensive to any section of the people; and (iv) it is identical with or too nearly resembles the name of LLP or company. Other provisions of Rule 8 of the Companies (Incorporation) Rules, 2014 shall also be complied with.

Under Rule 9 of the Companies (Incorporation) Rules, 2014, an application for reservation of name shall be made through RUN (Reserve Unique Name) web service (available at www.mca.gov.in). The name may either be approved or rejected, as the case may be, by the Registrar, Central Registration Centre after allowing resubmission of such application within 15 days for rectification of the defects, if any.

For the companies under Section 8 of the Act, the name shall include the words like foundation, forum, association, federation, chambers, confederation, council, electoral trust and the like, etc. [Rule 8(7) of the Companies (Incorporation) Rules, 2014].

The name including phrase “electoral trust” may be allowed for registration of companies to be formed under Section 8 of the Act, in accordance with the Electoral Trusts Scheme, 2013 notified by Central Board of Direct Taxes [Explanation to Rule 8(2)(b)(vi) of the  Companies (Incorporation) Rules, 2014].

  1. Validity of name approved.—Once approved, the name is valid for 20 days from the date of approval [Section 4(5)(i) of the Act].
  2. Application for licence under Section 8 of the Companies Act.—After the name is approved, the promoters of the company shall apply for licence under Section 8 of the Act. The licence provides certain terms and conditions to be followed during the lifetime of the company. Such application shall be made to the Registrar of Companies (in whose jurisdiction the registered office of the proposed company is to be situated). Such application shall be made in e-Form INC-12 [Rule 19 of the Companies (Incorporation) Rules, 2014]. Following documents that are to be submitted with the said e-form:

Draft memorandum and articles of association (format provided in Form INC-13):

(i)  declaration by practising profession that draft memorandum and articles of    association have been drawn up in conformity with the provisions of Section 8 of the Act and Rules made thereunder (in Form INC-14);

(ii) estimate of the future annual income and expenditure of the company for next 3 years, specifying the sources of the income and the objects of the expenditure;

(iii) grounds on which the application is made;

(iv) brief description of proposed activity;

(v) statement of assets and liabilities;

(vi) declaration by each of the persons making the application in Form INC-15 i.e. a declaration that draft memorandum and articles of association have been drawn up in conformity with the provisions of Section 8 of the Act and Rules made thereunder;

(vii) list of promoters (name, address, DIN or Income Tax PAN);

(viii) list of proposed directors (name, address, DIN or Income Tax PAN); and

(ix)   list of key managerial personnel (name, address, DIN or Income Tax PAN).

  1. Obtaining licence under Section 8 of the Companies Act.—The licence is granted by Central Government (powers delegated to the Registrar of Companies).
  2. Application for incorporation of company.— After obtaining licence under Section 8 of the Act, the promoters shall file an application for incorporation of the company in Form INC-32 (SPICe) along with following documents:

(i) memorandum and articles of association of the proposed company (incorporating the changes suggested by the Registrar of Companies at the time of issue of licence —as discussed above);

(ii) consent to act as a director (in Form DIR-2);

(iii) declaration by first director and subscribers of the proposed company (in Form INC-9);

(iv) declaration by practising professional (in Form INC-8);

(v) proof of registered office address [as provided in Rule 25 of the Companies (Incorporation) Rules, 2014];

(vi) indentify proof and residential proof of every subscribers of the proposed company;

(vii) pursuant to the recent amendment [i.e. Companies (Incorporation) Third Amendment Rules, 2019 dated 29-3-2019], the application for company incorporation shall be accompanied by e-Form Agile (INC-35) containing an application for registration of Goods and Services Tax Identification Number (Gstin), Employees’ State Insurance Corporation (ESIC) and Employees’ Provident Fund Organisation (EPFO).

  1. Certificate of Incorporation.— After review of e-form, information/proofs and documents, the Registrar, Central Registration Centre issues certificate of incorporation. Along with the certificate of incorporation, the Government also issues permanent account number (PAN) and tax deduction and collection account number (TAN) under the Income Tax Act.
  2. Opening of bank account and deposit of share subscription money.—The Board of Directors in their first meeting (or by circular resolution) shall decide to open the bank account of the company. The subscribers shall deposit the share subscription money in the company’s bank account (for the number of shares, we shall refer the subscription clause of the memorandum of association).
  3. Application for certificate of commencement of business.—A company (not being company limited by guarantee or unlimited company) shall not commence any business or exercise any borrowing powers unless a declaration is filed by director of the company within a period of 180 days of the date of incorporation of the company in e-Form INC 20-A with the Registrar of Companies. It is necessary to state that every subscriber to the memorandum of association has paid the value of the shares agreed to be taken by him on the date of making of such declaration. Section 10-A of the Act [as introduced by the Companies (Amendment) Ordinance, 2019]. Bank statement of the company shall be attached to the requisite e-form. The Registrar of Companies then issues certificate of commencement of business.

Generally, a company with charitable object (Section 8 company) is incorporated within 25 to 30 days. It is a time-bound process for incorporation of such company. After the name of such company is approved, there are 2 activities —application for licence under Section 8 and application for incorporation of the company. The company incorporation process also involves signing and execution of several documents at different stages.


* Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.