Tag: Board of Directors

Management Notes

Doctrine of Lifting the Veil of Corporate entity

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The Doctrine of Lifting the Corporate Veil is a significant concept in corporate law. It refers to a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Normally, a company is regarded as a separate legal entity, distinct from its shareholders, directors, or promoters, as established in the landmark case of Salomon v. Salomon & Co. Ltd. (1897). However, in certain situations, courts may “lift” or “pierce” the corporate veil to look beyond the company’s independent existence and examine the real individuals behind it.

This doctrine is applied when the corporate form is used to perpetrate fraud, evade tax, defeat law, or engage in dishonest practices. Indian courts have also accepted this principle to ensure justice and equity prevail over rigid legal formalities.

Purpose of the Doctrine:

The doctrine aims to:

  • Prevent misuse of corporate personality.

  • Hold the real persons accountable in case of fraud or illegal acts.

  • Maintain fairness in the application of corporate law.

  • Discourage unethical use of limited liability protections.

In essence, it is used to safeguard the public interest and ensure that the concept of limited liability is not abused.

Legal Basis in India:

In India, although there is no specific statute defining this doctrine, courts have developed it through judicial precedents under the Companies Act, 2013 and earlier company laws. Section 2(20) of the Companies Act defines a company as a separate legal person. However, Indian courts have exercised their inherent powers to disregard this separateness under specific circumstances.

Instances Where the Veil is Lifted

  • To Prevent Fraud or Improper Conduct

If a company is formed or used to commit fraud, cheat creditors, or deceive the public, courts can lift the veil. In Delhi Development Authority v. Skipper Constructions (1996), the Supreme Court held that the veil could be lifted if a company was used as a facade for fraud.

  • Evasion of Tax

Companies cannot be used as tools to avoid taxes. In Commissioner of Income Tax v. Meenakshi Mills (1967), the court lifted the veil to investigate tax evasion and found that the company was used to divert income.

  • Avoidance of Welfare Laws

If a company is set up to escape compliance with labour or social welfare laws (like PF, ESI), courts may disregard the corporate entity. This ensures that employers do not hide behind the veil to deny workers their rightful dues.

  • Agency or Sham Companies

Where a company is a mere agent of another person or company, and does not function independently, the veil may be lifted. Courts will then attribute actions or liabilities of the company to the real controller.

  • Protection of Public Interest

Courts lift the corporate veil when it is necessary to protect national interest, prevent illegal trade, or uphold security and law. For example, in LIC v. Escorts Ltd. (1986), the court analyzed the shareholding of foreign companies to determine control and ownership, for the sake of public policy.

Statutory Provisions Under the Companies Act, 2013:

While the Companies Act does not directly mention “lifting the veil,” certain provisions indirectly support the doctrine:

  • Section 7(7): If the company is incorporated by furnishing false or incorrect information, the liability can be imposed personally on the persons responsible.

  • Section 34 and 35: Penalties for misstatements in the prospectus can make directors and promoters personally liable.

  • Section 339: In case of fraud during winding up, the Tribunal may hold the persons who were knowingly parties to the fraud personally liable for company debts.

Judicial Interpretation and Landmark Cases in India:

  1. Salomon v. Salomon & Co. Ltd. (UK case, 1897)
    Established the principle of separate legal entity.

  2. Life Insurance Corporation of India v. Escorts Ltd. (1986)
    Explained that lifting the veil depends on the facts and must be applied cautiously.

  3. Gilford Motor Co. v. Horne (UK case)
    The veil was lifted to prevent an ex-employee from using a company to breach a contract.

  4. Union Carbide Case (Bhopal Gas Tragedy)
    The Indian government tried to lift the veil of Union Carbide Corporation to hold it responsible for the actions of its Indian subsidiary.

Limitations of the Doctrine:

While the doctrine is important, courts use it sparingly and cautiously. It is not meant to disregard the corporate structure in every dispute. Courts generally uphold the sanctity of the corporate form unless there is strong evidence of misuse, fraud, or illegal conduct. The doctrine cannot be used merely to satisfy debts or liabilities when no wrongdoing is involved.

Management Notes

Book Building Procedure for Issue of Shares

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Book building is a price discovery mechanism that is used in the stock markets while pricing securities for the first time. When shares are being offered for sale in an IPO, it can either be done at a fixed price. However, if the company is not sure about the exact price at which to market its shares, it can decide a price range instead of an exact figure. This process of discovering the price by providing the investors with a price range and then asking them to bid on it is called the book building process. It is considered to be one of the most efficient mechanisms of pricing securities in the primary market. This is the preferred method which is recommended by all major stock exchanges and as a result is followed in all major developed countries in the world.

Book Building Process:

  • Appointment of Investment Banker:

The first step starts with appointing the lead investment banker. The lead investment banker conducts due diligence. They propose the size of the capital issue that must be conducted by the company. Then they also propose a price band for the shares to be sold. If the management agrees with the propositions of the investment banker, the prospectus is issued with the price range as suggested by the investment banker. The lower end of the price range is known as the floor price whereas the higher end is known as the ceiling price. The final price at which securities are indeed offered for sale after the entire book building process is called the cut-off price.

  • Collecting Bids:

Investors in the market are requested to bid to buy the shares. They are requested to bid the number of shares that they are willing to buy at varying price levels. These bids along with the application money are supposed to be submitted to the investment bankers. It must be noted that it is not a single investment banker who is engaged in the collection of bids. Rather, the lead investment banker can appoint sub-agents to tap into their network especially for receiving the bids from a larger group of individuals.

  • Price Discovery:

Once all the bids have been aggregated by the lead investment banker, they begin the process of price discovery. The final price chosen in simply the weighted average of all the bids that have been received by the investment banker. This price is declared as the cut-off price. For any issue which has received substantial publicity and which is being anticipated by the public, the ceiling price is usually the cut-off price.

  • Publicizing:

In the interest of transparency, stock exchanges all over the world require that companies make public the details of the bids that were received by them. It is the lead investment banker’s duty to run advertisements containing the details of the bids received for the purchase of shares for a given period of time (let’s say a week). The regulators in many markets are also entitled to physically verify the bid applications if they wish to.

  • Settlement:

The application amount received from the various bidders has to be adjusted and shares have to be allotted. For instance, if a bidder has bid a lower price than the cut-off price then a call letter has to be sent asking for the balance money to be paid. On the other hand, if a bidder has bid a higher price than the cut-off, a refund cheque needs to be processed for them. The settlement process ensures that only the cut-off amount is collected from the investors in lieu of the shares sold to them.

Partial Book Building

Partial book building is another variation of the book building process. In this process, instead of inviting bids from the general population, investment bankers invite bids from certain leading institutions. Based on their bids, a weighted average of the prices is created and cut-off price is decided. This cut-off price is then offered to the retail investors as a fixed price. Therefore, the bidding only happens at an institutional level and not at a retail level.

This is also an efficient mechanism to discover prices. Also the cost and complications involved in conducting a partial book building are substantially low.

First of all, the book building process brings flexibility to the pricing of IPO’s. Prior to the introduction of book building, a lot of IPO’s were either underpriced or overpriced. This created problems because if the issue was underpriced, the company was losing possible capital. On the other hand, if the issue was overpriced it would not be fully subscribed. In fact, if it was subscribed below a given percentage, the issue of securities had to be cancelled and the substantial costs incurred over the issue would simply have to be written off. With the introduction of book building process, such events no longer happen and the primary market functions more efficiently.

Other Subtypes of Book Building

The following are subtypes of book building:

  • Accelerated Book Building

The companies can use an accelerated book-building process to acquire quick capital market. That can be the case when a company cannot finance its short-term project via debt financing. So, the issuing company contacts several investment banks that can act as underwriters the evening before the intended placement. Under this process, the offer period is open only for a day or two days, and you have no time for marketing for an issue. So, instead, the underwriter overnight contacts their networks and details the current topic to institutional investors. If this investor finds this issue interesting, then allotment happens overnight.

  • Partial Book Building

As the partial book building says, that issue book is built partially, where the investment banker only invites bids from the selected investors. Based on their bids, they take the weighted average of the prices to finalize the cut-off price. Then other investors, such as retail investors, take this cut-off price as a fixed price. So, the bidding happens with a selected group of investors under the partial book-building process.

Advantages of Book Building

  • The most efficient way to price the share in the IPO market.
  • The share price is finalized by investors’ aggregate demand, not by the fixed price set by the company management.

Disadvantages of Book Building

  • High costs are involved in the book-building process compared to the fixed-price mechanism.
  • The period is also more in the book booking process than the fixed-price mechanism.
Management Notes

Subscription of Shares, Minimum Subscription, Over-Subscription, Under Subscription

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Subscription of shares refers to the process where investors apply for shares issued by a company. When a company offers shares to the public through an Initial Public Offering (IPO) or other methods, investors submit applications to purchase them. Based on demand, the company may receive full, over, or under-subscription. Full subscription means the exact number of shares offered is applied for, over-subscription occurs when demand exceeds supply, and under-subscription happens when applications are fewer than the issued shares. Companies allocate shares based on predefined criteria, ensuring fair distribution among investors while adhering to regulatory guidelines.

Minimum Subscription of Shares:

The minimum subscription of shares refers to the minimum number of shares that a company must sell to raise a certain amount of capital to proceed with an issue, whether through an Initial Public Offering (IPO), Follow-on Public Offering (FPO), or any other public offering. This minimum subscription amount is typically defined in the prospectus and is a regulatory requirement, ensuring that the company has sufficient investor interest to justify proceeding with the issue.

In India, for instance, the minimum subscription requirement for public offerings is usually 90% of the total issue size. If the company fails to achieve this minimum subscription level, the issue is considered unsuccessful, and the funds collected (if any) must be refunded to the investors. This safeguard protects investors from getting involved in companies that may lack sufficient investor confidence or face difficulties in raising the required capital.

The concept of minimum subscription ensures that the company has a strong foundation of capital to fund its operations or expansion. It also prevents situations where the company might not have enough funds to cover operational or project expenses, thus providing a level of financial security.

Moreover, achieving minimum subscription enhances the credibility of the company in the eyes of investors and regulators, as it demonstrates market confidence in its business model and financial stability.

Over-Subscription of Shares:

Over-subscription occurs when the demand for shares in an initial public offering (IPO) or any other public share issue exceeds the number of shares offered by the company. This situation indicates high investor interest in the company’s shares, often due to favorable market conditions, strong company performance, or investor confidence in the business’s future prospects.

When an issue is over-subscribed, investors apply for more shares than what is available. For example, if a company issues 1,00,000 shares, and investors apply for 2,00,000 shares, the issue is considered over-subscribed by 100%. This scenario usually results in the company having to make decisions on how to allocate shares fairly among investors.

In cases of over-subscription, companies may use various methods to allocate shares, such as:

  1. Pro-rata Basis: Shares are allocated in proportion to the number of shares applied for by each investor. If an investor applied for 100 shares and the issue was over-subscribed by 2:1, they would receive only 50 shares.

  2. Lottery System: In some cases, especially when demand far exceeds supply, a lottery system is used to randomly allocate shares to applicants.

  3. First-Come, First-Served: Shares may be allotted based on the order in which applications are received, with early applications being given priority.

Under Subscription of Shares:

Under subscription occurs when a company issues shares to the public, but the total number of shares applied for is less than the number offered. This indicates low investor demand, possibly due to high pricing, poor market conditions, or weak company reputation. Unlike oversubscription (excess demand), under subscription means the company fails to raise the intended capital.

To resolve this, companies may extend the subscription period, revise the offer price, or rely on underwriters (if any) to purchase the remaining shares. If the minimum subscription (as per regulatory requirements) is not met, the issue may be canceled, and application money refunded. Under subscription can negatively impact the company’s market perception and future fundraising prospects.

Features of Under Subscription:

  • Lower Capital Raised

Under subscription means the company cannot collect the full projected capital, forcing it to seek alternative funding (e.g., loans, private placements). This may delay expansion plans or increase financial risk due to reliance on debt.

  • Underwriter’s Role Becomes Critical

If shares are underwritten, the underwriter must purchase the unsubscribed shares, ensuring the company receives the intended funds. This safety net comes at a cost (underwriting commission).

  • Regulatory Compliance Issues

Companies must meet minimum subscription requirements (e.g., 90% in some jurisdictions). Failure may force refunds and cancellation, requiring re-filing with regulatory bodies (e.g., SEBI, SEC).

  • Negative Market Sentiment

Low subscription signals weak investor confidence, potentially lowering share prices in secondary markets. It may also affect future IPO prospects and credit ratings.

  • Extended or Revised Offer

Companies may reprice shares or extend the subscription period to attract investors. However, this delays capital availability and increases administrative costs.

  • Impact on Share Allotment

Since demand is below supply, all applicants receive full allotment (no proportional distribution). This contrasts with oversubscription, where allotment is partial.

Bangalore University B.com Notes

Company Law and Administration Bangalore University B.com 3rd Semester NEP Notes

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Unit 1 Indian Companies Act 2013 [Book]
Introduction to Company Law, Evolution VIEW VIEW
Nature of Joint Stock Company VIEW VIEW
Overview of Companies Act 2013, Objectives, Significance of Companies Act 2013 VIEW
Body Corporate Meaning, Features VIEW
Classification of Companies VIEW
Distinction between Private Company and Public Company VIEW
Doctrine of Lifting the veil of Corporate entity VIEW
CSR Meaning, Scope VIEW
Provisions for CSR Activities under Schedule VII of the Companies Act 2013 VIEW

 

Unit 2 Formation of a New Company [Book]
Stages in Formation of a company as per Companies Act 2013 VIEW
Documents required for the formation of company VIEW
Memorandum of Association Meaning, Definition, Purpose and Content of Memorandum of Association VIEW
Articles of Association: Meaning, Definition, Contents and Alteration of Articles of Association VIEW
Distinction between Memorandum of Association and Articles of Association VIEW
Doctrine of Ultravires VIEW
Doctrine of Constructive notice and Doctrine of Indoor Management VIEW
Prospectus Meaning, Definition, Contents VIEW
Types and Registration of Prospectus VIEW
Statement in lieu VIEW
Misstatement in prospectus and its consequences VIEW

 

Unit 3 Capital Structure and Accounts of Companies [Book]
Share Capital Meaning, Definition VIEW
Types of Share Capital VIEW VIEW
Rules Regarding Issue of Shares VIEW
Distinction between Preference shares and equity shares VIEW
Debenture Meaning, Definition, Types VIEW
Rules Regarding Issue of Debenture VIEW VIEW VIEW
Distinction between Share and Debenture VIEW
Accounts of companies: Statutory books and Financial Statements VIEW

 

Unit 4 Administrative and Managerial role of a Company [Book]
Overview of Administrative and Managerial role, Key Managerial Personnel: VIEW
Director Meaning, Definition, Director Identification Number, Position, Rights VIEW
Director Liabilities VIEW
Director Duties, Power VIEW
Director Qualification, Disqualification VIEW
Director Appointment, Removal and Resignation of director VIEW
Meaning and role of Managing Director VIEW
Whole Time Directors VIEW
C-suite Executives, CEO, CFO, COO, CTO, CKO, CRO and CIO VIEW
Resident Director, Independent Director VIEW
Women Director VIEW
Company Secretary Meaning, Definition, Appointment of Company Secretary, Functions of CS, Duties and Responsibilities VIEW
VIEW
Audit Committee: Meaning and Functions of Audit Committee VIEW
VIEW

 

Unit 5 Corporate Meeting [Book]
Introduction to Corporate Meeting Meaning, Definitions and Types VIEW
VIEW
Proceedings under Section 118 of the Companies Act 2013 VIEW
Requisite of Valid Meeting:
Notice VIEW VIEW
Agenda VIEW
Chairman VIEW VIEW
Quorum VIEW
Proxy VIEW
Resolutions VIEW
Minutes VIEW
Postal Ballot, E- voting VIEW
Video Conferencing VIEW
Board of Directors (BODs) Meaning, Definitions, Board Meeting, Committee Meeting VIEW
Meeting of Board of Directors (BODs) VIEW
Winding Up of Company Meaning, Definition and Modes of Winding up VIEW
Official Liquidator Meaning, Powers and Duties VIEW
Consequences of Winding up of a Company VIEW
Bangalore University B.com Notes

Corporate Accounting Bangalore University B.com 3rd Semester NEP Notes

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Unit 1 Issue of Shares [Book]
Shares Introduction, Meaning, features VIEW
Types of shares VIEW
Issue of shares VIEW VIEW
Subscription of shares, Minimum subscription, Over subscription VIEW
Pro-Rata allotment of Shares VIEW
Book Building procedure for issue of shares VIEW
Problems related to Journal entries on issue of shares at par, premium and discount VIEW
Unit 2 Underwriting of Shares [Book]
Introduction, Meaning and Need for underwriting VIEW
Advantages of Underwriting VIEW
SEBI Regulations regarding Underwriting VIEW
Underwriting Agreement VIEW
Underwriting Commission VIEW
Underwriter, Functions of Underwriter VIEW
Types of Underwriting VIEW
Marked and Unmarked Applications VIEW
Problems on determination of Liability of Underwriters VIEW
Underwriting Process VIEW
Unit 3 Valuation of Goodwill [Book]
Meaning, Circumstances, Factors of Valuation of Goodwill VIEW
Methods of Valuation of Goodwill:
Average Profit Method of Valuation of Goodwill VIEW
Super Profit Method of Valuation of Goodwill VIEW
Capitalization of Super Profit average Profit Method of Valuation of Goodwill VIEW
Annuity Method of Valuation of Goodwill VIEW
Capitalization of Profit Method VIEW
Annuity Method VIEW
Brand Meaning and features VIEW VIEW
Factors influencing value of brand VIEW
Circumstances of valuation of brand VIEW
Intellectual Property Rights (IPR): Meaning and features VIEW
Factors influencing value of IPR VIEW
Circumstances of valuation of IPR VIEW
Patents Meaning and features VIEW VIEW
Factors influencing value of patents VIEW
Circumstances of valuation of patent VIEW
Unit 4 Valuation of Shares [Book]
Meaning, Need for Valuation of Shares VIEW
Factors Affecting Valuation of Shares VIEW
Methods of Valuation:
Intrinsic Value Method of Shares VIEW
Yield Method of Shares VIEW
Earning Capacity Method of Shares VIEW
Fair Value of shares VIEW
Rights Issue VIEW
Valuation of Rights Issue VIEW
Valuation of Share Warrant VIEW
Unit 5 Company Final Accounts [Book]
Statutory Provisions regarding preparation of Company Final Accounts VIEW
Treatment of Special Items VIEW
Tax deducted at source VIEW
Advance payment of Tax VIEW
Provision for Tax VIEW
Depreciation VIEW
Interest on debentures VIEW
Dividends VIEW
Rules regarding payment of dividends VIEW
Transfer to Reserves VIEW
Preparation of Profit and Loss Account and Balance Sheet in vertical form VIEW
Management Notes

Director General of Employment and Training

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The organization primarily looks after the operation of employment exchanges, industrial training institutes, vocational guidance programme and some other institutions. The activities of the directorate are essentially governed by the policies, standards and procedures set by the central directorate general, employment and training. Other activities of the organization include employment market information, vocational rehabilitation centers, and training of handicapped groups such as women and physically handicapped. The training wing of the department also looks after the implementation of the apprentices act, 1961. Generally, the directorate functions independently of the organizing of labour commissioner.

Management Notes

Director General of Factory Advice Service

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The office of the Chief Adviser of factories, which is now called Directorate General, Factory Advice Service and Labour Institutes, was setup in 1945 with the objective of advising Central and State Governments on administration of the Factories Act and coordinating the factory inspection services in the States. The Directorate General, Factory Advice and Labour Institutes (DGFASLI) comprises:

  • Headquarters situated in Mumbai
  • Central Labour Institute in Mumbai
  • Regional Labour Institutes in Chennai, Kanpur, Kolkata and Faridabad.

The DGFASLI is an attached office of the Ministry of Labour & Employment, Government of India and serves as a technical arm to assist the Ministry in formulating national policies on occupational safety and health in factories and docks. It also advises factories on various problems concerning safety, health, efficiency and well – being of the persons at work places.

Objectives of DGFASLI

  • To provide technical advice and service to the Central and State Governments, and workplaces including factories and ports on matters related to safety, health and welfare of workers.
  • To develop legislations, standards, guidelines and codes of practices consistent with international instruments/standards on Safety, Health and Environment at workplaces.
  • To conduct studies, surveys and audits in the field of Occupational Safety and Health (OSH)
  • To enforce and promote Safety, Health and Environment in major ports in India.
  • To become a national repository of information on OSH and to promote OSH at workplaces.
  • To conduct seminars, workshops and training programmes on OSH
  • To encourage and provide best practices in the field of OSH.
  • To establish and develop research and development in the area of OSH and risk management.
  • To operate Award Schemes such as PMSA, VRP and NSA
Management Notes

Causes for success and failure of start-ups in India

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According to the Startup India Portal, India has about 50,000 start-ups and is the 3rd largest ecosystem in the world. Start-ups are now emerging in tier-II and tier-III cities, such as Pune, Ahmedabad, and Kochi. Further, there is an increase in the investment flows from Chinese, Japanese, and Singapore based investors.

Causes for success

Reasons responsible for the growth of start-ups are:

  • Large Indian Market:

India’s diversity in culture, religion, and language has helped start-ups to create diversified products, according to the needs of a particular community. This becomes their Unique Selling Proposition, which in-turn entices investors to fund the start-up.

  • Fast-moving business environment:

In an uncertain and changing business ecosystem, the companies are under constant pressure to innovate to find a footing in the market. Sometimes, other companies invest or buy the start-ups to increase their own uniqueness.

  • Easy access to funds

The government has set up funds for easy startups in the form of venture capital.

  • Apply for tenders

New companies can apply for government tenders. They are excluded from the “related knowledge/turnover” standards appropriate for typical organizations explaining government tenders.

  • Reduction in cost

The government additionally gives arrangements of facilitators of licenses and brand names. They will give top-notch Intellectual Property Rights Services including quick assessment of licenses at lower expenses.

The government will bear all facilitator charges and the startup will bear just the legal expenses.

  • Tax holidays for three years

New companies will be excluded from income tax for a very long time, they get a certificate from the Inter-Ministerial Board (IMB).

  • R&D facilities

In the R&D area, seven new Research Parks will be set up to give offices to new businesses.

  • Tax saving for investors

Individuals putting their capital additions in the endeavor subsidizes arrangement by the government will get an exemption from capital increases. Thus, this will assist new companies to convince more investors.

  • Choose your investor

After this arrangement, the new companies will have an alternative to pick between the VCs, giving them the freedom to pick their investors.

  • Easy exit

Now, talking about the easy exit then if there should be an occurrence of exit, a startup can close its business within 90 days from the date of use of winding up.

  • No time-consuming compliances

For saving time and money numerous compliances have been facilitated for startups.

  • Meet other entrepreneurs

The government has proposed to hold 2 startup fests yearly both broadly and universally to empower the different partners of a startup to meet.

Causes for failure

Lack of focus

When Bill Gates and Warren Buffet were asked about one factor that was responsible for their success, both replied with one word: focus. To understand how focus can help, let’s look at an example.

Grubhub is a food delivery startup. From the beginning, the company decided to focus only on food delivery. There are a lot of other services that a company like that could offer- pickup of food, catering, and more, but the founders chose to focus on just delivery. The result? They could execute technically and operationally and grow the business successfully.

Lack of funds

In 2018, bike rental startup, Tazzo, shut shop. The reason, as given by one of its funding partners, was a failed product-market fit that led to drying up of funding. Even though the startup had raised a considerable amount of funds, the lack of a profitable business model led to the startup shutting down.

Lack of Product Market Fit

There is no one “Fits in all” formula. It has deeper layers to it. This is more of a framework than a goal. Many-a-times, startups fail to validate their product ideas in the existing market scenario. In today’s competitive world, it is important to bring in a product or service that is both problem-solving and fulfils the customer’s expectations in every way, be it price-related or output-related. You don’t want to be wasting your time and efforts on creating something for which there is ‘no market need’!

Lack of innovation

According to a survey, 77% of venture capitalists think that Indian startups lack innovation or unique business models. A study conducted by IBM Institute for Business Value found that 91% of startups fail within the first five years and the most common reason is – lack of innovation.

Although India is said to have the third-largest startup ecosystem, it doesn’t have meta-level startups such as some of the big names like Google, Facebook, and Twitter. Indian startups are also known for replicating global startups, rather than creating their own startup models.

Among the most innovative Indian startups would be startups like ChaiPoint, Ola, Saathi, and Swiggy, according to a list of 50 most innovative companies in the world.

Fear of Startup Failure

While this fear lives in almost every entrepreneur, some tend to simply stop taking risks. Decision-making is hindered as the key goal becomes to not make even one wrong decision at any costs, thus limiting the startup’s gamut. Such fear can not only restrain but also motivate entrepreneurs when directed in a positive way. Having a negative approach from the start can influence thoughts and behaviour badly.

Poorly Harmonised Team

Any well-to-do startup requires a wide range of expertise in its team of employees and management. It is not hard to find technically proficient people these days. However, it is very difficult to find people who know how to get along with others and can be counted on when managers are not looking over their shoulders. Skills and work approach of the founder and his/her team should complement each other efficiently. Working for a startup can create a sort of pressure for the employees too, but as a founder you need to maintain quality communication with them and exchange thoughts eagerly.

Management Notes

Procedures of Recording Shares

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The share capital of a company is the number of funds that a company can raise by the allotment of shares of its company but not exceeding the maximum amount mentioned in the memorandum of the company. When a company proposes to increase its subscribed capital by further issue of shares, then it can either issue equity or preference shares through the rights issue, preferential allotment or private placement of shares.

However, Article of Association of the Company must not restrict the right to make such allotment and also the authorise capital of the company must have the limit to allot the required shares. The procedure for allotment of shares can be time-consuming with the need to meet compliance at every step. You can avail affordable plans offered by Provenience to complete the process with ease.

Pursuant to the provisions of Section 42 & section 62 of the Companies Act, 2013, and the rules made thereunder, shares can be issued on the basis of Rights Issue, Private Placement & Preferential Allotment.

Under Right Issue, with the approval of the Board, shares are issued to the existing shareholders of the Company in the proportion of their current existing shareholding by issuing a Letter of Offer in this regard. The offer shall be open for a period not less than 15 days & not exceeding 30 days along with the right of renunciation. This offer period can be reduced in case of a Private Company with the consent of ninety percent, of the members of the Company. The offer letter shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

Private placement of shares is governed by Section 42 of the Companies Act, 2013 read with rules framed thereunder. With the approval of the members via Special Resolution, Shares are allotted to a selected group of persons by the issue of Private Placement Offer Letter (PPOL) which does not carry any right of renunciation. The subscription money must be paid either by cheque or demand draft or other banking channel and not by cash and be kept in a separate bank account in a scheduled bank. 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. A complete record of private placement offers shall be prepared in Form PAS-5.

Whereas, Preferential allotment refers to the allotment to any person being an existing shareholder or an outsider, either for cash or for a consideration other than cash. The price of such shares shall be determined by the Valuation Report. Rest of the practical procedure for the preferential allotment of shares is more or less similar to that of private placement.

Management Notes

Some important provisions of Banking Regulation Act of 1949

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Different types of banks, such as commercial banks, cooperative banks, rural banks, and private sector banks exist in India. The Reserve Bank of India (RBI) is the governing body for regulating and supervising the banks. Banking Regulation Act, 1949 is an Act that provides a framework for regulating the banks of India. The Act came into force on 16th March 1949. This Act gives RBI the power to control the behaviour of banks. This Act was passed as Banking Companies Act, 1949. It did not apply to Jammu and Kashmir until 1956. This Act monitors the day-to-day operations of the bank. Under this Act, the RBI can licence banks, put ​​regulation over shareholding and voting rights of shareholders, look over the appointment of the boards and management, and lay down the instructions for audits. RBI also plays a role in mergers and liquidation.

Objectives of the Banking Regulation Act, 1949

  • To meet the demand of the depositors and provide them security and guarantee.
  • To provide provisions that can regulate the business of banking.
  • To regulate the opening of branches and changing of locations of existing branches.
  • To prescribe minimum requirements for the capital of banks.
  • To balance the development of banking institutions.

Provisons

  1. Prohibition of Trading (Sec. 8):

According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation.

  1. Non-Banking Assets (Sec. 9):

According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”. Of course, the Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any period not exceeding five years.

  1. Management (Sec. 10):

Sec. 10 (a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of the following fields:

(a) Accountancy;

(b) Agriculture and Rural Economy;

(c) Banking;

(d) Cooperative;

(e) Economics;

(f) Finance;

(g) Law;

(h) Small Scale Industry.

The Section also states that at least not less than two directors should have special knowledge or practical experience relating to agriculture and rural economy and cooperative. Sec. 10(b) (1) further states that every banking company shall have one of its directors as Chairman of its Board of Directors.

  1. Minimum Capital and Reserves (Sec. 11):

Sec. 11 (2) of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:

(a) Foreign Banking Companies:

In case of banking company incorporated outside India, aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs.

It must deposit and keep with the R.B.I, either in Cash or in unencumbered approved securities:

(i) The amount as required above, and

(ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business.

(b) Indian Banking Companies:

In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below:

(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.

(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business, plus Rs. 25,000 in respect of each place of business elsewhere in the State.

No such banking company shall be required to have paid-up capital and reserves exceeding Rs. 5 lakhs and no such banking company which has only one place of business shall be required to have paid- up capital and reserves exceeding Rs. 50,000.

In case of any such banking company which commences business for the first time after 16th September 1962, the amount of its paid-up capital shall not be less than Rs. 5 lakhs.

(iii) If it has all its places of business in one State, one or more of which are in Mumbai or Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Kolkata? No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs.

  1. Capital Structure (Sec. 12):

According to Sec. 12, no banking company can carry on business in India, unless it satisfies the following conditions:

(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is not less than half of its subscribed capital.

(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as may have been issued prior to 1st April 1944. This restriction does not apply to a banking company incorporated before 15th January 1937.

(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the company.

  1. Payment of Commission, Brokerage etc. (Sec. 13):

According to Sec. 13, a banking company is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2½% of the paid-up value of such shares.

  1. Payment of Dividend (Sec. 15):

According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off.

But Banking Company need not:

(a) Write-off depreciation in the value of its investments in approved securities in any case where such depreciation has not actually been capitalized or otherwise accounted for as a loss;

(b) Write-off depreciation in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor;

(c) Write-off bad debts in any case where adequate provision for such debts has been made to the satisfaction of the auditors of the banking company.

Floating Charges:

A floating charge on the undertaking or any property of a banking company can be created only if RBI certifies in writing that it is not detrimental to the interest of depositors Sec. 14A. Similarly, any charge created by a banking company on unpaid capital is invalid Sec. 14.

  1. Reserve Fund/Statutory Reserve (Sec. 17):

According to Sec. 17, every banking company incorporated in India shall, before declaring a dividend, transfer a sum equal to 20% of the net profits of each year (as disclosed by its Profit and Loss Account) to a Reserve Fund.

The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a specified period. The exemption is granted if its existing reserve fund together with Securities Premium Account is not less than its paid-up capital.

If it appropriates any sum from the reserve fund or the securities premium account, it shall, within 21 days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation. Moreover, banks are required to transfer 20% of the Net Profit to Statutory Reserve.

  1. Cash Reserve (Sec. 18):

Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand liabilities in India.

The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or unencumbered approved securities. But every banking company’s asset in India should not be less than 75% of its time and demand liabilities in India at the close of last Friday of every quarter.

  1. Liquidity Norms or Statutory Liquidity Ratio (SLR) (Sec. 24):

According to Sec. 24 of the Act, in addition to maintaining CRR, banking companies must maintain sufficient liquid assets in the normal course of business. The section states that every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India.

This percentage may be changed by the RBI from time to time according to economic circumstances of the country. This is in addition to the average daily balance maintained by a bank.

Again, as per Sec. 24 of the Banking Regulation Act, 1949, every scheduled bank has to maintain 31.5% on domestic liabilities up to the level outstanding on 30.9.1994 and 25% on any increase in such liabilities over and above the said level as on the said date.

But w.e.f. 26.4.1997 fortnight the maintenance of SLR for inter-bank liabilities was exempted. It must be remembered that at the start of the preceding fortnights, SLR must be maintained for outstanding liabilities.

  1. Restrictions on Loans and Advances (Sec. 20):

After the Amendment of the Act in 1968, a bank cannot:

(i) Grant loans or advances on the security of its own shares, and

(ii) Grant or agree to grant a loan or advance to or on behalf of:

(a) Any of its directors;

(b) Any firm in which any of its directors is interested as partner, manager or guarantor;

(c) Any company of which any of its directors is a director, manager, employee or guarantor, or in which he holds substantial interest; or

(d) Any individual in respect of whom any of its directors is a partner or guarantor.

Note:

(ii) (c) Does not apply to subsidiaries of the banking company, registered under Sec. 25 of the Companies Act or a Government Company.

  1. Accounts and Audit (Sees. 29 to 34A):

The above Sections of the Banking Regulation Act deal with the accounts and audit. Every banking company, incorporated in India, at the end of a financial year expiring after a period of 12 months as the Central Government may by notification in the Official Gazette specify, must prepare a Balance Sheet and a Profit and Loss Account as on the last working day of that year, or, according to the Third Schedule, or, as circumstances permit.

At the same time, every banking company, which is incorporated outside India, is required to prepare a Balance Sheet and also a Profit and Loss Account relating to its branch in India also. We know that Form A of the Third Schedule deals with form of Balance Sheet and Form B of the Third Schedule deals with form of Profit and Loss Account.

It is interesting to note that a revised set of forms have been prescribed for Balance Sheet and Profit and Loss Account of the banking company and RBI has also issued guidelines to follow the revised forms with effect from 31st March 1992.

According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account should be prepared according to Sec. 29, and the same must be audited by a qualified person known as auditor. Every banking company must take previous permission from RBI before appointing, re­appointing or removing any auditor. RBI can also order special audit for public interest of depositors.

Moreover, every banking company must furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditor’s report to the RBI and also the Registers of companies within three months from the end of the accounting period.

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