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CA Inter Corporate & Other Laws – Important Questions Answers for 2024 Exams

CA Inter Law - Important Questions with Answers Chapter wise for May, 2024 & November, 2024 Exams

Basic Concepts of Companies - Important Questions & Answers

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Q. H Ltd. is the holding company of S Pvt. Ltd. As per the last profit and loss account for the year ending 31st March, 2022 of S Pvt. Ltd., its turnover was ` 1.80 crore; and paid up share capital was ` 80 lakh. The Board of Directors wants to avail the status of a small company. The Company Secretary of the company advised the directors that the company cannot be categorized as a small company. In the light of the above facts and in accordance with the provisions of the Companies Act, 2013, you are required to examine whether the contention of Company Secretary is correct, explaining the relevant provisions of the Act. (5 Marks – May 23)

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Ans. As per section 2(85) of the Companies Act, 2013, Small company means a company, other than a public company, —

(i)paid-up share capital of which does not exceed four crore rupees, and
(ii)turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees:

Provided that nothing in this clause shall apply to—

A)a holding company or a subsidiary company;
B)a company registered under section 8; or
C)a company or body corporate governed by any special Act.

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In the instant case, as per the last profit and loss account for the year ending 31st March, 2022 of S Pvt. Ltd., its turnover was to the extent of ` 1.80 crore, and paid-up share capital was ` 80 lakh. Though S Pvt. Ltd., as per the turnover and paid-up share capital norms, qualifies for the status of a ‘small company’ but it cannot be categorized as a ‘small company’ because it is the subsidiary of another company (H Ltd.). Hence, the contention of the Company Secretary is correct.

Q. Referring the relevant provisions of the Companies Act, 2013, examine, whether following companies will be considered as listed company or unlisted company:

a)ABC Limited, a public company, has listed its non-convertible Debt securities issued on private placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
b)CHG Limited, a public company, has listed its non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013.
c)PRS Limited, a public company, which has not listed its equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Companies Act, 2013. (Nov 22 – 5 Marks)

Ans. According to Section 2(52) of the Companies Act, 2013, listed company means a company which has any of its securities listed on any recognised stock exchange.

RULE 2A: According to Rule 2A of the Companies (Specification of definitions details) Rules, 2014, the following classes of companies shall not be considered as listed companies, namely:-

1.Public companies which have not listed their equity shares on a recognized stock exchange but have listed their –
(i)non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008; or
(ii)non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; or
(iii)both categories of (i) and (ii) above.
2.Public companies which have not listed their equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act.

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In view of the above provisions of the Act:

a)ABC Limited is an unlisted company.
b)CHG Limited is an unlisted company.
c)PRS Limited is an unlisted company.

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Q. ABC Private Ltd. has two wholly owned subsidiary companies, D Private Limited and E Private Limited. Examine, whether, D Private Limited and E Private Limited will be treated as related party as per the provisions of the Companies Act, 2013? (May 22 – 3 Marks)

Ans. According to section 2(76)(viii) of the Companies Act, 2013, Related party, with reference to a company, means any body corporate which is

 a holding, subsidiary or an associate company of such company;
 a subsidiary of a holding company to which it is also a subsidiary; or
 an investing company or the venturer of the company;

In the given question, D Private Limited and E Private Limited are wholly owned subsidiary companies of ABC Private Ltd. According to stated clause (B), above, D Private Limited and E Private Limited are related parties. However, as per the Notification No. G.S.R. 464(E) dated 5th June, 2015, clause (viii) shall not apply with respect to section 188 to a private company, though being a related parties.

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Q. MNP Limited is a registered public company having the following:

i

Directors and their Relatives

18

ii

Employees

26

iii

Ex-Employees (Shares were allotted during employment)

15

iv

Members holding shares jointly (7 x 2)

14

v

Other Members

137

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The Board of Directors of MNP Limited proposes to convert the company into a private limited company. Referring the provisions of the Companies Act, 2013, advise:

a)Whether the company can be converted into a private company?
b)Whether existing number of members need to be reduced for the proposed private company? (3 + 3 = 6 Marks) (May 22)

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Ans. According to Section 2(68) of the Companies Act, 2013, “Private company” means a company having prescribed minimum paid-up share capital, and which by its articles, limits the number of its members to two hundred.

However, where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member.

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It is further provided that following shall not be included in the number of members –

1.persons who are in the employment of the company; and
2.persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased.

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Accordingly, total Number of members in MNP Limited are:

(i)

Directors and their relatives

18

(ii)

Joint shareholders (7×2)

7

(iii)

Other Members

137

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Total

162

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a)MNP Limited may be converted into a private company only if the total members of the company are limited to 200. In the instant case, since existing number of members are 162 which is within the prescribed maximum limit of 200, so MNP Limited can be converted into a private company.
b)There is no need for reduction in the number of members for the proposed private company as existing number of members are 162 which does not exceed maximum limit of 200.

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Q. Kavya Ltd. has a paid up share-capital of Rs. 80 crores. Amjali Ltd. holds a total of Rs. 50 crores  of Kavya Ltd. Now, Kavya ltd. is making huge profits and wants to expand its business and is aiming at investing in Amjali Ltd. Kavya Ltd. has approached you to analyse whether as per the  provisions of the Companies Act, 2013, they can hold 1/10th of the share capital of Amjali Ltd. (5 Marks)March 21

Ans. In terms of section 2 (87) of the Companies Act 2013 “subsidiary company” or “subsidiary”, in  relation to any other company (that is to say the holding company), means a company in which the  holding company— 

(i) controls the composition of the Board of Directors; or  

(ii) exercises or controls more than one-half of the total voting power either at its own or together  with one or more of its subsidiary companies:  

Provided that such class or classes of holding companies as may be prescribed shall not have  layers of subsidiaries beyond such numbers as may be prescribed. 

Since, Kavya ltd. is holding more than one half (50 crores out of 80 crores) of the total share capital  of Kavya Ltd., it (Amjali Ltd.) is holding of Kavya Ltd. 

Further, as per the provisions of section 19 of the Companies Act, 2013, no company shall, either  by itself or through its nominees, hold any shares in its holding company and no holding company  

shall allot or transfer its shares to any of its subsidiary companies and any such allotment or  transfer of shares of a company to its subsidiary company shall be void: 

Provided that nothing in this sub-section shall apply to a case— 

(a) where the subsidiary company holds such shares as the legal representative of a deceased  member of the holding company; or 

(b) where the subsidiary company holds such shares as a trustee; or 

(c) where the subsidiary company is a shareholder even before it became a subsidiary company  of the holding company 

In the given question, Kavya ltd. cannot acquire the shares of Amjali Ltd. as the acquisition of  shares does not fall within the ambit of any of the exceptions provided in section 19.

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Q. Shiv Limited is incorporated on 3.10.2020. The company is having a paid- up share capital of  Rs. 5 crores. Following are key shareholders of the company: 

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Name of the Party holding shares 

Amount (in Rs.)

Central Government 

1.50

Punjab Government 

1.23

Others 

2.27

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The first auditor of the company has been appointed by the Board of Directors on 31.10.2020. The  members of the company have objected to such an appointment by the Board of Directors.  According to the members its only the members who can appoint the first auditor.  

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Advise the company on the validity of such appointment as per the provisions of the Companies  Act, 2013. Also, advise whether the contention of members of the company is correct.  (6 Marks) April,2021 

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Ans. According to section 2(45) of the Companies Act, 2013, “Government company” means any  company in which not less than 51% of the paid-up share capital is held by the Central Government,  or by any State Government or Governments, or partly by the Central Government and partly by  one or more State Governments, and includes a company which is a subsidiary company of such  a Government company. 

As per section 139(7), in the case of a Government company or any other company owned or  controlled, directly or indirectly, by the Central Government, or by any State Government, or  Governments, or partly by the Central Government and partly by one or more State  Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India  within 60 days from the date of registration of the company and in case the Comptroller and Auditor General of India does not appoint such auditor within the said period, the Board of Directors of the  company shall appoint such auditor within the next 30 days; and in the case of failure of the Board  to appoint such auditor within the next 30 days, it shall inform the members of the company who  shall appoint such auditor within the 60 days at an extraordinary general meeting, who shall hold  office till the conclusion of the first annual general meeting . 

In the given question, Shiv Limited is a government company as 54.6% [(1.5+1.23)/ 5= 54.6%] of  the share capital is held by Central government and State Government (Punjab Government). Thus, the first auditor of Shiv Limited shall be appointed by the Comptroller and Auditor-General  of India within 60 days from the date of registration. Thus, the appointment of first auditor by Board  of Directors on 31.10.2020 is not valid. The Board of Directors can appoint the first auditor in case  the Comptroller and Auditor-General of India does not appoint such auditor within the said period  of period 60 days. The Board of Directors of the company shall appoint such auditor within the next  30 days. 

In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform  the members of the company who shall appoint such auditor within 60 days at an extraordinary  general meeting, who shall hold office till the conclusion of the first annual general meeting. Thus,  the contention of members that its only the members who can appoint the first auditor of the  Government company, is not correct. 

 

Incorporation of Companies - - Important Questions & Answers

Q. The role of doctrine of ‘Indoor management’ is opposed to that of the role of ‘Constructive notice’. Comment on this statement with reference to the Companies Act, 2013. (Jan, 21 – 5 Marks)

Ans. Doctrine of Indoor Management

According to this doctrine, persons dealing with the company cannot be assumed to have knowledge of internal problems of the company. They can simply assume that all the required things were done properly in the company.

Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner.

The doctrine helps protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies.

The doctrine of indoor management was evolved around 150 years ago in the context of the doctrine of constructive notice. The role of doctrine of indoor management is opposed to of the role of doctrine of constructive notice. Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive notice.

 

Basis for Doctrine of Indoor Management

1.What happens internal to a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to.
2.If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf.

Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive notice)

(i)Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity.
(ii)Negligence: If, with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available in the circumstances where company does not make proper inquiry.

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(iii)Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers.

The above doctrines have been well considered while framing the provisions of various Acts pertaining to the companies worldwide. The Companies Act, 2013 and the earlier Acts relevant for the Companies in India are no exception to the same.

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Q. Mr. Raja along with his family members is running successfully a trading business. He is capable of developing his ideas and participating in the market place. To achieve this, Mr. Raja formed a single person economic entity in the form of One Person Company with his brother Mr. King as its nominee. On 4th May 2020, Mr. King withdrew his consent as Nominee of the One Person Company. Can he do so under the provisions of the Companies Act, 2013?

Examine whether the following individuals are eligible for being nominated as Nominee of the One Person Company as on 5th May 2020 under the above said Act.

(i)Mr. Shyam, son of Mr. Raja who is 15 years old as on 5th May 2020.
(ii)Ms. Devaki an Indian Citizen, sister of Mr. Raja stays in Dubai and India. She stayed in India during the period from 2nd January 2019 to 16th August 2019. Thereafter she left for Dubai and stayed there.
(iii)Mr. Ashok, an Indian Citizen residing in India who is presently a member of a ‘One Person Company’. (Nov,6 Marks)     

Ans.

As per section 3 of the Companies Act, 2013, the memorandum of One Person Company (OPC) shall indicate the name of the other person (nominee), who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company.

The other person (nominee) whose name is given in the memorandum shall give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation along with its Memorandum of Association and Articles of Association.

Such other person (nominee) may withdraw his consent in such manner as may be prescribed.

Therefore, in terms of the above law, Mr. King, the nominee, whose name was given in the memorandum, can withdraw his consent as a nominee of the OPC by giving a notice in writing to the sole member and to the One Person Company.

Following are the answers to the second part of the question as regards the eligibility for being nominated as nominee:

(i) As per the Rule 3 of the Companies (Incorporation) Rules, 2014, no minor shall become member or nominee of the OPC. Therefore, Mr. Shyam, being a minor is not eligible for being nominated as Nominee of the OPC.

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(ii) As per the Rule 3 of the Companies (Incorporation) Rules, 2014, Only a natural person who is an Indian citizen whether resident in India or otherwise

a.shall be eligible to incorporate a One Person Company;
b.shall be a nominee for the sole member of a One Person Company.

Explanation.- For the purposes of this rule, the term “resident in India” means a person who has stayed in India for a period of not less than 120 days during the immediately preceding one calendar year.

 

Here Ms. Devaki is an Indian Citizen and her resident in India holds no relevance here during the immediately preceding financial year in India. So, she is eligible for being nominated as nominee of the OPC.

As per the Rule 3 of the Companies (Incorporation) Rules, 2014, a person shall not be a 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.

(iii) Mr. Ashok, an Indian Citizen residing in India who is a member of an OPC (Not a nominee in any OPC), can be nominated as nominee.

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Q.S Ltd acquired 10% paid up share capital of H Ltd on 15th March 2017. H Ltd acquired 55% paid up share capital of S Ltd on 10th March 2018. H Ltd. on 25th September, 2020 decided to issue bonus shares in the ratio of 1:1 to the existing shareholders. Accordingly, bonus shares were allotted to S Ltd. Examine under the provisions of the Companies Act, 2013 and decide

(i) the validity of holding of shares by S Ltd. in H Ltd.

(ii) allotment of Bonus shares by H Ltd. to S Ltd. (4 Marks-Nov, 20)

Ans. As per Section 19 of the Companies Act, 2013, no company shall, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

However, this shall not apply where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

In the given case, H Ltd. has acquired 55% paid up share capital of S Ltd. on 10th March 2018. Whereas, S Ltd. has been holding 10% paid up share capital of H Ltd. since 15th March, 2017. The said instance as asked in the question falls under the exception stated above.

Therefore

(i)Holding of shares by S Ltd. in H Ltd. is valid in view of the proviso (c) to sub-section of section 19 of the Act, which states that the restrictions of provisions of section 19(1) will not be applicable where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.
(ii)Allotment of bonus shares by H Ltd. to S Ltd. is also valid in view of the above proviso.

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Q. The Articles of Association of a Company may contain provisions for entrenchment under Section 5 of the Companies Act, 2013. What is meant by entrenchment provisions in this context? Also State the relevant provisions of the said Act dealing with entrenchment provisions. (3 Marks Nov.20)

Ans. Entrenchment: Usually an article of association may be altered by passing special resolution but entrenchment makes it more difficult to change it. So entrenchment means making something more protective.

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Section 5 of the Companies Act, 2013 describes the provisions relating to entrenchment.

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Articles may contain provisions for entrenchment [Section 5(3)]: 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.

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Manner of inclusion of the entrenchment provision [Section 5(4)]: The 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.

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Notice to the registrar of the entrenchment provision [Section 5(5)]: 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 prescribe.

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Q.

(i)Herry Limited is a company registered in Thailand. It has no place of business established in India, yet it is doing online business through telemarketing in India having its main server for online business outside India. State the status of the Company under the provisions of the Companies Act, 2013.
(ii)SKP Limited (Registered in India), a wholly owned subsidiary company of Herry Limited decided to follow different financial year for consolidation of its accounts outside India. State the procedure to be followed in this regard.
(iii)Naveen incorporated a “One Person Company” making his sister Navita as the nominee. Navita is leaving India permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent of nomination in the said One Person Company. Taking into considerations the provisions of the Companies Act, 2013 answer the questions given below.
A.If Navita is leaving India permanently, is it mandatory for her to withdraw her nomination in the said One Person Company?
B.If Navita maintained the status of Resident of India after her marriage, then can she continue her nomination in the said One Person Company? (6 Marks- Nov.19)

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Ans. According to section 2(42) of the Companies Act, 2013, “foreign company” means any company or body corporate incorporated outside India which

a)has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
b)conducts any business activity in India in any other manner.

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According to Rule 2(1)(c)(iv) of the Companies (Registration of Foreign Companies) Rules, 2014, “electronic mode” means carrying out electronically based, whether main server is installed in India or not, including, but not limited to online services such as telemarketing, telecommuting, telemedicine, education and information research.

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Looking to the above description, it can be said that being involved in telemarketing in India having its main server for online business outside India, Herry Limited will be treated as foreign company.

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Where a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company or body corporate in such form and manner as may be prescribed, allow any period as its financial year, whether or not that period is a year.

Any application pending before the Tribunal as on the date of commencement of the Companies (Amendment) Act, 2019, shall be disposed of by the Tribunal in accordance with the provisions applicable to it before such commencement.

Also, a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause.

SKP Limited is advised to follow the above procedure accordingly.

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[Note: This answer is based on the assumption that Herry limited is a foreign Company registered outside India as inferred from part (i) of the question]

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As per Rule 3 & 4 of the Companies (Incorporation) Rules, 2014 following the      answers :

A.Yes, it is mandatory for Navita to withdraw her nomination in the said OPC as she is leaving India permanently as only a natural person who is an Indian citizen and resident in India shall be a nominee in OPC.
B.Yes, Navita can continue her nomination in the said OPC, if she maintained the status of Resident of India after her marriage by staying in India for a period of not less than 182 days during the immediately preceding financial year.

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Q. Mahima Ltd. was incorporated by furnishing false informations. As per the Companies Act, 2013, state the powers of the Tribunal (NCLT) in this regard. (Nov, 19 – 5 Marks)

Ans. Order of the Tribunal: According to section 7(7) of the Companies Act, 2013, where a company has been got incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants

a)pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
b)direct that liability of the members shall be unlimited; or
c)direct removal of the name of the company from the register of companies; or
d)pass an order for the winding up of the company; or
e)pass such other orders as it may deem fit.

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However before making any order-

(i)the company shall be given a reasonable opportunity of being heard in the matter; and
(ii)the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability.

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Q. Sapphire Private Limited has registered its articles along with memorandum as on 1st July 2021. The directors of the company seeks your advice regarding the effect of registration of the company on the company itself and on its members. (May 22 – 3 Marks)

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Ans. As per Section 9 and 10 of the Companies Act, 2013 following shall be the effect of registration of a company:

 From the date of incorporation, the subscribers to the memorandum and all members of the company, shall become a body corporate.
 Such a registered company shall be capable of exercising all the functions of an incorporated company with the perpetual succession with power to acquire, hold and dispose of property, and to contract and to sue and be sued.
 The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.
 All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

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Q. XYZ a One-Person Company (OPC) was incorporated during the year 2022-23 with an authorized capital of ₹ 45.00 lakhs (4.5 lakh shares of ₹ 10 each), The capital was fully subscribed and paid up. Turnover of the company during 2014-15 and 2023-24 was ₹ 2.00 crores and ₹ 2.5 crores respectively. Promoter of the company seeks your advice in following circumstances, whether XYZ (OPC) can convert into any other kind of company during 2024-25. Please, advise with reference to relevant provisions of the Companies Act, 2013 in the below mentioned circumstances:

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(i)If promoter increases the paid up capital of the company by ₹ 10.00 lakhs during 2016-17.
(ii)If turnover of the company during 2016-17 was ₹ 3.00 crores. (Nov,18 – 4 Marks)

Ans. One Person Company (OPC) can anytime convert voluntarily into any kind of company.

One person company shall be a Small Company. It means it paid up capital shall not exceed ₹ 4 crore and Turnover shall not exceed ₹ 40 crore.

Besides, Section 18 of the Companies Act, 2013 provides that a company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of Chapter II of the Act.

Based on the above provisions, our advice in the given circumstances will be as under:

In both cases, OPC can convert itself into any other type of company since voluntary conversion can be carried out anytime without looking into the aspect of Paid up capital and turnover.

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Q. Teresa Ltd. is a company registered in New York (U.S.A.). The company has no place of business established in India, but it is doing online business through data interchange in India. Explain with reference to relevant provisions of the Companies Act, 2013 whether Teresa Ltd. will be treated as Foreign Company. (6 Marks-Nov,18)

Ans. According to section 2(42) of the Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which,-

a)has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
b)conducts any business activity in India in any other manner.

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As per the Rule given in the Companies (Specification of Definitions Details) Rules, 2014, the term “electronic mode”, means carrying out electronically based, whether main server is installed in India or not, including, but not limited to-

(i)Business to business and business to consumer transactions, data interchange and other digital supply transactions;
(ii)Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;
(iii)Financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;
(iv)Online services such as telemarketing, telecommuting, telemedicine, education and information research; and
(v)All related data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise;

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In the given question, Teresa Ltd. will be treated as a foreign company within the meaning of section 2(42) of the Companies Act, 2013 since it is doing online business

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In the given question, Teresa Ltd. will be treated as a foreign company within the meaning of section 2(42) of the Companies Act, 2013 since it is doing online business through data interchange in India even though the company has no place of business established in India.

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Q. The persons (not being members) dealing with the company are always protected by the doctrine of Indoor management. Explain. Also, explain when doctrine of Constructive Notice will apply. (6 Marks –Nov,18)

Ans.

Doctrine of Indoor Management

According to this doctrine, persons dealing with the company need not inquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association.

Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner.

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The doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies.

The doctrine of indoor management is opposite to the doctrine of constructive notice. Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a safeguard against the possibility of abusing the doctrine of constructive notice.

Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive notice)

(i)Knowledge of irregularity: In case an ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity.
(ii)Negligence: If, with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
(iii)Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers.

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Q.

Q. As at 31st March, 2018, the paid up share capital of S Ltd. is ` 1,00,00,000 divided into 10,00,000 equity shares of ` 10 each. Of this, H Ltd. is holding 6,00,000 equity shares and 4,00,000 equity shares are held by others. Simultaneously, S Ltd. is holding 5% equity shares of H Ltd. out of which 1% shares are held as a legal representative of a deceased member of H Ltd. On the basis of the given information, examine and answer the following queries with reference to the provisions of the Companies Act, 2013 :

(i)Can S Ltd. make further investment in equity shares of H Ltd. during 2018-19?
(ii)Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?
(iii)Can H Ltd. allot or transfer some of its shares to S Ltd.? (4 Marks-May 19)

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Ans. The paid up share capital of S Ltd. is ` 1,00,00,000 divided into 10,00,000 equity shares of `10 each. Of this, H Ltd. is holding 6,00,000 equity shares.

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Hence, H Ltd. is the holding company of S Ltd. and S Ltd. is the subsidiary company of H Ltd. by virtue of section 2(87) of the Companies Act, 2013.

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In the instant case,

(i)As per the provisions of sub-section (1) of Section 19 of the Companies Act, 2013, no company shall, either by itself or through its nominees, hold any shares in its holding company. Therefore, S Ltd. cannot make further investment in equity shares of H Ltd. during 2018-19.
(ii)As per second proviso to Section 19, a subsidiary company shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee. Therefore, S Ltd. can exercise voting rights at the Annual General Meeting of H Ltd. only in respect of 1% shares held as a legal representative of a deceased member of H Ltd.
(iii)Section 19 also provides that no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void. Therefore, H Ltd. cannot allot or transfer some of its shares to S Ltd.

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Q. A group of individuals intend to form a club namely ‘Budding Pilots Flying Club’ as limited liability company to impart class room teaching and aircraft flight training to trainee pilots. It was decided to form a limited liability company for charitable purpose under Section 8 of the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved and the surplus of assets over the liabilities, if any, will be distributed amongst the members as a usual procedure allowed under the Companies Act.

Examine the feasibility of the proposal and advise the promoters considering the provisions of the Companies Act, 2013. (May,19 – 5 Marks)

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Ans. According to section 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company

(i)has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
(ii)intends to apply its profits, if any, or other income in promoting its objects; and
(iii)intends to prohibit the payment of any dividend to its members;

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the Central Government may, by issue of licence, allow that person or association of persons to be registered as a limited liability company.

In the instant case, the decision of the group of individuals to form a limited liability company for charitable purpose under section 8 for a period of ten years and thereafter to dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst the members will not hold good, since there is a restriction as pointed out in point (b) above regarding application of its profits or other income only in promoting its objects. Further, there is restriction in the application of the surplus assets of such a company in the event of winding up or dissolution of the company as provided in sub- section (9) of Section 8 of the Companies Act, 2013. Therefore, the proposal is not feasible.

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Q. Alpha Ltd., A Section 8 company is planning to declare dividend in the Annual General Meeting for the Financial Year ended 31-03-2018. Mr. Chopra is holding 800 equity shares as on date. State whether the act of the company is according to the provisions of the Companies Act, 2013. (2 Marks- MAY 18)

Ans. Prohibition on section 8 companies: According to Section 8(1) of the Companies Act, 2013, the companies having licence under Section 8 (Formation of companies with Charitable Objects, etc.) of the Act are prohibited from paying any dividend to its members. Their profits are intended to be applied only in promoting the objects of the company.

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Hence, in the instant case, the proposed act of Alpha Ltd., a company registered under the provisions of Section 8 of the Companies Act, 2013, which is planning to declare dividend, is not according to the provisions of the Companies Act, 2013.

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Q. Explain the provisions of the Companies Act, 2013 relating to the ‘Service of Documents’ on a  company and the members of the company. (MTP, 2021 – 3 Marks) 

Ans. Under section 20 of the Companies Act, 2013 a document may be served on a company or an  officer thereof by sending it to the company or the officer at the registered office of the company  by registered post or by speed post or by courier service or by leaving it at its registered office or  by means of such electronic or other mode as may be prescribed. However, in case where  securities are held with a depository, the records of the beneficial ownership may be served by  such depository on the company by means of electronic or other mode. 

Under section 20 (2), save as provided in the Act or the rule thereunder for filing of documents with  the registrar in electronic mode, a document may be served on Registrar or any member by sending  it to him by post or by registered post or by speed post or by courier or by delivering at his office  or address, or by such electronic or other mode as may be prescribed. However, a member may  request for delivery of any document through a particular mode, for which he shall pay such fees  as may be determined by the company in its annual general meeting. 

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Q. The Article of Association (AOA) of AB Ltd. provides that documents may be served upon the company only through Speed Post. Suresh dispatches some documents to the company by courier, under certificate of posting. The company did not accept it on the ground that it is in violation of the AOA. As a result, Suresh suffered from loss. Explain with reference to the provisions of the Companies Act, 2013:

a)Whether refusal of document by the company is valid?
b)Whether Suresh can claim damages for it? (Nov 22 – 5 Marks)

Ans. Serving of document to Company

In terms of Section 20(1) of the Companies Act, 2013, a document may be served on a company or an officer thereof by sending it to the company or the officer at the registered office of the company by-

 registered post, or
 speed post, or
 courier service, or
 leaving it at its registered office, or
 means of such electronic or other mode as may be prescribed.

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In the instant case, Suresh dispatches some document to AB Ltd. by courier whereas the AOA of said company provides that documents may be served upon the company only through Speed Post. AB Ltd. did not accept the documents on the ground that it is in violation of the AOA. Taking into account the above provision,

a)Refusal of documents by AB Ltd. is not valid as sending of documents by courier to AB Ltd. is complying with the provisions given under section 20(1) of the Act.
b)Since, the AB Ltd. is at fault by not accepting the documents sent by Suresh, YES, he can claim the damages for any loss occurred to him.

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Q. Mr. Shyamlal is a B. Tech in computer science. He has promoted an IT start up and got it registered  as a Private Limited Company. Initially, only he and his family members are holding all the shares  in the company. While drafting the Articles of Association of the company, it has been included that  Mr. Shyamlal will remain as a director of the company for lifetime.  

Mr. Mehra, a close friend of Mr. Shyamlal has warned him (Mr. Shyamlal) that in future if 75% or  more shares in the company are held by non- family members then by passing a Special  Resolution, the relevant articles can be amended and Mr. Shyamlal may be removed from the post  of director.  

Mr. Shyamlal has approached you to advise him for protecting his position as a director for lifetime.   Give your answer as per the provisions of the Companies Act, 2013. (MTP-Apr, 21 – 6 Marks)

Ans. As per the provisions of sub-section (3) of section 5 of the Companies Act, 2013, 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 special resolution are met or complied with.  

Usually, an article of association may be altered by passing a special resolution but entrenchment  makes it one difficult to change it. So, entrenchment means making something more protective. 

Manner of inclusion of the entrenchment provision: 

As per the provisions of sub-section (4) of section 5 of the Companies Act, 2013, the provisions of  entrenchment shall only be made either on formation of a company, or by an amendment in the  Articles of Association as agreed to by all the members of the company in the case of a private  company and by a special resolution in case of a public company.

As per the provisions of sub-section (4) of section 5 of the Companies Act, 2013, where the articles  contain provision 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.  

In the said situation the IT startup company is a private company. Therefore, Mr. Shyamlal can get  the articles altered which is agreed to by all the members whereby the amended article will say  that he can be removed from the post of director only if, say, 95% votes are cast in favour of the  resolution and give notice of the same to the Registrar.

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Q. Mr. Dinesh incorporated a new Private Limited Company under the provisions of the Companies  Act, 2013 and desires to commence the business immediately. Please advise Mr. Dinesh about the procedure for commencement of business as laid under the provisions of the Section 10A of  the Companies Act, 2013. (MTP-Apr, 21 – 5 Marks)

Ans. As per Section 10A of the Companies Act, 2013, a company incorporated after the commencement  of the Companies (Amendment) Second Ordinance, 2019 and having a share capital shall not  commence any business or exercise any borrowing powers unless: 

(i)A declaration is filed by a director within a period of 180 days of the date of incorporation of  the company in such form and verified in such manner as may be prescribed, with the  Registrar that every subscriber to the memorandum has paid the value of the shares agreed  to be taken by him on the date of making of such declaration; and 
(ii)The company has filed with the Registrar a verification of it registered office as provided in  sub-section (2) of section 12. 

Mr. Dinesh has to comply with the above requirements and procedure for commencing the business  of the company. 

 

Q. XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better administrative conveniences the company wants to shift its registered office from Mumbai to Pune (within the State of Maharashtra). What formalities the company has to comply with under the provisions of the Companies Act, 2013 for shifting its registered office as stated above? Explain. (SM)

Ans. The Companies Act, 2013 under section 13 provides for the process of altering the Memorandum of a company. Since the location or Registered Office clause in the Memorandum only names the state in which its registered office is situated, a change in address from Mumbai to Pune, does not result in the alteration of the Memorandum and hence the provisions of section 13 (and its sub sections) do not apply in this case.

However, under section 12 (5) of the Act which deals with the registered office of company, the change in registered office from one town or city to another in the same state, must be approved by a special resolution of the company. Further, presuming that the Registrar will remain the same for the whole state of Maharashtra, there will be no need for the company to seek the confirmation to such change from the Regional Director.

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Q. As per the financial statement as at 31.03.2021, the Authorized and Issued share capital of Manorama Travels Private Limited (the Company) is of ` 100 Lakh divided into 10 Lakh equity shares of ` 10 each. The subscribed and paid-up share capital on that date is ` 80 Lakh divided into 8 Lakh equity shares of ` 10 each. The Company has reduced its share capital by cancelling 2 Lakh issued but unsubscribed equity shares during the financial year 2021-22, without obtaining the confirmation from the National Company Law Tribunal (the Tribunal). It is noted that the Company has amended its Memorandum of Association by passing the requisite resolution at the duly convened meeting for the above purpose. While filing the relevant e-form the Practicing Company Secretary refused to certify the form for the reason that the action of the Company reducing the share capital without confirmation of the Tribunal is invalid.

In light of the above facts and in accordance with the provisions of the Companies Act, 2013, you are requested to (a) examine, the validity of the decision of the Company and contention of the practicing Company Secretary and (b) state, the type of resolution required to be passed for amending the capital clause of the Memorandum of Association. (May 22 – 5 Marks)

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Ans. According to section 61 of the Companies Act, 2013, a limited company having a share capital is empowered to alter its capital clause of the Memorandum of Association. The provisions are as under:

(1)According to the section, a limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.
(2)It provides that the cancellation of shares shall not be deemed to be a reduction of share capital.

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According to the given facts, in the said question, the company reduced its share capital without obtaining the confirmation from the NCLT. The Company amended its memorandum by passing the requisite resolution at the duly convened meeting. However, Company Secretary refused to certify stating that action of company reducing the share capital without confirmation of the Tribunal, is invalid.

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Accordingly, in the light of the stated facts, following shall be the answers:

a)Decision of the company is valid, as for alteration of share capital by cancellation of shares and diminishing of amount of share capital by the amount of the shares so cancelled, does not require confirmation of the Tribunal. As per the law, passing of the resolution in that behalf at the duly convened meeting by amending Memorandum of Association, is the sufficient compliance. Therefore, contention of practicing Company Secretary is not valid.
b)According to section 13, save as provided in section 61 of the Companies Act, 2013, company may alter the provisions of its memorandum with the approval of the members by a special resolution.

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Q. MNO a One Person company (OPC) was incorporated during the year 2015-16 with an authorised capital of ` 45 lakhs (4.5 lakhs shares of ` 10 each). The capital was fully subscribed and paid up. Turnover of the company during 2015-16 and 2016-17 was ` 2 crores and ` 2.5 crores respectively. Promoter of the company seeks your advice in the following circumstances, whether MNO (OPC) can convert into any other kind of company during 2017-18. Please, advise with reference to relevant provisions of the Companies Act, 2013 in the below mentioned circumstances:

(i)If promoter increases the paid up capital of the company by ` 10 lakhs during 2017-18
(ii)If turnover of the company during 2017-18 was ` 3 crores.

Ans. As per Rule 3 of the Companies (Incorporation) Rules, 2014, One Person Company (OPC) cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except where the paid up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.

Besides, Section 18 of the Companies Act, 2013 provides that a company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of the Chapter II of the Act.

According to the above provisions, following are the answers to the given circumstances:

(i)Where, if the promotors increases the paid up capital of the company by ` 10.00 lakh during 2017-2018 i.e., to ` 55 lakh (45+10= 55), MNO (OPC) may convert itself voluntarily into any other kind of company due to increase in the paid up share capital exceeding 50 lakh rupees. This could be done by the MNO by alteration of memorandum and articles of the company in compliance with the Provisions of the Act.
(ii)Where if the turnover of the MNO during 2017-18 was ` 3.00 crore, there will be no change in the answer, as it meets up the requirement of minimum turnover i.e, ` 2 crore for voluntarily conversion of MNO (OPC) into any other kind of company.

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Q. Alfa school started imparting education on 1.4.2010, with the sole objective of providing education to children of weaker society either free of cost or at a very nominal fee depending upon the financial condition of their parents. However, on 30th March 2018, it came to the knowledge of the Central Government that the said school was operating by violating the objects of its objective clause due to which it was granted the status of a section 8 company under the Companies Act, 2013. Describe what powers can be exercised by the Central Government against the Alfa School, in such a case? (SM)

Ans. Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, education, sports etc. Such company intends to apply its profit in promoting its objects. Section 8 companies are registered by the Registrar only when a license is

issued by the Central Government to them. Since, Alfa School was a Section 8 company and it had started violating the objects of its objective clause, hence in such a situation the following powers can be exercised by the Central Government:

(i)The Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.
(ii)Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.

However, no such order shall be made unless the company is given a reasonable opportunity of being heard.

(iii)Where a licence is revoked and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

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Q. The object clause of the Memorandum of Vivek Industries Ltd., empowers it to carry on real -estate business and any other business that is allied to it. Due to a downward trend in real-estate business the management of the company has decided to take up the business of Food processing activity. The company wants to alter its Memorandum, so as to include the Food Processing Business in its objects clause. Examine whether the company can make such change as per the provisions of the Companies Act, 2013? (SM)

Ans. Alteration of Objects Clause of Memorandum

The Companies Act, 2013 has made alteration of the memorandum simpler and more flexible. Under section 13(1) of the Act, a company may, by a special resolution after complying with the procedure specified in this section, alter the provisions of its Memorandum.

In the case of alteration to the objects clause, Section 13(6) requires the filing of the Special Resolution by the company with the Registrar. Section 13 (9) states that the Registrar shall register any alteration to the Memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution by the company. Section 13 (10) further stipulates that no alteration in the Memorandum shall take effect unless it has been registered with the Registrar as above.

Hence, the Companies Act, 2013 permits any alteration to the objects clause with ease. Vivek Industries Ltd. can make the required changes in the object clause of its Memorandum of Association.

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Q. Explain in the light of the provisions of the Companies Act, 2013, the circumstances under which a subsidiary company can become a member of its holding company.

Ans. In accordance with the provisions of Section 19 of the Companies Act, 2013, a subsidiary company cannot either by itself or through its nominees hold any shares in its holding company and no holding company shall allot or transfer its shares to any subsidiary companies. Any such allotment or transfer of shares in a company to its subsidiary is void. The section however does not apply where:

(1)the subsidiary company holds shares in its holding company as the legal representative of a deceased member of the holding company, or
(2)the subsidiary company holds such shares as a trustee, or
(3)the subsidiary company was a shareholder in the holding company even before it became its subsidiary.

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Q. Yadav Dairy Products Private limited has registered its articles along with memorandum at the time of registration of company in December, 2014. Now directors of the company are of the view that provisions of articles regarding forfeiture of shares should not be changed except by a resolution of 90% majority. While as per section 14 of the Companies Act, 2013 articles may be changed by passing a special resolution only. Hence, one of the directors is of the view that they cannot make a provision against the Companies Act, 2013. You are required to advise the company on this matter. (SM)

Ans. As per section 5 of the Companies Act, 2013 the article may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if more restrictive conditions than a special resolution, are met.

The 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.

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 prescribed manner.

In the present case, Yadav Dairy Products Private Limited is a private company and wants to protect provisions of articles regarding forfeiture of shares. It means it wants to make entrenchment of articles, which is allowed. But the company will have to pass a resolution taking permission of all the members and it should also give notice to Register of Companies regarding entrenchment of articles.

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Q. Anushka security equipments limited is a manufacturer of CCTV cameras. It has raised ` 100 crores through public issue of its equity shares for starting one more unit of CCTV camera manufacturing. It has utilized 10 crores rupees and then it realized that its existing business has no potential for expansion because government has reduced customs duty on import of CCTV camera hence imported cameras from china are cheaper than its own manufacturing. Now it wants to utilize remaining amount in mobile app development business by adding a new object in its memorandum of association.

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Does the Companies Act allow such change of object. If not then what advise will you give to company. If yes, then give steps to be followed.

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Ans. According to section 13 of the Companies Act, 2013 a company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and—

(i)the details in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change;
(ii)the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with SEBI regulations.

Company will have to file copy of special resolution with ROC and he will certify the registration within a period of thirty days. Alteration will be effective only after this certificate by ROC.

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Looking at the above provisions we can say that the company can add the object of mobile app development in its memorandum and divert public company into that business. But for that it will have to comply with above requirements.

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Q. Manglu and friends got registered a company in the name of Taxmann advisory private limited. Taxmann is a registered trade mark. After 5 years when the owner of trade mark come to know about the same, it filed an application with relevant authority. Can the company be compelled to change its name by the owner of trade mark? Can the owner of registered trade mark request the company to changes its name at its discretion? (SM)

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Ans. According to section 16 of the Companies Act, 2013 if a company is registered by a name which,—

  • in the opinion of the Central Government, is identical with the name by which a company had been previously registered, it may direct the company to change its name. Then the company shall by passing an ordinary resolution change its name within 3 months.
  • is identical with a registered trade mark and owner of that trade mark apply to the Central Government within three years of incorporation of registration of the company, it may direct the company to change its name.

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Then the company shall change its name by passing an ordinary resolution within 6 months.

Company shall give notice to ROC along with the order of Central Government within 15 days of change. In case of default company and defaulting officer are punishable.

In the given case, owner of registered trade mark is filing objection after 5 years of registration of company with a wrong name. While it should have filed the same within 3 years. Therefore, the company cannot be compelled to change its name.

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As per section 13, company can anytime change it name by passing a special resolution and taking approval of Central Government. Therefore, if owner of registered trade mark request the company for change of its name and the company accepts the same then it can change it name voluntarily by following the provision o of section 13.

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Q. Shri Laxmi Electricals Ltd. (S) is company min which Hanumaan power suppliers Limited (H) is holding 60% of its paid up share capital. One of the shareholder of H made a charitable trust and donated his 10% shares in H and ` 50 crores to the trust. He appoint S as the trustee. All the assets of the trust are held in the name of S. Can a subsidiary hold shares in its holding company in this way?

Ans. According to section 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

Following are the exceptions to the above rule—

(a)where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or
(b)where the subsidiary company holds such shares as a trustee; or

where the subsidiary company is a shareholder even before it became  a subsidiary company of the holding company but in this case it will not have a right to vote in the meeting of holding company.

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In the given case one of the shareholders of holding company has transferred his shares in the holding company to a trust where the shares will be held by subsidiary company. It means now subsidiary will hold shares in the holding company. But it will hold shares in the capacity of a trustee. Therefore, we can conclude that in the given situation S can hold shares in H.

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Q. Parag Constructions Limited is a leading infrastructure company. One of the directors of the company Mr. Parag has been singing all construction contracts on behalf of company for many years. All the parties who ever deal with the company know Mr. Parag very well. Company has got a very important construction contract from a renowned software company. Parag constructions will do construction for this site in partnership with a local contractor Firoz bhai. Mr. Parag signed partnership deed with Firoz bhai on behalf of company because he has an implied authority. Later in a dispute company denied to accept liability as a partner. Can the company deny its liability as a partner? (SM)

Ans. A bill of exchange, hundi or promissory note shall be deemed to have been made, accepted, drawn or endorsed on behalf of a company if made, accepted, drawn, or endorsed in the name of, or on behalf of or on account of, the company by any person acting under its authority, express or implied.

(1)A company may, by writing under its common seal, if any, authorise any person, either generally or in respect of any specified matters, as its  attorney to execute other deeds on its behalf in any place either in or outside India.

However, in case a company does not have a common seal, the above authorisation shall be made by 2 directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.

(2)A deed signed by such an attorney on behalf of the company and under his seal shall bind the company.

In the present case company has not neither given any written authority not affixed common seal of the authority letter. It means that Mr. Parag is not legally entitled to execute deeds on behalf of the company. Therefore, deeds executed by him are not binding on the company. Therefore, company can deny its liability as a partner.

 

Prospectus

Q. A Ltd. issued 1,00,000 equity shares of ` 100 each at par to the public by issuing a prospectus. The prospectus discloses the minimum subscription amount of ` 15,00,000 required to be received on application of shares and share application money shall be payable at ` 20 per share. The prospectus further reveals that A Ltd. has applied for listing of shares in 3 recognized stock exchanges of which 1 application has been rejected. The issue was fully subscribed and A Ltd. received an amount of ` 20,00,000 on share application. A Ltd., then proceeded for allotment of shares.

Examine the three disclosures in the above case study which are the deciding factors in an allotment of shares and the consequences for violation, if any under the provisions of the Companies Act, 2013. (Jan, 21 – 6 Marks)

Ans. As per the requirement of the question, disclosures which are the deciding factors in anallotment of shares are laid down in section 39 of the Companies Act, 2013.

According to Section 39(1), no allotment of any securities of a company offered to the public for subscription shall be made unless-

 the amount stated in the prospectus as the minimum amount has been subscribed, and
 the sums payable on application for the amount so stated have been paid to, and received by the company by cheque or other instrument.
 The amount payable on application on every security shall not be less than 5% of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf.

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In the question, A Ltd. issued shares to public by issuing of prospectus, disclosing minimum subscription, sum payable on application for the amount; and the amount received on share application is more than 5% of the nominal amount of the security.

Further, it revealed that A Ltd. has applied for listing of shares in 3 recognized stock exchanges of which one application was rejected.

In the given instance, there is compliance to section 23, as nothing is talked about matters required to be included in the prospectus under section 26 (1) and about filing with the registrar; assuming that the said requirements have been complied with, requirement of section 39 as regards obtaining of minimum subscription and the minimum amount receivable on application (not less than 5% of the nominal value of the securities offered) are fulfilled.

The provisions of section 40 of the Companies Act, 2013 states that every company making public offer shall, before making such offer, make an application to one or more recognized stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges.

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The above provision is very clear that not only the company has to apply for listing of the securities at a recognized stock exchange, but also obtain permission thereof from all the stock exchanges where it has applied, before making the public offer. Since one of the three recognized stock exchanges, where the company has applied for enlisting , has rejected the application and the company has proceeded with making the offer of shares, it has violated the provisions of section 40. Therefore, this shall be deemed to be irregular allotment of shares.

Consequently, A Ltd. shall be required to refund the application money to the applicants in the prescribed manner within the stipulated time frame.

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Q. CDS Ltd. is planning to make a private placement of securities. The Managing Director arranged to obtain a brief note from some source explaining the salient features of the issue of private placement that the Board of Directors shall keep in mind while approving the proposal on this subject. The brief note includes, inter alia, the information / suggestions on the following points:

(i) A private placement shall be made only to a select group of identified persons not exceeding 200 in a financial year.

The aforesaid ceiling of identified persons shall not apply to the offer made to the qualified institutional buyers but is applicable to the employees of the Company who will be covered under the Company’s Employees Stock Option Scheme.

(ii) The offer on private placement basis shall be made only once in a financial year for any number of identified persons not exceeding 200.

The Company solicits your remarks on the points referred above as to whether they are valid or not? Reasoned remarks should be given in accordance with the provisions of the Companies Act, 2013. (Jan, 21 – 4 Marks)

Ans. As per the provisions of sub-section (2) of section 42 of the Companies Act, 2013, privateplacement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed 50 or such higher number as may be prescribed, in a financial year subject to such conditions as may be prescribed.

It is also provided that any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees’ stock option as per provisions of section 62(1)(b) shall not be considered while calculating the limit of two hundred persons.

According to Rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, an offer or invitation to subscribe securities under private placement shall not be made to persons more than two hundred in the aggregate in a financial year.

As per Explanation given in this Rule, it is clarified that the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.

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Referring to the above mentioned provisions of sub-section (2) of section 42 of the Companies Act, 2013 and Rule 14 the Companies (Prospectus and Allotment of Securities) Rules, 2014, we can conclude as follows:

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The company is correct in proposing that private placement shall be made only to a select group of identified persons not exceeding 200 in a financial year. This part of the proposal is correct.

(i) The company is also correct in proposing that the aforesaid ceiling of identified persons shall not apply to offer made to the qualified institutional buyers, but the company is not correct in saying that the said ceiling is applicable to employees covered under the Company’s Employee Stock Option Scheme. Hence, the second part of the proposal is only partially correct.

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(ii) The Companies (Prospectus and Allotment of Securities) Rules, 2014 provides that an offer or invitation to subscribe securities under private placement shall not be made to persons more than 200 in aggregate in a financial year.

Keeping the ceiling of 200 persons in aggregate during a financial year, offer of private placement can be made more than once in a financial year. Therefore, the second statement is not fully correct.

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Q. The Board of Directors of ABC Limited are proposing to raise funds from the public through issue of equity shares. However due to volatile financial markets, the price per share and the number of shares to be issued are left open and to be decided post closure of the issue. As a financial advisor of the company, what would you suggest to the Board in this regard as per the provisions of the Companies Act, 2013? (May 22 – 5 Marks)

Ans. As a financial consultant the Board of Directors of ABC Limited would be advised to issue a Red Herring Prospectus. The expression “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. [Explanation to Section 32]

Thus, ABC Limited may raise funds from public through red herring prospectus whereby the price per security and number of securities are left open to be decided post closure of the issue.

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The company may follow the provisions of section 32 in issuing a red herring prospectus:

1.Red Herring Prospectus is issued prior to issue of Prospectus: A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
2.Filing with the registrar: A company proposing to issue a red herring prospectus shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer.
3.Obligations under Red Herring Prospectus vis-à-vis Prospectus: A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
4.Filing of Red Herring Prospectus with Registrar and SEBI upon closing of Offer: Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

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Q. The Board of Directors of Chandra Ltd. proposes to issue the prospectus inviting offers from the public for subscribing the shares of the Company. State the reports which shall be included in the prospectus for the purposes of providing financial information under the provisions of the Companies Act, 2013. (Nov, 19 – 4 Marks)

Ans. As per section 26(1) of the Companies Act, 2013, every prospectus issued by or on behalf of a publiccompany either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government:

Provided that until the Securities and Exchange Board specifies the information and reports on financial information under this sub-section, the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992, in respect of such financial information or reports on financial information shall apply.

Prospectus issued make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder.

Accordingly, the Board of Directors of Chandra Ltd. who proposes to issue the prospectus shall provide such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government in compliance with the above stated provision and make a declaration about the compliance of the above stated provisions.

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Q. What is a Shelf-Prospectus? State the important provisions relating to the issuance of Shelf- Prospectus under the provisions of Companies Act,2013. (Nov, 18 – 6 (2+4) Marks)

Ans.

Shelf prospectus As per the Explanation given in Section 31 of the Companies Act, 2013, the expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

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Provisions relating to issue of Shelf-prospectus:

1.Filing of shelf prospectus with the registrar: According to section 31, any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage-
a)of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and
b)in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.

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2.Filing of information memorandum with the shelf prospectus: A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus:

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3.Intimation of changes: Provided that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days thereof.

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4.Memorandum together with the shelf prospectus shall be deemed to be a prospectus: Where an information memorandum is filed, every time an offer of securities is made under sub-section (2), such memorandum together with the shelf prospectus shall be deemed to be a prospectus.

 

Q. Discuss the provisions relating to private placement of shares under the Companies Act, 2013. (Nov, 18 – 5 marks)

Hint: Write New Amended Answer

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Q. Explain the conditions and the manner in which a company may issue Global Depository Receipts in a foreign country. (Nov, 18- 6 Marks)

Ans. The Companies (Issue of Global Depository Receipts) Rules, 2014, lays the conditions and the manner in which a company may issue depository receipts in a foreign country.

Conditions for issue of depository receipts–

1)Passing of resolution: The Board of Directors of the company intending to issue depository receipts shall pass a resolution authorising the company to do so.
2)Approval of shareholders: The Company shall take prior approval of its shareholders by a special resolution to be passed at a general meeting:
3)Depository receipts shall be issued by an overseas depository bank: The depository receipts shall be issued by an overseas depository bank appointed by the company and the underlying shares shall be kept in the custody of a domestic custodian bank.
4)Compliance with all the provisions, schemes, regulations etc.: The Company shall ensure that all the applicable provisions of the Scheme and the rules or regulations or guidelines issued by the Reserve Bank of India are complied with before and after the issue of depository receipts.
5)Compliance report to be placed at the meeting : The company shall appoint a merchant banker or a practising chartered accountant or a practising cost accountant or a practising company secretary to oversee all the compliances relating to issue of depository receipts and the compliance report taken from such merchant banker or practising chartered accountant or practising cost accountant or practising company secretary, as the case may be, shall be placed at the meeting of the Board of Directors of the company or of the committee of the Board of directors authorised by the Board in this regard to be held immediately after closure of all formalities of the issue of depository receipts:
 
Manner for issue of depository receipts
1.The depository receipts can be issued by way of public offering or private placement or in any other manner prevalent abroad and may be listed or traded in an overseas listing or trading platform.
2.The depository receipts may be issued against issue of new shares or may be sponsored against shares held by shareholders of the company in accordance with such conditions as the Central Government or Reserve Bank of India may prescribe or specify from time to time.
3.The underlying shares shall be allotted in the name of the overseas as depository bank and against such shares, the depository receipts shall be issued by the overseas depository bank abroad.

 

Q. Modem Jewellery Ltd. decides to pay 5% of the issue price gap of shares as underwriting commission to the underwriters, but the Articles of the company authorize only 4% underwriting commission on shares. Examine the validity of the above decision under the provision of the Companies Act, 2013. (2 Marks –May 19)

Ans. Section 40(6) of the Companies Act, 2013 provides that a company may pay commission to any person in connection with the subscription to its securities subject to such conditions as may be prescribed. Rule 13 of the Companies

Prospectus and Allotment of Securities) Rules, 2014 provides the conditions. As per Rule 13(c) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five per cent of the price at which the shares are issued or a rate authorised by the articles, whichever is less.

In the instant case, Modern Jewellery Ltd. decides to pay 5% of the issue price gap of shares as underwriting commission to the underwriters, but the Articles of the company authorize only 4% underwriting commission on shares.

Hence, the company can only pay a maximum of 4% underwriting commission on shares.

 

Q. Explain various instances which make the allotment of securities as irregular allotment under the Companies Act, 2013.(May, 19 – 4 Marks)

Ans.Irregular allotment: The Companies Act, 2013 does not specifically provide for the term“Irregular Allotment” of securities. Hence, we have to examine the requirements of a proper issue of securities and consider the consequences of non- fulfillment of those requirements.

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In broad terms an allotment of shares is deemed to be irregular when it has been made by a company in violation of Sections 23, 26, 39 or 40. Irregular allotment therefore arises in the following instances:

1)Where a company does not issue a prospectus in a public issue as required by section 23; or
2)Where the prospectus issued by the company does not include any of the matters required to be included therein under section 26 (1), or the information given is misleading, faulty and incorrect; or
3)Where the prospectus has not been filed with the Registrar for registration under section 26 (4); or
4)The minimum subscription as specified in the prospectus has not been received in terms of section 39; or
5)The minimum amount receivable on application is less than 5% of the nominal value of the securities offered or lower than the amount prescribed by SEBI in this behalf; or
6)In case of a public issue, approval for listing has not been obtained from one or more of the recognized stock exchanges under section 40 of the Companies Act, 2013

 

Q. TDL Ltd., a public company is planning to bring a public issue of equity shares in June, 2018. The company has appointed underwriters for getting its shares subscribed. As a Chartered Accountant of the company appraise the Board of TDL Ltd. about the provisions of payment of underwriter’s commission as per Companies Act, 2013.(May,18 – 6 Marks)

Ans. The provisions of the Companies Act, 2013 regarding the payment of underwriter’s commission are as follows:

Payment of commission: A company may pay commission to any person in connection with the subscription to its securities, whether absolute or conditional, subject to such conditions as given in Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Conditions for the payment of commission:

a)the payment of such commission shall be authorized in the company’s articles ofassociation;
b)the commission may be paid out of proceeds of the issue or the profit of the company or both;
c)Rate of commission: The rate of commission paid or agreed to be paid shall not exceed, in case ofshares, five percent of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent of the price at which the debentures are issued, or as specified in the company’s articles, whichever isless.
d)No commission to be paid: There shall not be paid commission to any underwriter on securities which are not offered to the public for subscription;
e)Copy of contract of payment of commission to be delivered to registrar: a copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration.

 

Q. Unique Builders Limited decides to pay 2.5 percent of the value of debentures as underwriting commission to the underwriters but the Articles of the company authorize only 2.0 percent underwriting commission on debentures. The company further decides to pay the underwriting commission in the form of flats. Examine the validity of the above arrangements under the provisions of the Companies Act,2013. (SM)

Ans. Section 40 (6) of the Companies Act 2013, provides that a company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, whether absolute or conditional, subject to a number of conditions which are prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014. In relation to the case given, the conditions applicable under the above Rules are as under:

(a)The payment of such commission shall be authorized in the company’s articles of association;
(b)The commission may be paid out of proceeds of the issue or the profit of the company or both;
(c)The rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent (5%) of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in

case of debentures, shall not exceed two and a half per cent (2.5 %) of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less;

Thus, the Underwriting commission is limited to 5% of issue price in case of shares and 2.5% in case of debentures. The rates of commission given above are maximum rates.

In view of the above, the decision of Unique Builders Ltd. to pay underwriting commission exceeding 2% as prescribed in the Articles is invalid.

The company may pay the underwriting commission in the form of flats as both the Companies Act and the Rules do not impose any restriction on the mode of payment though the source has been restricted to either the proceeds of the issue or profits of the company.

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Q. Examine the validity of the following statement referring to the provisions of the Companies Act, 2013 and/or Rules:

“The Articles of Association of X Ltd. contained a provision that upto 4% of issue price of’ the shares may be paid as underwriting commission to the underwriters. The Board of Directors of X Ltd. decided to pay 5% underwriting commission.

Ans. Section 40 (6) of the Companies Act 2013, provides that a company may pay com mission to any person in connection with the subscription or procurement of subscription to its securities, whether absolute or conditional, subject to the number of conditions which are prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014. Under the Companies (Prospectus and Allotment of Securities) Rules, 2014 the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent (5%) of the price at which the shares are issued or a rate authorised by the articles, whichever is less.

In the given problem, the articles of X Ltd. have prescribed 4% underwriting commission but the directors decided to pay 5% underwriting commission.

Therefore, the decision of the Board of Directors to pay 5% commission to the underwriters is invalid.

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Q. PQR limited wants to raise funds for it upcoming project. It has issued private placement offer letters to 55 persons in their individual name to issue its equity shares. Out of these four are qualified institutional buyers. Before allotment under this offer letter company issued another private placement offer letter to another 155 persons in their individual name for issue of its debentures. Being a public company can it issue securities in a private placement? Is it in compliance with provisions related to private placement or should these offers be treated as public offers? What if the offer for debentures is given after allotment of equity shares but within the same financial year? (SM)

Ans. According to section 42 of the companies act, 2013 any private or public company may make private placement through issued of a private placement offer letter.

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But the offer shall be made to persons not exceeding fifty or such higher number as may be prescribed, in a financial year. For counting number of persons qualified institutional buyers and employees under employees stock option scheme will not be considered.

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Here rules prescribed limit as 200 persons in a financial year. But this limit should be counted separately for each type of security.

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If a company makes an offer or invitation to more than the prescribed number of persons it shall be deemed to be an offer to the public and shall be governed by the provisions related to prospectus.

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Also a company cannot make fresh offer under this section if allotments with respect to any offer made earlier have been completed or that offer has been withdrawn or abandoned by the company. This rule is applicable even if the issue is of different kind of security.

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Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions will apply accordingly.

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In the given case PQR limited is a public company and looking at above provisions we can say that even a public company can make private placement. Company has given offer to 55 persons out of which 4 are qualified institutional buyers hence the offer is given to effectively 51 persons which is well within the limit of 200 persons. From this angle company is in compliance with private placement rules.

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But company has given another private placement offer which is non- compliance of provisions of section 42 hence the offers given by company will be treated as public offer and will be governed accordingly.

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But if the company gives offer for debentures in the same financial year after allotment of equity shares is complete then both the offers can well be treated as private placement offers. Here we should not add 51 and 155 persons for checking the limit of 200 because this limit should be checked.

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Q. TDL Ltd., a public company is planning to bring a public issue of equity share in June, 2018. The company has appointed underwriters for getting its shares subscribed. As a Chartered Accountant of the company appraise the Board of TDL Ltd. About the provisions of payment of underwriter’s commission as per Companies Act, 2013.

Ans. The provisions of the Companies Act, 2013 regarding the payment of underwriter’s commission are as follows:

Payment of commission: A company may pay commission to any person in connection with the subscription to its securities, whether absolute or conditional, subject to such conditions as given in Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Conditions for the payment of commission:

(1)Power in AOA – the payment of such commission shall be authorized in the company’s articles of association;
(2)Source of Payment – the commission may be paid out of proceeds of the issue or the profit of the company or both;
(3)Rate of commission: The rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less.
(4)Disclosure of particulars: the prospectus of the company shall disclose the following particulars –
a.the name of the underwriters;
b.the rate and amount of the commission payable to the underwriter; and
c.the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
(5)No commission to be paid: there shall not be paid commission to any underwriter on securities which are not offered to the public for subscription;

Copy of contract of payment of commission to be delivered to registrar: a copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration.

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Q. What is meant by “Abridged Prospectus”? Under what circumstances an abridged prospectus need not accompany the detailed information regarding prospectus along with the application form? What are the penalties in case of default in complying with the provisions related to issue of abridged prospectus?

Ans.

(1)Meaning of Abridged Prospectus: – According to Section 2(1) of the Companies Act, 2013, an abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf.
(2)Circumstances under which the abridged prospectus need not accompany the application forms: Section 33 (1) of the Companies Act, 2013 states that no application form for the purchase of any of the securities of a company can be issued unless such form is accompanied by an abridged prospectus. In terms of the Proviso to section 33 (1) an abridged prospectus need not accompany the application form if it is shown that the form of application was issued:
(i)In connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or
(ii)Where the securities are not offered to the public.
(3)If a company makes any default in complying with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees for each default.

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Q. State in what way does the Companies Act, 2013 regulate and restrict the following in respect of a company going for public issue of shares:

(i)Minimum Subscription, and
(ii)Application Money payable on shares being issued?

Ans. The Companies Act, 2013 by virtue of provisions as contained in Section 39 (1) and (2) regulates and restricts the minimum subscription and the application money payable in a public issue of shares as under:

Minimum subscription [Section 39 (1)]

No Allotment shall be made of any securities of a company offered to the public for subscription; unless; –

(i)the amount stated in the prospectus as the minimum amount has been subscribed; and
(ii)the sums payable on application for such amount has been paid to and received by the company-

Application money: Section 39 (2) provides that the amount payable on application on each security shall not be less than 5% of the nominal amount of such security or such amount as SEBI may prescribe by making any regulations in this behalf.

Further section 39 (3) provides that if the stated minimum amount is not received by the company within 30 days of the date of issue of the prospectus or such time as prescribed by SEBI, the company will be required to refund the application money received within such time and manner as may be prescribed.

In case of any default under sub-section, the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

Section 40 (3) provides that all moneys received on application from the public for subscription to the securities shall be kept in a separate bank account maintained with a scheduled bank.

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Q. After receiving 80% of the minimum subscription as stated in the prospectus, a company allotted 100 equity shares in favour of Akash. The company deposited the said amount in the bank but withdrew 50% of the amount, before finalisation of the allotment, for the purchase of certain assets.

Akash refuses to accept the allotment of shares on the ground that the allotment is violative of the provisions of the Companies Act, 2013. Comment.

Ans. Allotment of Shares: The company has received 80% of the minimum subscription as stated in the prospectus. Hence, the allotment is in contravention of section 39(1) of the Companies Act, 2013 which prohibits a company from making any allotment of securities until it has received the amount of minimum subscription stated in the prospectus. Under section 39 (3), it is required to refund the money received (i.e. 80% of the minimum subscription) to the applicants. It has no other option available.

Therefore, in the present case Akash is within his rights refuses to accept the allotment of shares which has been illegally made by the company.

 

Q. The Board of Directors of Reckless Investments Ltd. have allotted shares to the investors of the company without issuing a prospectus with the Registrar of Companies, Mumbai. Explain the remedy available to the investors in this regard.

Ans. According to Section 23 of the Companies Act, 2013, a public company can issue securities to the public only by issuing a prospectus. Section 26 (1) lays down the matters required to be disclosed and included in a prospectus and requires the registration of the prospectus with the Registrar before its issue.

In the given case, the company has violated with the above provisions of the Act and hence the allotment made is void. The company will have to refund the entire moneys received and will also be punishable under section 26 (9) of the Act.

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Q. MBL Pharmaceutical Limited is committed to provide quality medicines at an affordable cost through relentless pursuit of excellence in its operations, product quality, documentation and services. The company is now focusing on oncology therapeutics & other generies with a vision to be a Global Leader in Oncology. The prospectus issued by the company contained some important extracts of the expert’s report on research by oncology department. The report was found untrue. Mr. Diwakar purchased the shares of MBL Pharmaceutical Limited on the basis of the expert’s report published in the prospectus. Will Mr. Diwakar have any remedy against the company? State also the circumstances where an expert is not liable under the Companies Act, 2013. (May 23 – 5 Marks)

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Ans. Remedy against the company: Under section 35 (1) of the Companies Act 2013, where a person has subscribed for securities of a company acting on any statement included in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person including an expert shall be liable to pay compensation to the person who has sustained such loss or damage. In the present case, Mr. Diwakar purchased the shares of MBL Pharmaceutical Limited on the basis of the expert’s report published in the prospectus. Mr. Diwakar can claim compensation for any loss or damage that he might have sustained from the purchase of shares. Further, section 35 also mentions punishment prescribed by section 36 i.e., punishment for fraud under section 447.

Circumstances when an expert is not liable: An expert will not be liable for any misstatement in a prospectus under the following situations:

1.Under section 26(5): It states that having given his consent, the expert withdrew it in writing before delivery of the copy of prospectus for filing, or
2.Under section 35(2)(b): It states that the prospectus was issued without his knowledge/consent and that on becoming aware of it, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent;
3.An expert will not be liable in respect of any statement not made by him in the capacity of an expert and included in the prospectus as such;
4.Under section 35(2)(c): As regards every misleading statement purported to be made by an expert /contained in a copy of / an extract from a report / valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by section 26(5) to the issue of the prospectus and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant’s knowledge, before allotment thereunder.

 

Q. Aarna Ltd. was dealing in export of cotton fabric to specified foreign countries. The company was willing to purchase cotton fields in Punjab State. The prospectus issued by the company contained some important extracts of the expert report. The report was found untrue. Mr. Nick purchased the shares of Aarna Ltd. on the basis of the expert’s report published in the prospectus. However, he did not suffer any loss due to purchase of such shares. Would Mr. Nick have any remedy against the company? State the circumstances where an expert is not liable under the Companies Act, 2013. (Nov 22 – 5 Marks)

Ans. Whether Mr. Nick has any Remedy?

Under Section 35 (1) of the Companies Act 2013 (the Act), where a person has subscribed for securities of a company acting on any statement included in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person including an expert shall be liable to pay compensation to the person who has sustained such loss or damage.

In the present case, Mr. Nick purchased the shares of Aarna Limited on the basis of the expert’s report published in the prospectus. Mr. Nick can claim compensation for any loss or damage that he might have sustained from the purchase of shares. Since, Mr. Nick did not suffer any loss due to purchase of such shares, he cannot claim any compensation for any loss or damage. Further, Section 35 of the Act also mentions punishment prescribed by Section 36 of the Act i.e. punishment for fraud under Section 447.

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Circumstances when an expert is not liable: An expert will not be liable for any mis-statement in a prospectus under the following situations:

1.Under Section 26 (5) of the Act: It states that having given his consent, the expert withdrew it in writing before delivery of the copy of prospectus for filing, or
2.Under Section 35 (2) (b) of the Act: It states that the prospectus was issued without his knowledge/consent and that on becoming aware of it, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent;
3.An expert will not be liable in respect of any statement not made by him in the capacity of an expert and included in the prospectus as such;
4.Under Section 35 (2) (c) of the Act: It states that, as regards every misleading statement purported to be made by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by Section 26(5) of the Act to the issue of the prospectus and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant’s knowledge, before allotment thereunder.

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Q. An allottee of shares in a Company brought action against a Director in respect of false statements in prospectus. The director contended that the statements were prepared by the promoters and he has relied on them. Is the Director liable under the circumstances? Decide referring to the provisions of the Companies Act, 2013.

Ans. Yes, the Director shall be held liable for the false statements in the prospectus under sections 34 and 35 of the Companies Act, 2013. Whereas section 34 imposes a criminal punishment on every person who authorises the issue of such prospectus, section 35 more particularly includes a director of the company in the imposition of liability for such mis statements.

The only situations when a director will not incur any liability for mis statements in a prospectus are as under:

(a)No criminal liability under section 34 shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.
(b)No civil liability for any mis statement under section 35 shall apply to a person if he proves that:
(1)Having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or
(2)The prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

Therefore, in the present case the director cannot hide behind the excuse that he had relied on the promoters for making correct statements in the prospectus. He will be liable for mis statements in the prospectus.

Share Capital - - Important Questions & Answers

Q. State the reasons for the issue of shares at premium or discount. Also write in brief the purposes for which the securities premium account can be utilized? (Jan, 21 – 5 Marks)

Ans. When a company issues shares at a price higher than their face value, the shares are said to be issued at premium and the differential amount is termed as premium. On the other hand, when a company issues shares at a price lower than their face value, the shares are said to be issued at discount and the differential amount is termed as discount. However, as per the provisions of section 53 of the Companies Act, 2013, a company is prohibited to issue shares at a discount except in the case of an issue of sweat equity shares given under section 54 of the Companies Act, 2013.

As per the provisions of sub-section (1) of section 52 of the Companies Act, 2013, where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account”.

Application of Securities Premium Account: As per the provisions of sub-section (2) of section 52 of the Companies Act, 2013, the securities premium account may be applied by the company—

a)towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
b)in writing off the preliminary expenses of the company;
c)in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
d)in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
e)for the purchase of its own shares or other securities under section 68

.

Q. (i) London Limited, at a general meeting of members of the company, passed an ordinary resolution to buy-back 30 percent of its equity share capital. The articles of the company empower the company for buy-back of shares. Explaining the provisions of the Companies Act, 2013, examine:

A.Whether company’s proposal is in order?
B.Would your answer be still the same in case the company instead of 30 percent, decides to     buy-back only 20 per cent of its equity share capital? (Mark- 3 Marks)

(ii) The Board of Directors of Rajesh Exports Ltd., a subsidiary of Manish Ltd., decides to grant a loan of ` 3 lakh to Bhaskar, the finance manager of Manish Ltd., getting salary of ` 40,000 per month, to buy 500 partly paid-Up equity shares of ` 1,000 each of Rajesh Exports Ltd. Examine the validity of Board’s decision with reference to the provisions of the Companies Act, 2013. (2 Marks)

Ans. (i) According to the provisions of section 68 (2) of the Companies Act, 2013, no company shall purchase its own shares or other specified securities under sub- section (1), unless —

a)the buy-back is authorised by its articles;
b)a special resolution has been passed at a general meeting of the company authorising the buy-back: Provided that nothing contained in this clause shall apply to a case where—
i.the buy-back is, 10% or less of the total paid-up equity capital and free reserves of the company; and
ii.such buy-back has been authorised by the Board by means of a resolution passed at its meeting;
c)the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company:

Provided that in respect of the buy-back of equity shares in any financial year, the reference to 25% in this clause shall be construed with respect to its total paid-up equity   capital in that financial year.

In the instant case, London Limited, at a general meeting of members of the company, passed an ordinary resolution to buy back 30% of its equity share capital. The articles of the company empower the company for buy back of shares.

A.the Company’s proposal is not in order, since a special resolution as required by the above provision has not been passed, rather an ordinary resolution has only been passed
B.if the company instead of 30%, decides to buy back only 20% (even if it is within the specified limit of 25%) of its equity share capital, then also special resolution is required. Hence, our answer will not change. This proposal of the company will also be not in order.

.

(ii) As per section 67(2) of the Companies Act, 2013, no public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company.

As per the provisions of section 67(3)(c) of the Companies Act, 2013, nothing stated above, shall apply to the giving of loans by a company to persons in the employment of the company other than its directors or key managerial personnel, for an amount not exceeding their salary or wages for a period of six months with a view to enabling them to purchase or subscribe for   fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership.

If we analyse the provisions of section 67(3)(c) of the Companies Act, 2013, we can come to know that the relaxation given here can be availed only when all the following three conditions are fulfilled:

1)The loan has been given to the employees of the company other than its directors or key managerial personnel (not the employee of its holding company). Therefore this condition has not been fulfilled;
2)The amount does not exceed their salary or wages for a period of six months.- This condition has not been fulfilled.
3)The amount should be utilized by the employee for purchase of fully shares or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership. – Here Mr. Bhaskar is going to purchase the shares in Rajesh Exports Ltd., which is neither his employer company, nor holding company of his employer company and the shares are not fully paid-up. Therefore, this condition has also not been fulfilled.

Even in case Mr. Bhaskar would not have fulfilled any one of the above conditions, the decision of the Board of Directors of Rajesh Exports Ltd. would not have been valid. Therefore we can conclude that the decision of the Board of Directors of Rajesh Exports Ltd. is not valid.

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Q. The Authorized share capital of SSP Limited is ` 5 crore divided into 50 Lakhs equity shares of ` 10 each. The Company issued 30 Lakhs equity shares for subscription which was fully subscribed. The Company called so far ` 8 per share and it was paid up. Later on the Company proposed to reduce the Nominal Value of equity share from ` 10 each to ` 8 each and to carry out the following proposals:

i.Reduction in Authorized Capital from ` 5 crore divided into 50 Lakhs equity shares of ` 10 each to ` 4 crore divided into 50 Lakhs equity shares of ` 8 each.
ii.Conversion of 30 Lakhs partly paid up equity shares of ` 8 each to fully paid up equity shares of ` 8 each there by relieving the shareholders from making further payment of ` 2 per share.

State the procedures to be followed by the Company to carry out the above proposals under the provisions of the Companies Act, 2013. (5 Marks-Nov,20)

.Ans. Procedure for reduction of share capital-

In order to carry out proposals by SSP Limited to reduce the nominal value of the equity share, the company has to comply with the procedure given under section 66 of the Companies Act, 2013 which deals with the Reduction of share capital.

 

Procedure

1)Reduction of share capital by special resolution: Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—
a)extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
b)either with or without extinguishing or reducing liability on any of its shares, —

(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or

(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

2)Issue of Notice from the Tribunal: The Tribunal shall give notice of every application made to it to the Central Government, Registrar and the creditors of the company and shall take into consideration the representations, if any, made to it by them within a period of three months from the date of receipt of the notice.
3)Order of tribunal: The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit.
4)Publishing of order of confirmation of tribunal: The order of confirmation of the reduction of share capital by the Tribunal shall be published by the company in such manner as the Tribunal may direct.
5)Delivery of certified copy of order to the registrar: The company shall deliver a certified copy of the order of the Tribunal and of a minute approved by the Tribunal to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.

.           ii. Alteration of Share Capital:

SSP Limited proposes to alter its share capital. The Present authorized share capital ` 5 Crore will be altered to ` 4 Crore. According to Section 61 of the Companies Act, 2013, a limited company having a share capital may alter its capital part of the memorandum.

.

A limited company having a share capital may, if so authorized by its articles, alter its memorandum in its general meeting to –

1)Cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. The cancellation of shares shall not be deemed to be reduction of share capital.
2)A company shall within 30 days of the shares having been consolidated, converted, sub- divided, redeemed, or cancelled or the stock having been reconverted, shall give a notice to the Registrar in the prescribed form along with an altered memorandum [Section 64 of the Companies Act, 2013].

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The Company has to follow the above procedures to alter its authorized share capital.

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Q. ABC Limited is a public company incorporated in New Delhi. The Board of Directors (BOD) of the company wants to bring a public issue of 100000 equity shares of ` 10 each. The BOD has appointed an underwriter for this issue for ensuring the minimum subscription of the issue. The underwriter advised the BOD that due to current economic situation of the Country it would be better if the company offers these shares at a discount of ` 1 per share to ensure full subscription of this public issue. The Board of Directors agreed to the suggestion of underwriter and offered the shares at a discount of ` 1 per share. The issue was fully subscribed and the shares were allotted to the applicants in due course.

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Decide whether the issue of shares as mentioned above is valid or not as per Section 53 of Companies Act 2013. What would be your answer in the above case if the shares are issued to employees as Sweat equity shares? (2 + 1 = 3 Marks) Nov,20

.

Ans. As per the provisions of sub-section (1) of section 53 read with section 54 of the Companies Act, 2013, a company shall not issue shares at a discount, except in the case of an issue of sweat equity shares. As per the provisions of sub-section (2) of section 53 of the Companies Act, 2013, any share issued by a company at a discount shall be void.

In terms of the above provisions, issue of shares by ABC Limited at a discount of `1 per share is not valid.

In case the above shares have been issued to employees as Sweat equity shares, then the issue of shares at discount is valid. [Section 54(1) of the Companies Act, 2013.

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Q. SKS Limited issued 8% ` 1,50,000; Redeemable Preference Shares of ` 100 each in the month of May, 2010, which are liable to be redeemed within a period of 10 years. Due to the Covid-19 pandemic, the Company is neither in a position to redeem the preference shares nor to pay dividend in accordance with the terms of issue. The Company with the consent of Redeemable Preference Shareholders of 70% in value, made a petition to the Tribunal [NCLT] to accord approval to issue further redeemable preference shares equal to the amount due. Will the petition be approved by the Tribunal in the light of the provisions of the Companies Act, 2013? Can the company include the dividend unpaid in the above issue of redeemable preference shares? (Nov 22 – 3 Marks)

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Ans. According to section 55(3) of the Companies Act, 2013, where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may—

 with the consent of the holders of three-fourths in value of such preference shares, and
 with the approval of the Tribunal on a petition made by it in this behalf,

issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

In the instant case, since the company made a petition to the NCLT with the consent of Redeemable Preference Shareholders of 70% in value, the said petition is not valid and will not be approved by the NCLT.

If the consent has been taken by three-fourths (75%) in value of such preference shares, the company can include the dividend unpaid in the above issue of redeemable preference shares.

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Q. Anika Limited has an Authorized Capital of 10,00,000 equity shares of the face value of `100 each. Some of the hides expressed their opinion in the Annual General Meeting that it is very difficult for them to trade in the shares of the company in the mock made and requested the company to reduce the face value of each share to `10 and increase the number of shares to 1,00,00,000. Examine, whether the request of the shareholders is considerable and if so, how the company can alter its share capital as per the provisions of the Companies Act 2013? (Nov 22 – 6 Marks)

Ans. According to Section 61(1)(d) of the Companies Act, 2013, a limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived.

Section 64 of the Act states that a company shall, within 30 days of its share capital having been altered in the manner provided in Section 61 (1), give notice to the Registrar in the prescribed form along with an altered memorandum.

In the given situation, shareholders of Anika Limited, in the AGM requested the Company to reduce the face value of each share (from INR 100 to INR 10) and increase the number of shares than fixed by the memorandum (i.e. from 10 Lakh to 1 crore).

According to the above provision, Anika Limited, having authorized capital of 10,00,000 equity shares (face value ` 100 each) can reduce the face value of each share to ` 10 each and increase the shares to 1,00,00,000 [thereby keeping the total amount of authorized share capital to ` 10,00,00,000], if authorised by the articles of association. Hence, the request of the shareholders is considerable.

.

How the company can alter its Share Capital

The company has to alter its memorandum in its general meeting as per the procedure contained in Section 13 of the Companies Act, 2013 and give notice to the Registrar along with an altered memorandum.

 

Q. X Ltd. issued a notice on 1st Feb, 2018 to its existing shares holders offering to purchase one extra share for every five shares held by them.

The last date to accept the offer was 15th    Feb, 2018 only. Mr. Kavi has given an application to renounce the shares offered to him in favour of Mr. Ravi, who is not a shareholder of the company. Examine the validity of application of Mr. Kavi under the provisions of the Companies Act, 2013. Would your answer differ if Mr. Kavi is a shareholder of X Ltd.? (Nov, 19 – 5 Marks)

Ans. According to section 62 of the Companies Act, 2013, where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

a)to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:-

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid 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; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, 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.

a)In the instant case, X Ltd. issued a notice on 1st Feb, 2018 to its existing shares holders offering to purchase one extra share for every five shares held by them. The last date to accept the offer was 15th Feb, 2018 only. Mr. Kavi has given an application to renounce the shares offered to him in favour of Mr. Ravi, who is not a shareholder of the company.
b)As nothing is specified related to the Articles of the company, it is assumed offer shall be deemed to include a right of renunciation. Hence, Mr. Kavi can renounce the shares offered to him in favour of Mr. Ravi, who is not a shareholder of the company.
c)In the second part of the question, even if Mr. Ravi is a shareholder of X Ltd. then also it does not affect the right of renunciation of shares of Mr. Kavi to Mr. Ravi.

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Q. XYZ unlisted company passed a special resolution in a general meeting on January 5th, 2019 to buy back 30% of its own equity shares. The Articles of Association empowers the company to buy back its own shares. Earlier the company has also passed a special resolution to buy back its own shares on January 15th, 2018. The company further decided that the payment for buyback be made out of the proceeds of the company’s earlier issue of equity share. In the light of the provisions of the Companies Act, 2013,

(i) Decide, whether the company’s proposal is in order.

(ii) What will be your  answer  if buy  back offer  date is  revised from January  5 th, 2019 to January 25th 2019 and percentage of buyback is reduced from 30% to 25% keeping the source of purchase as above? (5 Marks-Nov,19)

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Ans. (i) In the instant case, the company’s proposal is not in order due to the following reasons:

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A.Though XYZ unlisted company passed a special resolution but it proposed to buy back 30% of its own equity shares. But as per section 68(2)(c) of the Companies Act, 2013, buy-back of equity shares in any financial year shall not exceed 25% of its total paid up equity capital in that financial year.
B.The Articles of Association empowers the company to buy back its own shares. This condition is in order as per section 68(2)(a).
C.Earlier the company has also passed a special resolution to buy back its own shares on January 15th, 2018, now the company passed a special resolution on January 5th, 2019 to buy back its own shares. This is not valid as no offer of buy-back, shall be made within a period of one year from the date of the closure of the preceding offer of buy-back, if any. [proviso to section 68(2)]
D.The company further decided that the payment for buy back be made out of the proceeds of the company’s earlier issue of equity share. This is not in order as according to proviso to section 68(1), buy- back of any kind of shares or other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

(ii) If buy back offer date is revised from 5th January 2019 to January 25th 2019 and percentage of buy back is reduced from 30% to 25% keeping the source of purchase as above, then also the company’s proposal is not in order as buy-back of any kind of shares or other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

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Q. ABC Ltd. has following balances in their Balance Sheet as on 31st March, 2018:

.

.

.

`

(1)

Equity shares capital (3.00 lakhs equity shares of ` 10 each)

30.00 lacs

(2)

Free reserves

5.00 lacs

(3)

Securities Premium Account

3.00 lacs

(4)

Capital redemption reserve account

4.00 lacs

(5)

Revaluation Reserve

3.00 lacs

.

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Directors of the company seeks your advice in following cases:

 (i) Whether company can give bonus shares in the ratio of 1:3?

 (ii) What if company decide to give bonus shares in the ratio of 1:2?

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Ans. Issue of bonus shares [Section 63]: As per Section 63 of the Companies Act, 2013, a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—

a)its free reserves;
b)the securities premium account; or
c)the capital redemption reserve account:

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Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

As per the given facts, ABC Ltd. has total eligible amount of `12 lakhs (i.e. 5.00+3.00+4.00) out of which bonus shares can be issued and the total share capital is` 30.00 lakhs.

.

Accordingly:

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i.For issue of 1:3 bonus shares, there will be a requirement of ` 10 lakhs (i.e., 1/3 x 30.00 lakh) which is well within the limit of available amount of ` 12 lakhs. So, ABC Limited can go ahead with the bonus issue in the ratio of 1:3.
ii.In case ABC Limited intends to issue bonus shares in the ratio of 1:2, there will be a requirement of ` 15 lakhs (i.e., ½ x 30.00 lakh). Here in this case, the company cannot go ahead with the issue of bonus shares in the ratio of 1:2, since the requirement of ` 15 Lakhs is exceeding the available eligible amount of `12 lakhs.

 

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Q. The Board of Directors are proposing to declare a bonus issue of 1 share for every 2 shares held by the existing shareholders. The balance sheet of Frontline Limited showed the following positions as at 31st March 2022:

 Authorized Share Capital (50,00,000 equity shares of ` 10 each) – ` 5,00,000
 Issued, subscribed and paid-up Share Capital (20,00,000 equity shares of ` 10 each, fully paid-up) – ` 2,00,00,000
 Free Reserves – Rs. 50,00,000
 Securities premium account – Rs. 25,00,000
 Capital Redemption Reserve – Rs.  25,00,000

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The Board wants to know the conditions of issuing bonus shares under the provisions of the Companies Act, 2013. Also explain, whether the company may proceed for a bonus issue. (5 Marks – May 23)

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Ans. Conditions for bonus shares: According to section 63(1) of the Companies Act, 2013, a company may issue fully paid- up bonus shares to its members, in any manner whatsoever, out of –

 its free reserves;
 the securities premium account; or
 the capital redemption reserve account.

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Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

Conditions for issue of Bonus Shares [Section 63(2)]: No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless—

 it is authorised by its Articles;
 it has, on the recommendation of the Board, been authorised in the general meeting of the company;
 it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
 it has not defaulted in respect of payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
 the partly paid-up shares, if any, outstanding on the date of allotment, are made fully paid-up;
 it complies with such conditions as are prescribed by Rule 14 of the Companies (Share Capital and debentures) Rules, 2014 which states that the company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.

Further, the company has to ensure that the bonus shares shall not be issued in lieu of dividend.

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Issue of bonus shares: For the issue of bonus shares, Frontline Limited will require reserves of ` 1,00,00,000 (i.e. half of ` 2,00,00,000 being the paid-up share capital) and the available reserves with the company are of same amount i.e. ` 1,00,00,000 (` 50,00,000+ ` 25,00,000 + ` 25,00,000). Hence, after following the above conditions relating to the issue of bonus shares, the company may proceed for a bonus issue of 1 share for every 2 shares held by the existing shareholders.

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Q. Which fund may be utilized by a public limited company for purchasing (buy back) its own shares? Also explain the provisions of the Companies Act, 2013 regarding the circumstances in which a company is prohibited to buy back its own shares. (5 Marks-May,19)

Ans. Funds utilized for purchase of its own securities: Section 68 of the Companies Act, 2013 states that a company may purchase its own securities out of:

a)its free reserves; or
b)the securities premium account; or
c)the proceeds of the issue of any shares or other specified securities.

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However, buy-back of any kind of shares or other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

 

Prohibition for buy-back in certain circumstances [Section 70]

1)The provision says that no company shall directly or indirectly purchase its own shares or other specified securities-
a)through any subsidiary company including its own subsidiary companies; or
b)through any investment company or group of investment companies; or
c)if a default is made by the company in repayment of deposits or interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon, to any financial institutions or banking company;

But where the default is remedied and a period of three years has lapsed after such default ceased to subsist, then such buy-back is not prohibited.

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2)No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with provisions of Sections 92 (Annual Report), 123 (Declaration of dividend), 127 (Punishment for failure to distribute dividends), and section 129 (Financial Statements).

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Q. Harsh purchased 1000 shares of Singhania Ltd. from Pratik and sent those shares to the company for transfer in his name. The company neither transferred the shares nor sent any notice of refusal of transfer to any party within the period stipulated in the Companies Act, 2013. What is the time frame in which the company is supposed to reply to transferee? Does Harsh, the transferee have any remedies against the company for not sending any intimation in relation to transfer of shares to him? (4 Marks-May,18)

Ans. Refusal for Registration of transferred/transmitted securities: According to Section 58 (4) of the Companies Act, 2013, if a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company within ninety days of the delivery of the instrument of transfer, appeal to the Tribunal.

Remedies available to the Transferee against the company: Section 58 (5) of the Companies Act, 2013, provides that the Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss the appeal, or by order—

a)direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or
b)direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved;

.

In the instant case, Harsh, can make an appeal before the tribunal for remedies that the company shall be ordered to register transfer /transmission of securities within 10 days of the receipt of order, or rectify register and pay damages.

 

Q . Xgen Limited has a paid-up equity capital and free reserves to the extent of ` 50,00,000. The company is planning to buy-back shares to the extent of ` 4,50,000. The company approaches you for advice with regard to the following

(i) Is special resolution required to be passed?

(ii) What is the time limit for completion of buy-back?

(iii) What should be ratio of aggregate debts to the paid-up capital-and free reserves after buy- back? (3 Marks-May,18)

Ans. Ans. Section 68(2) of the Companies Act, 2013 deals with the Conditions required for buy- back of shares.

As per the Act, the company shall not purchase its own shares or other specified securities unless-

.

a)The buy-back is authorized by its articles;
b)A special resolution has been passed at a general meeting of the company authorizing the buy-back: except where—

Time limit for Completion of Buy Back: As per section 68(4), every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board under sub-section (2).

Ratio of aggregate debts: Provision also specifies that ratio of the aggregate debts (secured and unsecured) owed by the company after buy back is not more than twice the paid up capital and its free reserves. However, Central Government may prescribe higher ratio of the debt for a class or classes of companies.

As per the stated facts, Xgen Ltd. has a paid up equity capital and free reserves to the extent of ` 50,00,000. The company planned to buy back shares to the extent of

` 4,50,000.

Referring to the above provisions, the answers will be as follows:

1.No, special resolution will not be required as the buyback is less than 10% of the total paid-up equity capital and free reserves (50,00,000×10/100= 5,00,000) of the company, but such buy back must be authorized by the Board by means of a resolution passed at its meeting.
2.Time limit for completion of buy back will be- within a period of one year from the date of passing of the resolution by the Board.
3.The ratio of the aggregate debts (secured and unsecured) owed by the company after buy back should not be more than twice the paid up capital and its free reserves.

The above buy-back is possible when backed by the authorization by the articles of the company.

.

Q. Can equity share with differential voting rights be issued? If yes, state the conditions under which such shares may be issued.(May, 18 – 6 Marks)

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Ans. Conditions for the issue of equity shares with differential rights (Rule 4 of the Companies (Share capital and Debenture) Rules, 2014): No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely:-

1.the articles of association of the company authorizes the issue of shares with differential rights;
2.the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders.

.

3.However, where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
4.the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;
5.the company is having consistent track record of distributable profits for the last three years;
6.the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
7.the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;

.

8.the company has not defaulted in payment of the dividend on preference shares or 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 or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;
9.However, a company may issue equity shares with differential rights upon expiry of five years from the end of the financial Year in which such default was made good.
10.the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

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Q. VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. The Board of Directors of SV Company Ltd. (incorporated on January 1, 2017) decided to raise the share capital by issuing further Equity shares. The Board of Directors resolved not to offer any shares to VRS Company Ltd, on the ground that it was already holding a high percentage of the total number of shares already issued, in SV Company Ltd. The Articles of Association of SV Company Ltd. provides that the new shares be offered to the existing shareholders of the company. On March 1, 2017 new shares were offered to all the shareholders except VRS Company Ltd. Referring to the provisions of the Companies Act, 2013 examine the validity of the decision of the Board of Directors of SV Company Limited of not offering any further shares to VRS Company Limited.

Ans. The legal issues in the presented problem in the question is covered under Section 62 (1) of the Companies Act, 2013.

Section 62 (1) (a) of the Companies Act, 2013 provides that if, at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares should be offered to the existing equity shareholders of the company as at the date of the offer, in proportion to the paid up capital on those shares. Hence, the company cannot ignore a section of the existing shareholders and must offer the shares to the existing equity shareholders in proportion to their holdings.

As per facts of the case, the articles of SV company Ltd. provided that the new shares should first be offered to the existing shareholders. However, the company offered new shares to all shareholders excepting VRS company Ltd., which held a major portion of its shares. Also, under the Companies Act, SV company Ltd. had no legal authority to do so.

Therefore, in the given case, SV Ltd.’s decision not to offer any further shares to VRS Co. Ltd on the ground that VRS Co. Ltd already held a high percentage of shareholding in SV Co. Ltd. is not valid for the reason that it is violation of the provisions of Section 62 (1) (a).

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Q. The Directors of Mars India Ltd. desire to alter capital clause of Memorandum of Association of their company. Advise them, under the provisions of the Companies Act, 2013 about the ways in which the said clause may be altered.

Ans. Alteration of Capital: Under section 61 (1) a limited company having a share capital may, if authorized by its Articles, alter its Memorandum in its general meeting to:

(i)increase its authorized share capital by such amount as it thinks expedient;
(ii)consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares

However, no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner.

(iii)convert all or any of its paid- up shares into stock and reconvert that stock into fully paid shares of any denomination
(iv)sub-divide the whole or any part of its shares into shares of smaller amount than is fixed by the Memorandum
(v)cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Further, under section 64 where a company alters its share capital in any of the above mentioned ways, the company shall file a notice in the prescribed form with the Registrar within a period of thirty days of such alteration or increase or redemption, as the case may be, along with an altered memorandum. The memorandum shall be altered by a special resolution and in compliance with other relevant provisions of section 13 of the Companies Act, 2013.

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Q. Ramesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of shares to the company at the address of its Registered Office in Mumbai. He did not receive the shares certificates even after the expiry of four months from the date of dispatch of transfer deed. He lodged a criminal complaint in the Court at New Delhi. Decide, under the provisions of the Companies Act, 2013, whether the Court at New Delhi is competent to take action in the said matter?

Ans. Jurisdiction of Tribunal, the Companies Act, 2013: According to Section 56 (4) of the Companies Act, 2013 every company, unless prohibited by any provision of law or of any order of court, Tribunal or other authority, shall deliver the certificates of all shares transferred within a period of one month from the date of receipt by the company of the instrument of transfer.

Further under section 56 (6), where any default is made in complying with the provisions of sub-sections (1) to (5) of section 56 (which deals with transfer and transmission of shares), the company shall be punishable with fine which shall not be less than 25,000 rupees but which may extend to 5 lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than 10,000 rupees but which may extend to one lakh rupees.

The jurisdiction binding on the company is that of the state in which the registered office of the company is situated. Hence, in the given case the Delhi court is not competent to take action in the matter.

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Q. Mr. ‘Y’, the transferee, acquired 250 equity shares of BRS Limited from Mr. ‘X’, the transferor. But the signature of Mr. ‘X’, the transferor, on the transfer deed was forged. Mr. ‘Y’ after getting the shares registered by the company in his name, sold 150 equity shares to Mr. ‘Z’ on the basis of the share certificate issued by BRS Limited. Mr. ‘Y’ and ‘Z’ were not aware of the forgery. State the rights of Mr. ‘X’, ‘Y’ and ‘Z’ against the company with reference to the aforesaid shares.

Ans. According to Section 46(1) of the Companies Act, 2013, a share certificate once issued under the common seal, if any, of the companyor signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares. Therefore, in the normal course the person named in the share certificate is for all practical purposes the legal owner of the shares therein and the companycannot deny his title to the shares.

However, a forged transfer is a nullity. It does not give the transferee (Y) any title to the shares. Similarly, any transfer made by Y (to Z) will also not give a good title to the shares as the title of the buyer is only as good as that of the seller.

Therefore, if the company acts on a forged transfer and removes the name of the real owner (X) from the Register of Members, then the company is bound to restore the name of X as the holder of the shares and to pay him any dividends which he ought to have received.

In the above case, ‘therefore, X has the right against the company to get the shares recorded in his name.

However, neither Y nor Z have any rights against the company even though they are bona fide purchasers.

However, since X seems to be the perpetrator of the forgery, he will be liable both criminally and for compensation to Y and Z.

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Q. Data Limited (listed on Stock Exchange) was incorporated on 1st October, 2018 with a paid- up share capital of ` 200 crores. Within this small time of 4 months it has earned huge profits and has topped the charts for its high employee friendly environment. The company wants to issue sweat equity to its employees. A friend of the CEO of the company has told him that they cannot issue sweat equity shares as 2 years have not elapsed since the time company has commenced its business. The CEO of the company has approached you to advise them about the essential conditions to fulfilled before the issue of sweat equity shares especially since their company is just a few months old.

Ans. Sweat equity shares of a class of shares already issued.

According to section 54 of the Companies Act, 2013, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely—

(i)the issue is authorised by a special resolution passed by the company;
(ii)the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
(iii)where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exc hange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as prescribed under Rule 8 of the Companies (Share and Debentures) Rules, 2014,

The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

Data Limited can issue Sweat equity shares by following the conditions as mentioned above. It does not make a difference that the company is just a few months old.

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Q. Innovative Ltd., a start-up by a few qualified professionals, which was incorporated in 2014. The company is booming and favouring the younger generation to work. The Capital Structure of the company is as follows:

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Particulars

INR (Crore)

Authorised Share Capital

.

100,00,000 Equity Shares of ` 10 each

10.00

Issued, Subscribed and Paid-up Share Capital

.

50,00,000 Equity Shares of ` 10 each

5.00

Share Premium

1.00

General Reserve

3.52

Profit & Loss Account

1.58

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The company decided to issue 30% sweat equity shares to a class of directors and permanent employees to keep them motivated and partner in growth. Lock-in period for sweat equity will be five years. For this purpose, a resolution in General meeting of company was passed in this manner.

“The Resolution specifies 15 lakh sweat equity shares, Current Market price ` 25 per share with a consideration of ` 5 per share to be issued to a class of directors and employees.”

The company seeks your advice with reference to the provision of issue of sweat equity shares under the Companies Act, 2013.

(i)Whether size of issue of sweat equity shares was appropriate?
(ii)Whether lock-in period was justifiable? (May, 23 – 6 Marks)

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Ans. Issue of Sweat Equity Shares: As per section 53, a company shall not issue shares at a discount, except as provided in section 54.

Section 54 of the Companies Act, 2013 states that sweat equity shares are issued to keep the employees of a company motivated by making them partner in the growth of the company.

Section 54 mentions the provisions which need to be adhered to by a company if it desires to issue sweat equity shares.

Conditions: According to section 54 (1), a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely—

(a)the issue is authorised by a special resolution passed by the company;
(b)the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued.

Limit on issue of Sweat Equity Shares: According to proviso to Rule 8 (4) of the Companies (Share Capital & Debentures) Rules 2014, w.r.t a start-up company, it may issue sweat equity shares not exceeding fifty percent of its paid-up capital up to ten years from the date of its incorporation or registration.

Lock-in Period: Rule 8 (5) of the Companies (Share Capital & Debentures) Rules 2014, states that the sweat equity shares issued to directors or employees shall be locked in/non-transferable for a period of three years from the date of allotment.

Accordingly, in the given instance,

(i)Size of issue of sweat equity shares was appropriate, as the decision of the company to issue 30% sweat equity shares to a class of directors and employees was within the prescribed limit. Resolution containing 15 lakh sweat equity shares was also within the limit of 25 lakh sweat equity shares (i.e.,50% of paid-up capital) with the details as to the current market price and with the consideration to be issued.
(ii)No, as per law, lock-in period will be of three years from the date of allotment. Here, it states five years which is against the law.

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Q. Walnut Limited has an authorized share capital of 1,00,000 equity shares of ` 100 per share and an amount of ` 3 crores in its Share Premium Account as on 31-3-2018. The Board of Directors seeks your advice about the application of share premium account for its business purposes. Please give your advice.

Ans. According to section 52 of the Companies Act, 2013, where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

The securities premium account may be applied by the company—

(a)towards the issue of unissued shares of the companyto the members of the company as fully paid bonus shares;
(b)in writing off the preliminary expenses of the company;
(c)in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
(d)in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
(e)for the purchase of its own shares or other securities under section 68

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Q. OLAF Limited, a subsidiary of PQR Limited, decides to give a loan of ` 4,00,000 to the Human Resource Manager, who is not a Key Managerial Personnel of OLAF Limited, drawing salary of ` 30,000 per month, to buy 500 partly paid-up Equity Shares of ` 1000 each in OLAF Limited. Examine the validity of company’s decision under the provisions of the Companies Act, 2013.

Ans. Restrictions on purchase by company or giving of loans by it for purchase of its share: As per section 67 (3) of the Companies Act, 2013 a company is allowed to give a loan to its employees subject to the following limitations:

(a)The employee must not be a Key Managerial Personnel;
(b)The amount of such loan shall not exceed an amount equal to six months’ salary of the employee.
(c)The shares to be subscribed must be fully paid shares

Section 2 (51) of the Companies Act, 2013 defines the “Key Managerial Personnel” (KMP) whereby a KMP includes the Chief Executive, Company Secretary, Whole Time Director, Chief Financial Officer, such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and such other officer as may be prescribed.

In the given instance, Human Resource Manager is not a KMP of the OLAF Ltd. He is drawing salary of ` 30,000 per month and loan taken to buy 500 partly paid up equity shares of ` 1000 each in OLAF Ltd.

Keeping the above provisions of law in mind, the company’s (OLAF Ltd.) decision is invalid due to two reasons:

i.The amount of loan being more than 6 months’ salary of the HR Manager, which should have restricted the loan to ` 1.8 Lakhs.
ii.The shares subscribed are partly paid shares whereas the benefit is available only for subscribing fully paid shares.

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Q. Mr. Siddharth holds 400 shares of Gauri Ltd. He intends to nominate these shares to his son Ambar. Discuss the provisions of the Companies Act, 2013 in relation to facility of nomination.

Ans. Nomination is a facility whereby a holder of any financial asset (bank a/c, FD, securities etc.) could nominate the name of person who would be entitled to that financial asset in case of his or her death. Generally, such nomination overrides any will. It is a very logical thing to do to avoid legal, procedural tangles related to transmission at a later stage for the near and dear ones.

As per Section 72 of the Companies Act, 2013-

(1)every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death.
(2)Where the securities of a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of death of all the joint holders.
(3)Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.
(4)Where the nominee is a minor, it shall be lawful for the holder of the securities, making the nomination to appoint, in the prescribed manner, any person to become entitled to the securities of the company, in the event of the death of the nominee during his minority.

Thus, Mr. Siddharth can nominate the shares held by him in Gauri Ltd. to his son.

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Q. Mars India Ltd. owed to Sunil `1,000. On becoming this debt payable, the company offered Sunil 10 shares of `100 each in full settlement of the debt. The said shares were fully paid and were allotted to Sunil. Examine the validity of this allotment in the light of the provisions of the Companies Act, 2013

Ans. Under section 62 (1) (c) of the Companies Act, 2013 where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, either for cash or for a consideration

other than cash, such shares may be offered to any persons, if it is authorised by a special resolution and if the price of such shares is determined by a valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

In the present case, Mars India Ltd is empowered to allot the shares to Sunil in settlement of its debt to him. The issue will be classified as issue for consideration other than cash must be approved by the members by a special resolution. Further, the valuation of the shares must be done by a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

 

Q. What are the provisions of the Companies Act, 2013 relating to the appointment of ‘Debenture Trustee’ by a company? Whether the following can be appointed as ‘Debenture Trustee’:

(i)A shareholder who has no beneficial interest.
(ii)A creditor whom the company owes Rs.499 only.
(iii)A person who has given a guarantee for repayment of amount of debentures issued by the company?

Ans. Appointment of Debenture Trustee: Under section 71 (5) of the Companies Act, 2013, no company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the companyhas, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.

The rules framed under the Companies Act for the issue of secured debentures provide that before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures.

Further according to the rules, no person shall be appointed as a debenture trustee, if he-

(i)Beneficially holds shares in the company;
(ii)Is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;
(iii)Is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
(iv)Is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
(v)Has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
(vi)Has any pecuniary relationship with the company amounting to two percent. or m ore of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(vii)is a relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel;

Thus, based on the above provisions answers to the given questions are:

(i)A shareholder who has no beneficial interest, can be appointed as a debenture trustee.
(ii)A creditor whom company owes Rs.499 cannot be so appointed. The amount owed is immaterial
(iii)A person who has given guarantee for repayment of principal and interest thereon in respect of debentures also cannot be appointed as a debenture trustee.

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Q. The Board of Directors of SRD Limited, an unlisted public company, engaged in the business of manufacturing of two wheelers; intend to issue debentures in order to finance its project of electric scooter manufacturing. The company seeks your advice regarding the maximum amount of debentures it can issue to raise the desired funds. The company has provided the following abstracts from its financial statements ended on 31st March, 2022:

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1,00,000 Nos. of Equity Shares of `100 each

(Authorised Share Capital)  

1,00,00,000

40,000 Nos. of Equity Shares of ` 100 each, fully paid-up. (Subscribed and Paid-up Share Capital)

40,00,000

Share Premium Reserve

50,00,000

General Reserve

30,00,000

Balance in Profit and Loss Account

20,00,000

Capital Reserve (profit on sale of Fixed Assets)

30,00,000

8% Non-Convertible Debentures

30,00,000

9.5% Term Loan from XYZ Bank Limited for purchase of Plant and Machinery (Repayment starts after 1 year moratorium period

20,00,000

Short-term Cash Credit Loan from XYZ Bank Limited

(On hypothecation of stock and receivables of the Company, repayable on demand)

50,00,000

  

Referring to and analyzing the relevant provisions of the Companies Act, 2013, advise the company presenting the necessary calculations:

a)The amount that can be raised by the company by issuing debentures and the resolution, if any, is required to be passed in the General Meeting of the Company in respect of the same?
b)What will be your answer in case the above company desired to issue debentures with an option to convert such debentures into shares?(Nov 22 – 6 Marks)

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Ans. a) The amount that can be raised by the Company by issuing Debentures:

Section 71 of the Companies Act, 2013 (the Act), deals with the manner in which a company may issue debentures. Before the issue of debentures, the Board of Directors of the Company in compliance with Section 180(1)(c) of the Act, shall obtain approval of the shareholders through special resolution if the borrowings by issuing debentures together with the amount already borrowed exceed the aggregate of company’s paid-up share capital, free reserves and securities premium amount. Temporary loans obtained from the company’s bankers in the ordinary course of business are not to be in cluded in the borrowings.

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The Amount that can be raised by the Company by issuing Debentures: In view of the above provisions, SRD Limited can raise money to the extent of the following amounts without the approval of the shareholders through a special resolution:

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Particulars

Amount

Paid up Equity Share Capital

40,00,000

Share Premium Reserve

50,00,000

General Reserve*

30,00,000

Balance in Profit and Loss Account*

20,00,000

Aggregate of its paid-up share capital, free reserves and securities premium amount (A)

1,40,00,000

.

Since in the question, no pre-condition, is provided for issue of debenture with an option to convert such debentures into shares, so accordingly, the amount that can be raised by the company by issuing debentures will be:

.

Particulars

Amount

8% Non- Convertible Debentures

30,00,000

9.5% Term Loan for Purchase of Plant and Machinery

20,00,000

Amount already Borrowed (B)

50,00,000

.

Here, Short– term Cash Credit loan from XYZ Bank Ltd. is a ‘Temporary Loan’ obtained from the company’s bankers.

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Debentures that can be issued by the Board of Directors in the Board Meeting without obtaining approval of the shareholders through special resolution passed in the General Meeting = (A) – (B) = ` 90,00,000.

Further, the Board of Directors of the company shall obtain approval of the shareholders through special resolution if the borrowings by issuing debentures exceed ` 90,00,000.

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b) Issue of Debentures with an Option to Convert into Shares: According to Section 71(1) of the Companies Act, 2013 a company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. It is also provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting. Thus, in case SRD Limited desires to issue debentures with an option to convert such debentures into shares, it has to pass the special resolution irrespective of the amount to be raised.

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Q. Mr Nilesh has transferred 1000 shares of Perfect Ltd. to Ms. Mukta. The company has refused to register transfer of shares and does not even send a notice of refusal to Mr. Nilesh or Ms. Mukta respectively within the prescribed period. Discuss as per the provisions of the Companies Act, 2013, whether aggrieved party has any right(s) against the company for such refusal?

Ans. The problem as asked in the question is governed by Section 58 of the Companies Act, 2013 dealing with the refusal to register transfer and appeal against refusal.

In the present case the company has committed the wrongful act of not sending the notice of refusal of registering the transfer of shares.

Under section 58 (4), if a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer, appeal to the Tribunal.

Section 58 (5) further provides that the Tribunal, while dealing with an appeal made under sub-section (4), may, after hearing the parties, either dismiss the appeal, or by order—

a)direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or
b)direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved;

In the present case Ms. Mukta can make an appeal before the tribunal and claim damages.

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Q. Shree Ltd. is engaged in the manufacture of consumer goods and has got a good brand value. Over the years, it has built a good reputation and its Balance Sheet as at March 31, 2017 shows the following position:

Authorized Share Capital (25,00,000 equity shares of face value of ` 10/- each) ` 2,50,00,000

Issued, subscribed and paid-up capital (10,00,000 equity shares of face value of `10/- each, fully paid-up) ` 1,00,00,000

Free Reserves ` 3,00,00,000

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The Board of Directors are proposing to declare a bonus issue of 1share for every 2 shares held by the existing shareholders. The Board wants to know the conditions and the manner of issuing bonus shares under the provisions of the Companies Act, 2013. Discuss.

Ans. According to Section 63 of the Companies Act, 2013, a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of –

(i)its free reserves;
(ii)the securities premium account; or
(iii)the capital redemption reserve account.

Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

Conditions for issue of Bonus Shares: No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless—

(i)it is authorised by its Articles;
(ii)it has, on the recommendation of the Board, been authorised in the general meeting of the company;
(iii)it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
(iv)it has not defaulted in respect of payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
(v)the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up; (f) it complies with such conditions as may be prescribed.

But the company has to ensure that the bonus shares shall not be issued in lieu of dividend.

Hence, after following the above compliances on issuing bonus shares under the Companies Act, 2013, Shree Ltd. may proceed for a bonus issue of 1 share for every 2 shares held by the existing shareholders.

Deposits- Important Questions & Answers

Q. Define the term ‘deposit’ under the provisions of the Companies Act, 2013 and comment with relevant provisions that the following amount received by a company will be considered as deposit or not;

i.₹ 5,00,000 raised by Rishi Ltd. through issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India.
ii.₹ 2,00,000 received from Mr. T, an employee of the company who is drawing annual salary of ₹ 1,50,000 under a contract of employment with the company in the nature of non-interest bearing security deposit.
iii.Amount of ₹ 3,00,000 received by a private company from a relative of a Director, declared    by the depositor as out of gift received from his mother. (Nov,2019 – 6 Marks)

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Ans. Deposit:According to section 2 (31) of the Companies Act, 2013, the term ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include such categories of amount as prescribed in the Rule 2 (1) of the Companies (Acceptance of deposit) Rules, 2014, in consultation with the Reserve bank of India.

Amounts received by the company will not be considered as deposit: In terms of Rule 2 (c) of the Companies (Acceptance of deposit) Rules, 2014, following shall be the answers-

i.In the first case, where ₹ 5,00,000 raised by the Rishi Ltd. through issue of non- convertible debenture not constituting a charge on the assets of the company and listed on recognised stock exchange as per the applicable regulations made by the SEBI, will not be considered as deposit in terms of sub-clause (ixa) of the said rule.

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ii.In the second case, ₹ 2,00,000 was received from Mr. T, an employee of the company drawing annual salary of ₹ 1,50,000 under a contract of employment with the company in the nature of non-interest bearing security deposit. This amount received by company from employee, Mr. T will be considered as deposit in terms of sub-clause (x) of the said rule, as amount received is more than his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit.
iii.In the third case, amount of ₹ 3,00,000 received by a private company from a relative of a Director, declaring details of the amounts so deposited as out of gift received from his mother. This amount received by the private Company will not be considered as deposit in terms of sub-clause (viii) of the said rule. Here as per the requirement, the relative of the director of the private company, from whom money is received, furnished the declaration in writing to the effect that the amount is given out of gift received from his mother    and not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.

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Q. Mr. Raj is an employee of DSP Trading Pvt Ltd. As per his contract of employment, his annual salary is ₹ 5,00,000. Mr. Raj paid to the company

₹ 5,30,000 in the nature of non-interest bearing security deposit. Referring to the provisions of the Companies Act, 2013, define deposit and decide whether this amount received from Mr. Raj will be considered as deposit as per rule 2(1)(c)? (May 23 – 5 Marks)

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Ans. Deposit: According to section 2 (31) of the Companies Act, 2013, the term ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve bank of India.

Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014 states various amounts received by a company which will not be considered as deposits. As per rule 2(1)(c)(x) any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non- interest-bearing security deposit is not considered as deposit.

In the instant case, ` 5,30,000 was received by DSP Trading Private Limited as a non- interest-bearing security deposit, from its employee, Mr. Raj, who draws an annual salary of ` 5,00,000 under a contract of employment.

Accordingly, amount of ` 5,30,000 received from Mr. Raj, will be considered as deposit in terms of sub-clause (x) of Rule 2 (1) (c) of the Act, as the amount received from Mr. Raj is more than his annual salary of ` 5,00,000.

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Q. RS Ltd. received share application money of ₹ 50.00 Lakh on 01.06.2019 but failed to allot shares within the prescribed time limit.

The share application money of ₹ 5.00 Lakh received from Mr. Khanna, a customer of the Company, was refunded by way of book adjustment towards the dues payable by him to the company on 30.07.2019. The Company Secretary of RS Ltd. reported to the Board that the entire amount of ₹ 50.00 Lakh shall be deemed to be ‘Deposits’ as on 31.07.2019 and the Company is required to comply with the provisions of the Companies Act, 2013 applicable to acceptance of deposits in relation to this amount.

You are required to examine the validity of the reporting of the Company Secretary in the light of the relevant provisions of the Companies Act, 2013.(Jan,21 – 4 Marks)

Ans. According to Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, the following category of receipt is not considered as deposit:

Any amount received and held pursuant to an offer made in accordance with the provisions of the Companies Act, 2013 towards subscription to any securities, including share application money or advance towards allotment of securities, pending allotment, so long as such amount is appropriated only against the amount due on allotment o f the securities applied for;

It is clarified by way of Explanation that if the securities for which application money or advance for such securities was received cannot be allotted within 60 days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as a deposit under these rules.

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Further, it is clarified that any adjustment of the amount for any other purpose shall not be treated as refund.

In the given question, RS Limited has received ` 50 Lakhs as share application money on 01.06.2019. It failed to allot shares within the prescribed limit. Further, on 30. 07.2019 the company adjusted the amount of ` 5 Lakhs received from Mr. Khanna (a customer of the company), by way of book adjustment towards the dues payable by him to the company.

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In the light of the facts of the question and provisions of Law:

1)If such application money or advance is not refunded to the subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as a deposit. In the question, the prescribed limit of 60 days will end on 31.07.2019 and the company has 15 more days to refund such application money to the subscribers. Otherwise, after lapse of such 15 days, the amount not so refunded will be treated as deposit. Hence, the Company Secretary of RS Limited is not correct in treating the entire amount of ` 50 Lac as ‘Deposits’ on 31.07.2019.
2)Any adjustment of the amount for any other purpose shall not be treated as refund. Thus, the amount of ` 5 Lakhs adjusted against payment due to be received from Mr. Khanna, cannot be treated as refund.

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Q. Referring to the provisions of the Companies Act, 2013, examine the validity of the following:

Safar Limited having a net worth of ` 130 crore wants to accept deposits from its members. It has approached you to advise whether it falls within the category of an eligible company? What special care has to be taken while accepting such deposits from members? (Jan,21 – 3 Marks)

Ans.According to Rule 2(1)(e) of the Companies (Acceptance of Deposits) Rules, 2014, an “eligiblecompany” as referred to in section 76(1) of the Companies Act, 2013 means a public company, having a net worth of not less than ₹ 100 crore or a turnover of not less than ₹ 500 crore and which has obtained the prior consent of the company in general meeting by means of a special resolutionand also filed the said resolution with the Registrar of Companies before making any invitation to the public for acceptance of deposits.

However, an ‘eligible company’, which is accepting deposits within the limits specified under section 180 (1) (c), may accept deposits by means of an ordinary resolution.

According to Rule 4 (a) of the Companies (Acceptance of Deposits) Rules, 2014, an ‘eligible company’ shall accept or renew any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members does not exceed 10% of the aggregate of the paid-up share capital, free reserves and securities premium account of the company.

Safar Limited is having a net worth of ₹ 130 crores. Hence, it falls in the category of

eligible company’.

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The fact that turnover has not been stated in the question will not affect this answer, since fulfilling any one criteria will be sufficient.

Thus, Safar Limited has to ensure that acceptance of deposits from its members together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from the members, in no case, exceeds 10% of the aggregate of the paid-up share capital, free reserves and securities premium account of the company.

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Q. Viki Limited engaged in the business of consumer durables. It is managed by a team of professional managers. The Company has not made default in payment of statutory dues, and repayment of debenture/ Institutional loan with interest. The Company advertised a circular in the newspaper dated 20th September 2020 inviting the deposits from the members and public for the first time. The latest audited financial statement of the Company revealed the following data, as on 31.3.2020:

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Particulars

Amount (Rs. in Crores)

Paid up share capital

70

Securities Premium

20

Free Reserves

20

Long-term borrowings