Module 4

Companies Act 2013

Meaning and types, Incorporation, Memorandum & Articles of association, Prospectus, IPO,
Issue of shares and bonus shares, rights issue, sweat equity, role of directors, share
qualification, company meetings.

Definition, Nature and Kinds of a Company

Definition: A company is an Association (Voluntary) of many persons who contribute money

or money’s worth to a common stock & employs it in some common trade/ business and share
the profit or loss arising them.

Nature/ Characteristics of a Company

1. An artificial person created by law
It is an artificial person, because it does not take birth but created by law.

2. Separate legal entity:

- An entity separate from its members
- It has an independent corporate existence
- The Company’s money & property belong to them not to the shareholders
Eg. Salomon Vs. Salomon & Co. case

3. Limited liability: If the company limited by shares, the liability of the members is limited to
the unpaid value of the share. (Eg. Face value: Rs.10, he paid Rs.7, yet to pay only Rs.3).

4. Perpetual succession
- The company never dies, nor does it’s life depends on the life of its members.
- The members may come and go but the company can go on forever (until dissolved), it
continues to exist even if all its human members are dead.
- A company‘s exist persist irrespective of the change in the composition of its
membership.

5. Common seal: The company seal acts as the official signature of the company

6. Transferability of shares: Company shares are subject to certain conditions, freely

transferable.

7. Separate property: Being a separate person, company is able of owning, enjoying &
disposing of property in its own name.
8. Capacity of sue: A company can sue and be sued in its own corporate name.

Kinds of Companies
I. Classification on the basis of incorporation
1. Statutory companies
2. Registered companies

II. Classification on the basis of liability

1. Companies with limited liability
a. Companies limited by shares
b. Companies limited by guarantee
2. Companies with unlimited liability

III. Classification on the basis of Number of members

1. A private companies
2. A public companies

IV. Classification on the basis of control

1. Holding companies
2. Subsidiary companies

V. Classification on the basis of ownership

1. Govt. companies
2. Non- Govt. companies

VI. Association not for profit

VII. One man company

I. Classification on the basis of incorporation

1. Statutory companies: - Created by a special act of the legislature, Eg.RBI, SBI, etc.
– These are mostly concerned with public utilities Eg. Railways.
2. Registered companies: -formed and registered under the companies’ act 1956/2013.

II. Classification on the basis of liability

1. Companies with limited liability
a. Companies limited by shares
- Where the liability of the members of a company is limited to the amount of unpaid/paid on
the shares.
- The liability can be enforced during the existence of the company as also during the winding
up.
b. Company limited by guarantee
- The member’s liability is limited to a fixed amount, which the members undertake to
contribute to the assets of the company.

2. Unlimited company
- Every member is liable for the debts of the company
- Their liability is unlimited
- These may/may not have share capital

III. Classification on the basis of Number of members

1. Private company (close corporation): Sec.3 (1)(iii), defined, a private company has a
minimum paid up capital of Rs.1,00,000 or more as prescribed and also.
a. Restricts the right to transfer its shares
b. Limited members (Max.200)
c. Prohibits any invitation to the public to subscribe for any shares/ debentures
d. Prohibits any acceptance of deposits from persons other than its members
e. Number of debenture holders in a private company may exceed 50
f. Joint holders of shares are treated as a single member

2. Public company
- Minimum paid up Rs.5 lakhs and maximum as prescribed
- Shares freely transferable
- It can invite the public to subscribe for shares

Distinction between a Public company and a Private company

S.N. Particulars Public Private
1 Minimum capital Rs.5,00,000 Rs.1,00,000
2 Minimum members 07 02 (1 person company)
3 Max. members Unlimited 200
4 No. of Directors Atleast 03 Atleast 02
5 Restriction on appointment Qualification It is not necessary
of directors approval
from Registrar is must
6 Restriction on invitation to Can invite the public Prohibited to invite
subscribe for shares public
7 Transferability of shares & Freely transferable Restricted
Debentures
8 Quorum 5 members 2 members must
must be present be present
9 Managerial remuneration Total remuneration No restriction (If it is not
should not exceed 11% a subsidiary of a public co.)
on Net profit
10 “Limited” title The word of “Limited” The word of “Private Limited”
should be added should be added followed by
followed by company company
name name
 11 Special privileges No such privileges to It enjoy the
Public limited following privileges:
companies a. Need not issue
prospectus
b. Mini. 2
members enough
c. May issue any kind of shares
d. 2 directors enough
e. Statutory meeting and
reporting is not necessary
f. No restriction on managerial
remuneration (If it is a
subsidiary of Public co. limited
to 11% on NP)
g. Can commence business
immediately on
incorporation

IV. Classification on the basis of Number of control

1. Holding company: If a company has control over the other company

2. Subsidiary company: If a company coming under the control of another company (Holding
company) called subsidiary company.
Other conditions:
a. Holding company must control the appointment and removal of the directors of the
subsidiary companies
b. Holding company must have the majority shares of the subsidiary company
c. Subsidiary company of another subsidiary co. – must come under the Holding company.
Eg. H S S1 S2, Here S1 and S2 are the subsidiaries of H.

V. Classification on the basis of Ownership

1. Govt. Company: A company in which not less than 51% of the paid up share capital held by
(a) The Central Govt. or (b) State Govt. or (c) Partly Central and partly by State.
Rules: - Appointment of auditors – Auditors should be appointed by Central Govt. on the advice
of Auditor General of India.
- Audit report to be submitted to Auditor General of India
- Annual report to be placed before parliament
- 51% of paid up share should be held by the Govt.

2. Foreign company: Any company incorporated outside India, which has an established place
of Business in India.
Rules:
a. Documents: Every foreign company, within 30 days of its establishment in India, shall file
with the Registrar the following documents.
i. Certificate copy of the Charter, AoA, MoA, etc.,
ii. Full address & Principal office
iii. A list of directors and Secretaries
iv. The name & address of any person reside in India
b. Books of Accounts – as Indian company
c. Obligation to furnish the country of incorporation
d. Documents to be delivered to registrar

VI. Association not for Profit: The Central Govt. may grant a license to an association for
a. Promoting commerce, science, religion, charity or any other useful object
b. Using its profit for its objective and not for payment of dividend

VII. One Man Company (OPC –One Person Co.): This is a company in which, one man
holds the whole of the share capital of the company. Some dummy members may be
appointed to satisfy the statutory requirements.

VIII. Illegal association: If the number of members in an association/ orgn. exceeds the limit
and it is not registered under the companies act 1956 is called an illegal company or
association.

FORMATION OF A COMPANY
Formation of the company means incorporating or creating the company.
Project ‘MCA-21’ - Ministry of Corporate Affairs has launched a programme for managing the
work relating to filing of documents, etc. with ROCs etc. and getting approvals from Ministry of
Corporate Affairs. The physical filing of all forms has been discontinued and converted into
electronic filing. This project is termed as Project ‘MCA-21’.

Incorporation of Company
1. Provisions relating to filing of applications, documents, inspection, etc., through electronic
form
- Applications and required documents shall be filed through the electronic form and
authenticated in such manner as may be specified in the rules.
- ‘Certificate Filing Centers’ (to be operated by professionally qualified
persons/CA/ICWA/CS) will facilitate e-filing of documents.
- Every director will have to obtain DIN (Director’s Identification Number.
- Filing of forms and application will be through internet
- Payment of fees can be through internet through credit card/ net banking
- Office of ROC, Regional Director and Delhi HQ will process the documents and applications
submitted electronically by companies.
- Issuance of certificated and approvals will continue to remain on paper. This will be
dispatched by post or courier to applicant.
2. Documents to be filed with the Registrar: The following documents duly stamped together
with the necessary fees are to be filed with the Registrar of Companies.
a. The Memorandum of Association
b. The Articles of Association
c. Agreements & appointment of Managerial persons
d. A list of directors
e. A declaration about the formalities and should be signed by the following persons
i. An advocate of Supreme court/ High court
ii. An attorney
iii. Secretary or Chartered accountant
iv. A person named in articles as director
f. Notice about the situation of the Registered office

3. Certificate of Incorporation
If the Registrar satisfied with the documents, which are submitted, he retains them and issues
a “Certificate of Incorporation” (of the formation of the company), the Registrar is not required
to carry out any investigation about the truthfulness of the given documents.

4. Conclusiveness of Certificate of Incorporation

A certificate of incorporation given by the Registrar is the conclusive evidence that means the
company has fulfilled all the requirements - this is known as Rule in Peel’s case.

Ref. case:
- The date mentioned in the certificate of Incorporation (CoI) is the date of the Birth of the
company
- Even though the company got CoI, its illegal activities cannot be legalized

5. Effect of Registration
- The company becomes a distinct legal entity
- It acquires a perpetual succession
- It’s property is not the property of its shareholders

6. Business commencement certificate

Private limited company can commence business immediately after its incorporation; but
Public limited company can commence business after getting Business commencement
certificate.

# Promoter: He is a person do all the necessary preliminary work and takes preliminary
essential decisions (such as whether it should be a private/ public co., capital, etc.).

# Pre- incorporation/ Preliminary contracts

If any contracts agreed before incorporation (Before getting CoI) by the promoter is called Pre-
incorporation or Preliminary contracts.
- The company is not liable for the acts of the promoters done before its incorporation
Conditions:
- Company not bound by pre-incorporation contracts
- Company cannot enforce pre-incorporation contract
- Promoters are personally liable.

# Provisional contracts
It refers to contracts entered into by a public company after its incorporation but before it is to
be issued the certificate of commencement of business.

MEMORANDUM OF ASSOCIATION

It is a fundamental document defines its raison d’etre (i.e. reason for existence)
Features:
a. It contains fundamental conditions
b. Regulates the external affairs of the company
c. Lays down the area of operation
d. Reason for existence
e. Possible scope of the company

Content of Memorandum of Association

1. Name clause: The name of a company followed by limitation/ private limited and its identity
and symbol of its existence is given in the Memorandum of Association (MoA). Rules/
Conditions:
a. Undesirable name to be avoided
- As per the opinion of the Central Govt. the company must avoid
i. Too similar to the name of another company
ii. Misleading
b. Injunction if identical name adopted
c. ‘Limited’ or ‘Private Limited’ as the last word of words of the name
d. Prohibition of use of certain names – such as
i. Emblem and Name of United Nations Organisation, WTO, etc.,
ii. Indian National flag, the name, emblem, official seal etc.,
iii.Emblem and seal of Central & State Govt. and President of India
e. Use of some key words according to authorized capital

S. Key word Authorized Capital

N
1 Corporation 5 Crores
2 International, Global, Universal, Asia, Continental 1 Crore
–
being first word
3 Hindustan, India, Bharat – Being first word 50 Lakhs
4 Industries/ Udyog 1 Crore
5 Enterprise, Products, Business, Manufacturing 10 Lakhs

Publication of Name:

- Paint its name with address, it should be placed on the outside of the registered office
- It should be in legible character
- It should be used in all business letters, bill heads, invoices, receipts, etc.

1. The Registered office clause

Every company should have the registered office at the time of registration.
All communications and notices are to be send to that address.
Notice of situation of the registered office and every change shall be given to
Registrar within 30 days after the date of incorporation
Incase of default, the director will be punished with fine of Rs.500 for every
day during which the default continues.

2. The objects clause:

The objects clause of a company shall be clearly stated in Memorandum, it
defines the scope of the company and any alteration could be made only as per
the law.
It enables the subscriber to know the purpose of their investment and enables
the creditors to know the persons involved in company activities.
The object clause in Memorandum of every company has to state (i) Main object and
(ii) Other object.

3. The Capital clause

- The Registered/ authorized/ Nominal capital should be stated
- It also be stated the amount of shares, its type etc.

4. The Liability clause

The liability of its members is stated in this clause, whether they are limited by
share or limited by guarantee.

5. The Association clause

- Declaration of all the directors & members/ subscribers is stated
- The names, addresses & description of the subscribers and number of shares
taken by each one of them is mentioned

The MoA shall be signed by at least 7 subscribers in case of public company (2 in

case of private company). Their signature shall be attested by at least 1 witness
(the witness should not be the relative/ another subscriber).

Alteration of Memorandum – Alteration of Conditions:

1. Change of name
- The company may change its name with the approval of the Central Govt.
- Mere changing the word ‘Private’ to ‘Public’ or vice versa, need not get the approval
- The company may change its name be ordinary resolution and shall change its
name with 12 months of its registration as per the direction of the Central Govt.
- If the company does not follow the direction given by the Govt., shall be
punishable with fine of Rs.100 for every day during which the default continues.
- Where the company changes its name, the Registrar shall enter the new name
& issue a fresh certificate of incorporation in new name.
2. Change of registered office
a. Change of Registered office from one place to another within a state:
- The company has to give an application to the Regional Director for
getting confirmation order
- The Regional Director issues the order and it should be send to the Registrar
within 2 months for getting approval.
b. Change of Registered office from one state to another
-It is possible by passing a special resolution

3. Alteration of Objects
The objects of a company may be altered by special resolution, so as to enable
the company:
a. To carry on its business more economically or more efficiently
b. To attain its main purpose by new/ improved means
c. To enlarge its operation
d. To amalgamate with any other company

Change in liability clause

- A company limited by shares/ guarantee cannot change its liability clause in
the memorandum
- It is possible to give additional liability to its members

4. Change in capital clause: The Company may change in the capital

clause about increase, reduction or re-organisation.

Doctrine of Ultra Vires (Ultra- Beyond; Vires- Power): It means that the
company doing of the act is beyond the legal power and authority of the company.
Ultra Vires act is void.

Ultra vires the directors: They do beyond their powers, but within the powers
of the company

Ultra vires the articles: If an act or transaction is done beyond the articles.

Articles of Association
The Articles of association or Articles are the rules, regulations and bye-laws for
the internal management of the affairs of a company.

Forms and Signature of Articles (Sec.30)

1.Printed 2. Divided into paragraphs 3. Signed by each members with one
witness

4. Printed on computer laser printer and it should be accepted by the Registrar.

Contents of Articles
1.Share capital, rights of 10. General meetings and proceedings
shareholders,
payment of commissions etc.
2. Line on shares 11. Voting rights of members, proxies
3. Calls on shares 12. Directors appointment,
remuneration,
qualification, powers, etc.
4. Transfer of shares 13. Managers
5. Transmission of shares 14. Secretary
6. Forfeiture of shares 15. Dividend and reserves
7. Conversion of shares in to stocks 16. Accounts, audit and borrowing powers
8. Share warrants 17. Capitalisation of profits
9. Alteration of capital 18. Winding up
# A public company may have its own Articles of association. If it does not have
its own Articles, it may adopt Table A given in Schedule I to the Act.

Alteration of Articles: Companies have been given full power to alter their
articles, unless otherwise it is restricted by any provision.
Procedure of alteration: - By passing special resolution
- Alterations should be informed to the Registrar within 30 days of its passing

Limitations to Alteration

1. Must not be inconsistent or go beyond with the companies act

2. Must not conflict with the Memorandum
3. Must not sanction any illegal
4. Must be for the benefit of the company
5. Must not increase the liability of members
6. Alteration by special resolution only
7. Approved of Central Govt. is must – when Public co. is converted to Private co.
8. Alteration leads to breach of contract is valid
9. Must not result in expulsion (removal) of a member
10. No power of the Tribunal to amend articles
11. Alteration may be with retrospective (show) effect

Doctrine of Indoor Management

The outsiders of company presume that all the activities of the company is being
done regularly and within the scope of the MoA and AoA. This is known as
“Doctrine of Indoor management” or “The rule in Royal British bank Vs. Turquand”
or “Turquand rule”.
Case: Ref. Royal British Bank Vs. Turquand/ CL/N.D.Kapoor
Exception: 1. Knowledge of irregularity 2. Negligence 3. Forgery

4. Acts outside the scope of MoA & AoA

Memorandum of Association and Articles of Association – Distinction

Memorandum of Association Articles of Association

1. It indicates the nature 1.It indicates the rules and regulations
2. It defines relationship with outside 2. It defines relationship with Internal
world management
of the company
3. It defines the scope of the company, the 3. They are the rules for carrying out the objects
company can not go beyond of
the company
4. It is a Supreme document 4. It is subordinate to the Memorandum
5.Every company must have its own 5. Company limited by shares need not have
memorandum articles of its own – Table A applies
6.There are strict restrictions on its 6.AoA can be altered by special resolution, but
alteration do not conflict with Memorandum and
Companies act
7. Any act of the company is Ultra vires 7. Any act of the company is Ultra vires to
the memorandum is void Articles may be confirmed by the shareholders.
PROSPECTUS

Any document inviting deposits from the public or inviting

offers from the public for the subscription of shares or
debentures of a company is a prospectus.

# Private Company need not issue a Prospectus, because it

is prohibited from making any invitation to the public to
subscribe for any shares or debentures of the company.

Features

1. It is an Invitation/ Ad./ Circular to the public to subscribe for

any shares or debentures of the company
2. It should be in writing (Ads. In TV/ Films is not a prospectus)
3. Invitation to the public – any invitation made to its friends
or relatives to subscribe shares is not a prospectus
4. Offer to the public
5. Must be dated
6. Must be signed by the Directors and Registered to the Registrar.

Red- herring Prospectus or Information memorandum

It is a circular issued to the public prior to filling or issuing

prospectus. Generally, it does not have complete particulars
about price and number of shares to be issued.

Content of the Prospectus

The important content of Prospectus is as follows

A. Part I of Schedule II
1. General information
1.Name & Address of Reg. office 7.Date of Opening & Closing of issue
2.Consent of the Central Govt. about 8.Name & address of Auditors and lead
present issue and about its financial managers
soundness
3.Name of its Regional stock exchange 9.Name & Address of Trustee
4.Provision relating to punishment for 10.Rating from CRISIL or any other
fictitious application agency
5.Declaration about refund of the issue, if 11. Underwriting of the issue
Minimum subscription is not attained
6.Declaration about allotment of shares

2. Capital structure of the company

a. Authorised, Issued, subscribed and paid-up capital
b. Size of present issue – its reservation (Preferential allotment)
c. Paid up capital – after the present issue or after the conversion of
debenture

3. Terms of the Present issue

a. Terms of payment
b. b. Rights of the instrument holder
c. How to apply – availability of forms, etc. d. Any special
tax benefits, if any.

4. Particulars of the Issue

a. Object b. Project cost c. Sources of finance

5. Company management and project

1.History, objects and present business 7.Collaboration agreement, if any
of the company
2.Promoters & their Background 8.Infrastructure facility for Raw
material, power, water etc.
3.Subsidiary of the company 9.Schedule of implementation of project
4.Name & address of Directors 10.Nature of product & marketing etc.
5.Location of Project 11.Future prospectus and development
6.Plant, Machinery & Technology used

6. Particulars about the company and its subsidiaries (Sister

concerns)

7. Outstanding litigation relating to – (a) Operation and finance

of the company
(b) Particulars of default, etc.

8. Management perception of risk factors – Reg.

availability of raw materials, fluctuations in foreign
exchange rate, marketing, etc.

B. Part II of Schedule II
1. General information
a. Consent of Directors, Auditors, Advocates, Managers, Bankers &
Registrar
b. Expert’s opinion
c. Change of any directors of auditors, if any, in the last 3 years and
its reasons
d. Authority for the issue
e. Procedure and time schedule for allotment and issue of certificates
f. Name & address of Company secretary, Legal adviser, etc.

2. Financial information
a. Report by the auditors – About profit and loss, Assets &
liabilities and Rate of dividend paid by the company during
the preceding 5 financial years.
b. Reports by the Accountants – on the profits or losses of
the business for the preceding 5 financial years and about
the assets and liabilities of the business (Not more than
120 days before the date of issue of prospectus).

3. Statutory and other information

a. Minimum subscription
b. Expenses of the issue, fees structure etc.,
c. Commission and brokerage
d. Previous issue for cash
e. Previous public issue- Date of allotment, closing date, date of refund
etc.,
f. Issue of shares otherwise than for cash
g. Debentures and redeemable preference shares and
other instruments issued by the company outstanding as
on date of prospectus
h. Options to subscribe
i. Details of purchase of property
j. Rights of members regarding Voting, dividend etc.,
k. Restrictions, if any, on transfer of shares/ debentures
l. Material contracts and inspections.

Misstatement in prospectus & their consequences

If there is any misstatement of a material fact in a prospectus, there

may arise

Liability for misstatements in Prospectus

I. Civil liability II. Criminal

liability (Sec.63 & 68)

Against the company

Promoters and experts

Recession of Claim for Damages

Compensation
Damages for Contract
damages
sec.62 & 56 Non-compliance
For fraudulent

I. Civil liability
A person who has been induced to subscribe for shares on
the faith of a misleading prospectus has remedies against
the company, promoters and experts.

1. Remedies against the company

If there is a misstatement or withholding of material
information in a prospectus and if it induced, the share-
holder can
a. Rescind/ recession of the contract
b. Claim damages from the company, if the statement is fraudulent/
innocent
a. Recession of the contract (Rescind the contract)
A person can apply to the court for the recession of the
contract, if such statements in the prospectus are false,
fraudulent, or withholding of material information but he
will have to surrender all the shares to the company. The
contract can be rescinded in the following conditions are
satisfied:
i. The statement must be a material misrepresentation of fact
ii. The statement must have induced the shareholder to buy them
iii. The statement must be untrue
iv. If the shares should not be purchased in open market (If
so, recession is not possible)
v. The omission of material fact must be misleading.

b. Damages for deceit (dishonesty)

- The affected person entitled to sue the company for damages
- He must prove the same matter
- He cannot both retain the shares and get damages against the
company

2. Remedies against the Directors, promoters and experts –

Their liabilities
a. Liability for damages for misstatement in
prospectus – should pay the compensation.
Defenses of Directors:

i. Withdrawal of consent
ii. Absence of consent
iii. Ignorance of untrue statement
iv. Reasonable ground for belief
v. Statement of experts
b. Liability for damages for omission
c. Liability under general law: If the mistake is done in the
following nature
- Knowingly
- Without belief in its truth
- Recklessly, not caring whether it was true or false

II. Criminal Liability

Where a prospectus contains any untrue statement,
every authorised person is punishable with imprisonment
upto 2 years of fine upto Rs.50,000 or both.
Criminal activities:

a. Issue and allotment of shares in fictitious names

b. Fraudulently inducing persons to invest money
c. Issuing application for shares without memorandum

1. Initial Public Offering (IPO)

Meaning of IPO
An Initial Public Offering (IPO) refers to the process by which a private
company offers its shares to the public for the first time. By issuing
shares to the general public, a company transitions from being
privately held to a publicly traded entity.
Objectives of IPO
1. Raising Capital for Expansion.
2. Reducing Debt.
3. Enhancing Public Image and Credibility.
4. Providing Liquidity to Existing Shareholders.
5. Facilitating Mergers and Acquisitions.
Process of IPO (As per Companies Act 2013 & SEBI
Regulations)
1. Board Approval - Approval of IPO by the company’s board of
directors.
2. Due Diligence and Documentation - Preparation of a Draft Red
Herring Prospectus (DRHP), financial statements, legal compliance,
etc.
3. Filing with SEBI - Submitting DRHP to SEBI for approval.
4. Marketing & Promotion - Roadshows, advertisements, etc., to
generate investor interest.
5. Pricing of Shares - Fixed Price Issue or Book Building Process.
6. Public Subscription - Opening the issue for the public to apply.
7. Allotment of Shares - Final allocation of shares to applicants.
8. Listing on Stock Exchange - Making shares available for trading
in recognized stock exchanges.
 Regulatory Framework
 Governed by Companies Act 2013, SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018 (ICDR).
 Disclosure requirements, eligibility norms, promoter’s contribution,
and lock-in periods are specified under SEBI Regulations.
2. Issue of Shares
Meaning
Issue of shares refers to the process through which companies raise
capital by distributing shares to investors.
Types of Share Issues
1. Public Issue - IPOs and FPOs (Follow-on Public Offerings).
2. Private Placement - Offering shares to a select group of investors.
3. Preferential Allotment - Issuance of shares to specific individuals
or entities at a predetermined price.
4. Rights Issue - Offering shares to existing shareholders in
proportion to their holdings.
5. Bonus Issue - Distribution of additional shares to existing
shareholders without any payment.
Procedure for Issue of Shares
1. Board Resolution - Approval from the board of directors.
2. Preparation of Prospectus or Offer Document.
3. Approval from Regulatory Bodies (e.g., SEBI).
4. Subscription by the Public/Private Investors.
5. Allotment of Shares and Issue of Share Certificates.
Regulatory Framework
 Governed by the Companies Act 2013 (Sections 23 to 41).
 SEBI regulations apply where public issues are concerned.
3. Bonus Shares
Meaning
Bonus shares are additional shares issued to existing shareholders at
no extra cost, based upon the number of shares already held by them.
It represents a capitalisation of reserves or surplus of the company.
Objectives of Issuing Bonus Shares
1. Rewarding shareholders.
2. Adjusting the market price of shares.
3. Enhancing liquidity.
4. Capitalizing retained earnings.
Regulatory Framework
 Governed by Section 63 of the Companies Act 2013.
 SEBI guidelines apply for listed companies.
Conditions for Issuing Bonus Shares
1. Authorized by Articles of Association.
2. Approval in General Meeting by shareholders.
3. Fully paid-up shares are issued as bonus shares.
4. Cannot be issued in lieu of dividend.
4. Rights Issue
Meaning
A Rights Issue is a method of raising additional capital by offering
existing shareholders the right to purchase additional shares at a
discounted price, in proportion to their existing holdings.
Objectives
1. To raise fresh capital without increasing debt.
2. To reward existing shareholders by offering them shares at a lower
price.
Procedure
1. Board Approval.
2. Preparation of Offer Letter (Section 62 of the Companies Act
2013).
3. Dispatch of Offer Letter to Existing Shareholders.
4. Acceptance or Renunciation by Shareholders.
5. Allotment of Shares.
Regulatory Framework
 Governed by Section 62 of the Companies Act 2013.
 Compliances under SEBI Regulations if the company is listed.
5. Sweat Equity
Meaning
Sweat equity refers to shares issued by a company to its employees or
directors at a discount or for consideration other than cash, in
recognition of their contribution in terms of know-how, intellectual
property rights, or value addition.
Objectives
1. Rewarding and retaining key employees.
2. Promoting innovation and dedication.
3. Aligning employee interest with the company’s growth.
Conditions for Issuance
1. Authorization by a special resolution in the general meeting.
2. The resolution must specify the number of shares, their value, and
consideration.
3. Minimum one-year employment for eligibility (in most cases).
4. Compliances with SEBI regulations for listed companies.
Regulatory Framework
 Governed by Section 54 of the Companies Act 2013.
 SEBI (Issue of Sweat Equity) Regulations for listed companies.
6. Role of Directors
Meaning
 Directors are individuals appointed to manage the affairs of a
company. They act as agents, trustees, and representatives of the
company.
Types of Directors
1. Executive Director - Full-time director involved in day-to-day
management.
2. Non-Executive Director - Not involved in daily management but
provides expertise and oversight.
3. Independent Director - Provides unbiased judgment; mandatory
for certain companies under SEBI guidelines.
4. Nominee Director - Appointed to represent the interests of
financial institutions or stakeholders.
5. Managing Director - Entrusted with substantial powers of
management.
Duties of Directors (Under Companies Act 2013)
1. To act in good faith and in the best interest of the company.
2. To avoid conflict of interest.
3. To exercise reasonable care, skill, and diligence.
4. To comply with statutory obligations and regulations.
5. Not to achieve undue gain or advantage.
6. To promote the company's objectives.
7. Share Qualification
Meaning
Share qualification refers to the minimum number of shares a director
must hold to qualify for directorship as per the company's Articles of
Association.
Importance
1. Ensures alignment of directors’ interests with shareholders.
2. Encourages responsibility and accountability.
Provisions
 Must be acquired within a specified period after appointment.
 Failure to acquire share qualification may lead to disqualification.
8. Company Meetings
Types of Company Meetings
1. Board Meetings - Regular meetings of the board of directors to
discuss policies and strategies.
2. General Meetings - Meetings involving shareholders, including
Annual General Meetings (AGM) and Extraordinary General Meetings
(EGM).
3. Class Meetings - Meetings held for shareholders of a particular
class of shares.
Requirements
 Proper notice, quorum, and minutes as specified by the Companies
Act 2013.
 Resolutions can be Ordinary or Special based on the nature of the
decision.