Tag: Corporate Ethics

Director Loans

Section 185 of the Companies Act, 2013 lays down certain restrictions with regard to the granting of loans to Directors in order to monitor their working.

When the Companies Act, 1956 was in force, public companies were permitted to grant loans, guarantees, and securities as long as they obtained prior permission from the Central Government to do so. The companies used to exercise a practice of borrowing funds and passing them to subsidiaries and other associate companies through inter-corporate loans.

However, when it came to compliance with the terms of the loan agreement, the holding companies used to take a step back, leaving the subsidiaries in the lurch. In order to put a stop to the exploitation of the subsidiaries, Section 185 of the Companies Act, 2013 came into force.

Section 185 (as amended by the Companies (Amendment) Act, 2017):

• Limits the prohibition on loans, advances, etc. to Directors of the company or its holding company or any partner of such Director or any partner of such Director or any firm in which such Director or relative is a partner.
• Allows the company to give a loan or guarantee or provide security in connection with any loan to any person/ entity in whom any of the Directors are interested, subject to:-
  • Passing of Special Resolution by the company in a General Meeting (Approval of at least 75% of the members is required).
  • Utilization of loans by the borrowing company shall be solely for its principal business activities.
• The penalty provisions as set out under Section 185 (4) of the Act, in addition to the Company, now extends to an officer in default of the company (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act).

Exemptions with Regard to Loans Given to Directors

• Loans to the Managing Director or Whole Time Director:
• The loans to MD or WTD may be given only if the following conditions are met with:
  • Where it is part of the Policy of Service of the company to grant loans to all employees.
  • Pursuant to any scheme which is duly approved by the members by way of a Special Resolution
• Loans to Subsidiary Company:

Where the holding company grants the loan, guarantee or security to its wholly-owned subsidiary company, which uses the same for its principal activity of business only.

• Loans to Companies as part of Ordinary Business:

If the rate of interest charged on such loans is not lesser than the rate prescribed by RBI at the time, loans may be given to companies in the ordinary course of business.

• Loans given by Banks and Financial Institutions to Subsidiaries:

Grant of loan is permitted based on:

• Where the holding company provides the security or guarantee with respect to the loan made by the bank or any financial institution to the subsidiary company.
• The loan must be utilised for the subsidiary’s principal activity of the business.

Director Remuneration

‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

Directors’ remuneration is the process by which directors of a company are compensated, either through fees, salary, or the use of the company’s property, with approval from the shareholders and board of directors.

The process of directors’ remuneration came about because of shareholder concerns that directors were rewarding themselves large salaries despite showing poor profits or revenue.

Therefore, the process was initiated by which shareholders were able to agree to or reject fees paid to directors in general. This amount is the upper limit that can be paid to the board of directors.

The board of directors, in turn, will determine how those fee payments are split up among the directors, including the general director of the company.

On the other hand, director’s remuneration, meaning the salaries and bonuses paid out to directors, is part of the directors’ employment contract signed with the company. The board of directors then has direct control over that remuneration agreement.

Shareholders may sue the directors if they pay excessive amounts that exceed the agreed payment or if they pay themselves a disproportionately large number of profits instead of distributing it to the stockholders as dividends.

Permissible managerial remuneration

• Total managerial remuneration payable by a public company, to its directors, managing director and whole-time director and its manager in respect of any financial year:

The percentages displayed above shall be exclusive of any fees payable under section 197(5).

Until now, any managerial remuneration in excess of 11% required government approval. However, now a public company can pay its managerial personnel remuneration in excess of 11% without prior approval of the Central Government. A special resolution approved by the shareholders will be sufficient.

In case a company has defaulted in paying its dues or failed to pay its dues, permission from the lenders will be necessary.

• When the company has inadequate profits/no profits:In case a company has inadequate profits/no profits in any financial year, no amount shall be payable by way of remuneration except if these provisions are followed.

Qualifications of a Director:

The Act has a dedicated provision which is Section 162 that underlines the reasons for which a person may not appoint as a director. There is no such provision regarding the qualification under the Act.

As regards to the qualification of directors, there is no direct provision in the Companies Act, 2013.But, according to the different provisions relating to the directors; the following qualifications may be mentioned:

1. A director must be a person of sound mind.
2. A director must hold share qualification, if the article of association provides such.
3. A director must be an individual.
4. A director should be a solvent person.
5. A director should not be convicted by the Court for any offence, etc.

Rule 5 of The Companies (Appointment and Qualification of Directors) Rules, 2014 states the qualification of the Independent Director as follows

“An independent director shall possess appropriate skills, experience, and knowledge in one or more fields of finance, law, management, sales, marking, administration, research, corporate governance, technical operations, or other disciplines related to the company’s business.”

Disqualifications of a director:

The relevant provision of the law that deals with the disqualification of directors are Section 152, 164, 165, and 188 of the Act and The Companies (Appointment and Qualification of Directors) Rules, 2014.

Section 164 of Companies Act, 2013, has mentioned the disqualification as mentioned below:

1) A person shall not be capable of being appointed director of a company, if the director is

(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) An undischarged insolvent;

(c) Has applied to be adjudicated as an insolvent and his application is pending;

(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence;

(e) Has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or

(f) An order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section;

2) Such person is already a director of a public company which:

(a) Has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or

(b) Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:

Effects of Disqualification

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act. It has recently published the names of the disqualified Directors on the government website.

Remedies against Disqualification

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT). He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a Director does not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the disqualified person will still continue to be a director for the next seven days. Within this period, he can file his annual returns to stay the order of disqualification. However, there exists no procedure to reappoint a disqualified director. He can only be reappointed after a period of five years has elapsed from the date of disqualification.

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or paid dividend referred to in clause (B).

When a meeting is to be convened, a notice is required to be sent to all who are to attend it.

It should satisfy these conditions:

1. It should be under proper authority
2. It should state the name of the organisation
3. It should state the day, date, time, and place. Also, sometimes, how to reach the place
4. It should be well in advance. Some require seven days’ notice, some 48 hours’
5. It should state the purpose and, if possible, the agenda
6. It should carry the date of circulation and convener’s/secretary’s signature
7. It should go to all persons required at the meet
8. It should mention the TA/DA etc. payable and the arrangements for this

In practice, it is necessary to ensure that the notice has reached in time. This may be done telephonically. Dispatch section and post are prone to delays

We often find that between the date of a letter from a major public organisation and the post mark on the letter, there is a gap of 10-12 days. A notice that should reach seven days before a meet should not reach seven days after the meet.

Proxy

Proxy means substitute. In the world of meetings proxy means a substitute sent by a member to attend a meeting on his behalf. The idea comes from the Companies Act. Sec. 176 of the Act provides that a member of a company is entitled to send another person to attend a meeting and to vote on his behalf.

According to Sec. 176 of the Companies Act:

(1) Any member entitled to attend a general meeting and to vote may send a proxy to attend the meeting and to vote on his behalf.

But the following rules have to be followed for the purpose:

(a) In case of a company not having share capital, a proxy can be sent provided it is mentioned in the Articles of the company.

(b) A member of a private company cannot send more than one proxy unless otherwise provided in the Articles.

(c) A proxy can vote at the meeting only by poll unless otherwise provided in the Articles but he cannot speak.

(d) In the notice for the meeting it shall be clearly mentioned that a proxy can be sent and a proxy form is attached to the notice.

(e) A member intending to send a proxy shall fill in the form naming the proxy and signing on stamps of prescribed value and send it to the company at least forty-eight hours before the meeting. A legally appointed representative of the member may sign on his behalf on the proxy form.

(f) The proxy sent by a member need not be a member and may be an outsider.

(g) Any member may inspect the proxy forms sent by other members provided he gives three days’ notice to the company.

(h) Inspection shall be allowed by the company at least twenty-four hours before the meeting, during business hours.

(2) A proxy is not counted when quorum is counted. But at an annual general meeting held at the order of the Central Government (Sec. 167) or at a meeting of members held at the order of the Company Law Board (Sec. 186), only one member on whose complaint meeting has been so ordered, may be present by proxy and that proxy will make the quorum.

(3) It has to be noted that no proxy can be sent by a director to attend a Board meeting on his behalf.

(4) Generally, associations other than companies do not allow proxy.

(5) It is a duty of the secretary to collect the proxy forms and prepare a Proxy List.

(6) In case of Government Companies, the shares are often held in the name of the President of India or a Governor, who invariably sends a representative (Sec. 187 A). Same is true when one body corporate (not necessarily a ‘company’) holds shares in another body corporate then the shareholder body corporate send a representative to the meetings.

Such a representative is selected by a resolution of the Body of Directors (or Governing Body) of the shareholder body corporate. A representative is not merely a proxy (Sec. 187). A representative is counted for counting quorum and can speak at the meeting unlike a proxy. The word ‘proxy’ has double meaning. It means the person who is sent as substitute as well as the form or the instrument to be filled in by a member for appointing a proxy.

Shareholder Meeting is a formal gathering of the shareholders of a corporation, where they come together to discuss significant issues concerning the company. These meetings can be annual or special and serve as a platform for shareholders to exercise their rights, express opinions, and make decisions on key matters affecting the company. They play a crucial role in corporate governance and ensure that shareholders have a say in the direction of the company.

Importance of Shareholder Meetings:

• Democratic Process:

Shareholder meetings embody the democratic principle of corporate governance, allowing shareholders to voice their opinions and vote on critical issues.

• Decision-Making:

These meetings are crucial for making decisions regarding the appointment of directors, approval of financial statements, dividends, mergers, and other significant corporate actions.

• Transparency:

Shareholder meetings provide an opportunity for management to present the company’s performance and future prospects, promoting transparency and accountability.

• Shareholder Rights:

They protect shareholders’ rights by enabling them to participate in decisions that affect their investments and hold management accountable.

• Communication:

Shareholder meetings facilitate direct communication between management and shareholders, allowing for questions and discussions about the company’s operations and strategies.

• Legal Compliance:

Conducting annual shareholder meetings is often a legal requirement under corporate laws, ensuring that the company adheres to regulatory obligations.

• Building Trust:

Regular engagement with shareholders through meetings can foster trust and confidence in management and the company’s strategic direction.

Components of Shareholder Meetings:

1. Notice of Meeting:

A formal communication sent to shareholders detailing the date, time, location, and agenda of the meeting.

2. Agenda:

A list of topics to be discussed during the meeting, ensuring all relevant matters are covered.

3. Minutes of Meeting:

A written record of the proceedings, including discussions, decisions made, and action items assigned.

4. Participants:

Shareholders who attend the meeting, which can include both individual and institutional investors.

5. Chairperson:

An appointed individual who leads the meeting, ensuring it runs smoothly and that all agenda items are addressed.

6. Voting Procedures:

Guidelines for how decisions will be made, including methods for casting votes (e.g., show of hands, ballots, electronic voting).

7. Financial Statements:

Presentation of the company’s financial performance, often a key agenda item for annual meetings.

Advantages of Shareholder Meetings:

• Empowerment of Shareholders:

Shareholder meetings empower investors to influence company decisions and express their views on corporate governance.

• Enhanced Accountability:

Meetings create a forum for shareholders to hold management accountable for their actions and company performance.

• Opportunity for Dialogue:

They provide a platform for open dialogue between shareholders and management, fostering better relationships.

• Transparency in Operations:

Shareholders can gain insights into the company’s strategies and performance, promoting transparency.

• Networking Opportunities:

Meetings allow shareholders to network with other investors, management, and board members.

• Compliance with Regulations:

Holding regular meetings ensures that the company complies with legal and regulatory requirements.

• Facilitates Long-term Planning:

Shareholder involvement in discussions encourages a focus on long-term strategic goals and sustainability.

Disadvantages of Shareholder Meetings:

• Time-Consuming:

Meetings can be lengthy and require significant time from both management and shareholders.

• Cost Implications:

Organizing meetings incurs expenses, such as venue costs, printing materials, and refreshments, which can be burdensome for the company.

• Potential for Conflict:

Shareholder meetings can lead to disagreements or conflicts, particularly when there are opposing views among shareholders.

• Inefficiency:

Poorly organized meetings may result in unproductive discussions or a lack of focus on critical issues.

• Limited Participation:

Not all shareholders may attend, especially smaller ones, leading to decisions that may not represent the views of the entire shareholder base.

• Pressure from Activist Shareholders:

Meetings can attract activist shareholders, whose demands may disrupt the meeting’s agenda and lead to tensions.

• Decision Delays:

Complex discussions can delay decisions that may be critical for the company’s immediate needs or future direction.

Liquidator is an individual or entity appointed to wind up the affairs of a company during the liquidation process. Their primary responsibility is to collect and realize the company’s assets, settle its liabilities, and distribute any remaining funds to the shareholders. The role of the liquidator is crucial as they act as an intermediary between the company, its creditors, and shareholders. They have a variety of roles, duties, and powers, each of which is integral to the successful completion of the liquidation process.

Key Roles of a Liquidator:

• Asset Realization:

Liquidator’s primary role is to take control of the company’s assets, sell or liquidate them, and turn them into cash. This may include real estate, machinery, equipment, inventory, and accounts receivable. The liquidator maximizes asset value to pay off the company’s liabilities.

• Debt Settlement:

Once the liquidator has converted the company’s assets into cash, they are responsible for using the proceeds to settle the company’s debts. This is done based on the priority of claims, with secured creditors paid first, followed by preferential creditors, unsecured creditors, and lastly shareholders.

• Distribution to Creditors:

Liquidator is responsible for distributing the proceeds from asset sales to the company’s creditors in accordance with statutory priorities. They ensure that each creditor receives their due share based on the ranking of claims.

• Final Distribution to Shareholders:

After all debts have been paid, any remaining funds are distributed to the shareholders. This is typically the last step in the liquidation process, and in most cases, shareholders receive little or no funds if the company is insolvent.

• Reporting and Documentation:

Liquidator is required to keep accurate records of all transactions during the liquidation process. This includes documenting the sale of assets, payments to creditors, and any distributions to shareholders. The liquidator must submit regular reports to creditors, shareholders, and, in some cases, the court or regulatory bodies.

• Ensuring Legal Compliance:

Liquidator ensures that the liquidation process complies with all relevant laws and regulations. This includes adhering to the rules set out by the Companies Act or other governing legislation, filing necessary reports with regulatory authorities, and ensuring that all legal obligations are met.

• Conducting Investigations:

Liquidator may be required to investigate the conduct of the company’s directors prior to liquidation, especially in cases of insolvency. This is done to determine if any wrongful trading, fraud, or negligence occurred. If misconduct is found, the liquidator can pursue legal action against the directors on behalf of creditors.

• Company Dissolution:

After completing the liquidation process, the liquidator is responsible for dissolving the company and striking it off the register of companies. Once this is done, the company ceases to exist as a legal entity.

Key Duties of a Liquidator:

• Act in Good Faith:

Liquidator must act in good faith, with honesty and transparency throughout the liquidation process. They must always act in the best interest of the creditors and ensure that the liquidation is conducted fairly and without bias.

• Duty to Secure Assets:

Liquidator has a duty to take immediate control of the company’s assets and safeguard them from further loss or damage. This may involve securing properties, collecting receivables, and preventing unauthorized access to the company’s assets.

• Duty of Impartiality:

Liquidator must remain impartial and act in the interest of all stakeholders, including creditors, shareholders, and employees. They must not show favoritism towards any party and must handle the liquidation process objectively.

• Duty to Notify Creditors and Shareholders:

It is the liquidator’s duty to notify creditors and shareholders about the commencement of the liquidation process. The liquidator must provide regular updates on the status of the liquidation and inform them of any key decisions, including asset sales and distributions.

• Duty to Maximize Returns:

Liquidator has a duty to maximize the value of the company’s assets for the benefit of creditors. They must make decisions that ensure the best possible return for creditors, which could involve selling assets at market value or negotiating settlements with debtors.

• Duty to Comply with Legal Obligations:

Liquidator must comply with all statutory and legal obligations throughout the liquidation process. This includes filing the necessary reports, ensuring that all transactions are properly recorded, and submitting final accounts to regulatory authorities.

• Duty to Close the Liquidation:

Liquidator must ensure that the liquidation process is completed efficiently and promptly. Once all assets have been sold, and liabilities settled, the liquidator has a duty to finalize the process, distribute any remaining funds, and dissolve the company.

Key Powers of a Liquidator:

• Power to Sell Assets:

Liquidator has the power to sell the company’s assets, whether through auction, private sale, or negotiation. This power allows the liquidator to liquidate assets to generate funds for creditor repayment.

• Power to Sue and Be Sued:

Liquidator has the authority to initiate or defend legal proceedings on behalf of the company. This power enables the liquidator to recover money owed to the company or settle disputes with creditors, debtors, or other parties.

• Power to Compromise Claims:

Liquidator has the power to negotiate and compromise claims made by or against the company. This power is particularly useful in settling disputes with creditors or debtors without resorting to lengthy legal processes.

• Power to Investigate Company Affairs:

Liquidator has the power to investigate the affairs of the company and the conduct of its directors. This includes reviewing financial records, auditing company accounts, and identifying any fraudulent or wrongful activities.

• Power to Call Meetings:

Liquidator can convene meetings of creditors and shareholders when necessary. These meetings are usually called to inform stakeholders about the progress of the liquidation process or to seek their approval for specific actions.

• Power to Appoint Agents:

Liquidator has the authority to appoint agents, such as accountants, auditors, or legal advisers, to assist in the liquidation process. These professionals help the liquidator with specialized tasks such as asset valuation, forensic accounting, or legal compliance.

• Power to Settle Liabilities:

Liquidator has the power to settle the company’s liabilities by paying creditors in accordance with the legal priority of claims. This power is critical in ensuring that secured and preferential creditors receive their due share from the liquidation proceeds.

Companies Act, 2013 introduces various provisions to strengthen corporate governance and transparency in Indian companies. Among these, the roles of Resident Director and Independent Director are pivotal in ensuring compliance with legal obligations, maintaining ethical standards, and protecting the interests of shareholders. Both these positions come with distinct responsibilities and qualifications, and they are crucial for the smooth functioning of the corporate sector.

Resident Director

Resident Director was introduced by the Companies Act, 2013 to ensure that at least one director of every company resides in India for a significant period, thereby maintaining a connection to the local regulatory environment. This requirement applies to all types of companies, whether public, private, or foreign, and aims to ensure that companies are easily accountable to Indian regulatory authorities.

1. Definition and Legal Requirement

According to Section 149(3) of the Companies Act, 2013, every company must have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year. This director is referred to as the Resident Director. The law ensures that there is at least one individual in the company’s management who is familiar with Indian regulations, available to address local issues, and can liaise with Indian regulatory bodies.

2. Qualifications of a Resident Director

The Act does not prescribe specific qualifications for a Resident Director other than the residency requirement. Any individual who is capable of being appointed as a director under the provisions of the Companies Act, 2013 can serve as a Resident Director, provided they meet the residency criterion. They should not be disqualified under Section 164 of the Act, which deals with disqualifications for appointment as a director, such as being of unsound mind, an undischarged insolvent, or convicted of a criminal offense.

3. Duties of a Resident Director

While a Resident Director is expected to fulfill the duties of a regular director, their specific responsibility is to ensure that the company remains compliant with Indian laws and regulations. Their duties include:

• Ensuring the company’s adherence to corporate governance norms.
• Facilitating communication with regulatory authorities in India.
• Ensuring the timely filing of statutory documents such as annual returns and financial statements with the Registrar of Companies (ROC).
• Providing guidance on regulatory changes and ensuring the company adjusts its practices accordingly.

4. Consequences of Non-compliance

If a company fails to appoint a Resident Director, it may face penalties under the Companies Act. The company and its officers could be fined or penalized for violating Section 149(3) of the Act. Additionally, failure to comply with this requirement could result in greater scrutiny from regulatory authorities.

Independent Director

An Independent Director plays a key role in enhancing corporate accountability and protecting shareholder interests by maintaining a degree of independence from the company’s management. Their presence on the board helps ensure that decisions are made objectively, without undue influence from company insiders, and in alignment with good governance practices.

1. Definition and Legal Framework

An Independent Director is defined under Section 149(6) of the Companies Act, 2013. They are non-executive directors who do not have any material or pecuniary relationship with the company, its directors, or its promoters, except for receiving director’s remuneration. They must also meet specific qualifications and follow a code of conduct as outlined in the Companies Act and the rules of the Securities and Exchange Board of India (SEBI) for listed companies.

Independent Directors are typically required in listed companies and certain other large public companies. SEBI’s Listing Obligations and Disclosure Requirements (LODR) regulations mandate that a specified proportion of the board must comprise Independent Directors in listed companies, with at least one-third of the board being independent in companies that do not have an executive chairman.

2. Qualifications of an Independent Director

According to Section 149(6), an individual must meet certain criteria to qualify as an Independent Director. These are:

• Integrity and Expertise: The individual must be a person of integrity and possess relevant expertise and experience in the fields of law, finance, economics, or other disciplines that are beneficial to the company.
• Independence: The individual must not be a promoter or related to promoters or directors of the company or its subsidiaries. Additionally, they should not have a material or pecuniary relationship with the company or its related parties.
• No Managerial Role: The individual should not have been an employee or key managerial personnel of the company or its affiliates in the preceding three financial years.
• No Significant Shareholding: The individual, their relatives, or their associates must not hold more than 2% of the total voting power of the company.
• No Financial Transactions: The individual should not have significant transactions (exceeding 10% of their income) with the company or its associates.

3. Duties of an Independent Director

Independent Directors play a crucial role in safeguarding the interests of shareholders, particularly minority shareholders, and ensuring that the company follows ethical practices. Their key duties are:

• Objective Oversight: Independent Directors must provide unbiased oversight on corporate governance and ensure that the board’s decisions are made in the company’s best interest.
• Compliance with Laws and Policies: Independent Directors are responsible for ensuring that the company complies with all applicable laws, including the Companies Act, SEBI regulations, and other sector-specific regulations.
• Protection of Minority Shareholders: One of the core duties of an Independent Director is to protect the interests of minority shareholders and ensure that their voices are heard.
• Risk Management: Independent Directors should evaluate and mitigate risks associated with the company’s operations, including financial, operational, and legal risks.
• Appointment and Remuneration: Independent Directors play a critical role in recommending the appointment of key managerial personnel and determining their remuneration. This includes evaluating the performance of executive directors and setting appropriate remuneration packages.
• Conflict of Interest Management: Independent Directors must ensure that the company’s decisions do not unfairly favor insiders or related parties. They must actively prevent and manage conflicts of interest.

4. Tenure of Independent Director

Companies Act, 2013 provides for a maximum tenure of five consecutive years for Independent Directors. After completion of the first term, they may be reappointed for another term of five years, subject to approval by the shareholders. However, after serving two terms, they must take a mandatory cooling-off period of three years before being eligible for reappointment.

5. Liabilities and Protection of Independent Directors

The liabilities of Independent Directors are generally limited to acts of omission or commission that are directly attributable to their knowledge or participation in company decisions. Section 149(12) of the Companies Act, 2013 provides them protection, stating that Independent Directors are liable only in respect of matters that occurred with their knowledge, consent, or connivance. This is meant to ensure that they are not held accountable for decisions over which they had no control or knowledge.

Share represents a unit of ownership in a company, providing the shareholder with a claim on the company’s assets and profits, as well as a proportionate interest in its management. Shareholders hold an ownership stake in the company, and the extent of their rights and privileges depends on the type and number of shares they own. Shares are primarily classified as equity shares and preference shares, each with different rights and characteristics.

The Indian Companies Act, 2013, governs the issue and regulation of shares in India, ensuring transparency and safeguarding the interests of shareholders.

Features of Shares:

• Ownership in the Company

Share represents a unit of ownership in a company, giving the shareholder a proportional stake in the business. Shareholders are considered part-owners and their liability is limited to the unpaid amount on the shares they hold. By holding shares, investors become entitled to certain rights, such as voting in general meetings, receiving dividends, and participating in major company decisions. The number of shares owned determines the degree of ownership and influence in the company. Ownership through shares also allows for easy transferability, enabling shareholders to sell or gift their holdings in accordance with the company’s Articles of Association.

• Indivisible Unit

Share is the smallest indivisible unit into which the capital of a company is divided. It cannot be split into smaller fractions for the purpose of ownership transfer. For example, if a person holds one share, it cannot be transferred partially; the whole share must be transferred. This indivisibility ensures clarity in ownership records and facilitates proper management of shareholder registers. However, a shareholder can hold multiple shares, and collectively, they may be bought, sold, or transferred. Indivisibility also helps in maintaining the legal and financial structure of the company’s capital, as per provisions in the Companies Act, 2013.

• Transferability

Shares of a public company are freely transferable, allowing investors to buy or sell them without needing prior approval from the company, subject to SEBI and stock exchange regulations. This liquidity feature makes shares an attractive investment, enabling shareholders to convert their investment into cash whenever required. In the case of private companies, the transfer of shares is restricted as per their Articles of Association, requiring board approval. Transferability promotes capital mobility, encourages wider participation in ownership, and helps companies attract investments, while also offering flexibility and choice to existing shareholders regarding the disposal of their holdings.

• Source of Income

Shares provide shareholders with income primarily in the form of dividends, which are a portion of the company’s profits distributed to owners. The amount of dividend depends on the company’s profitability and the board’s decision. In addition to dividends, shareholders can earn through capital appreciation — the increase in the market value of shares over time. However, income from shares is not guaranteed, as returns depend on business performance, market conditions, and economic factors. This potential for higher returns compared to fixed-income investments makes shares attractive, but they also carry higher risk, requiring investors to assess before investing.

• Limited Liability

One of the key features of shares is that they confer limited liability on shareholders. This means shareholders are liable to contribute only up to the unpaid value of the shares they hold. For instance, if a share is worth ₹100 and the shareholder has paid ₹80, they can only be asked to pay the remaining ₹20 in case the company faces financial distress. They are not personally liable for the company’s debts beyond this limit. This protection encourages investment in companies, as investors know their personal assets are safe from business losses or insolvency proceedings of the company.

• Classes and Types

Shares can be classified into different types, primarily equity shares and preference shares, each with distinct rights and obligations. Equity shares carry voting rights and are entitled to dividends after preference shareholders are paid. Preference shares usually do not carry voting rights but have priority in dividend payment and capital repayment on liquidation. Within these categories, further variations exist, such as cumulative preference shares, non-cumulative preference shares, redeemable preference shares, etc. This classification allows companies to design their capital structure flexibly, attracting different types of investors with varied risk appetites, income expectations, and control preferences.

Types of Shares:

Shares are broadly categorized into two main types: Equity Shares and Preference Shares. Each category serves different purposes and provides shareholders with distinct rights and privileges.

Equity Shares (also known as Ordinary Shares)

Equity shares are the most common type of shares issued by companies and represent the core ownership of the company. Shareholders holding equity shares are referred to as equity shareholders. Equity shares provide voting rights, a claim on the company’s profits (through dividends), and residual claims on the company’s assets in case of liquidation.

Key Features of Equity Shares:

• Voting Rights:

Equity shareholders have voting rights in the company’s general meetings, which allow them to participate in important corporate decisions such as the election of directors, mergers, and acquisitions.

• Dividend:

Dividends on equity shares are not fixed and depend on the company’s profitability. If a company makes a profit, it may declare dividends, but if it incurs losses, no dividend is paid.

• Residual Claims:

In the event of the company’s liquidation, equity shareholders are the last to be paid. After creditors and preference shareholders are settled, the remaining assets are distributed to equity shareholders.

• Fluctuating Returns:

Equity shareholders experience returns that fluctuate based on the company’s performance. Higher profits typically lead to better returns through dividends and capital appreciation.

Types of Equity Shares:

• Voting Equity Shares:

These shares offer voting rights to shareholders, allowing them to participate in corporate decisions.

• Non-voting Equity Shares:

In some cases, companies issue non-voting equity shares, where shareholders do not have voting rights but may receive higher dividends or other benefits.

• Bonus Shares:

These are additional shares issued to existing shareholders, usually in proportion to their existing holdings, without any additional payment. It is a way of rewarding shareholders by capitalizing retained earnings.

Preference Shares

Preference shares, as the name suggests, offer shareholders preferential treatment over equity shareholders in certain matters. Preference shareholders have a fixed dividend and have priority over equity shareholders in the event of the company’s liquidation. However, preference shareholders typically do not have voting rights, except in certain circumstances, such as non-payment of dividends.

Key Features of Preference Shares:

• Fixed Dividend:

Preference shareholders are entitled to a fixed dividend before any dividend is paid to equity shareholders, regardless of the company’s profitability.

• Priority in Liquidation:

In the event of liquidation, preference shareholders are paid before equity shareholders, although they rank after creditors.

• Limited Voting Rights:

Preference shareholders usually do not have voting rights in general meetings. However, if the company fails to pay dividends for a specified period, they may gain voting rights.

• Less Risk:

Since preference shareholders have a fixed dividend and priority during liquidation, their investment is considered less risky compared to equity shares.

Types of Preference Shares:

• Cumulative Preference Shares:

If a company is unable to pay dividends in a given year, the unpaid dividends accumulate and must be paid out in future years before any dividend is paid to equity shareholders.

• Non-Cumulative Preference Shares:

If a company does not declare dividends in a particular year, the right to receive those dividends lapses, and the shareholder cannot claim it in future years.

• Redeemable Preference Shares:

These shares can be bought back by the company after a specified period, providing a form of capital repayment to the shareholder.

• Irredeemable Preference Shares:

These shares are not subject to redemption and remain as long as the company exists.

• Convertible Preference Shares:

These shares can be converted into equity shares at a specified time and under specified conditions.

• Non-Convertible Preference Shares:

These shares cannot be converted into equity shares, and the shareholder will continue to hold preference shares for the duration.

The formation of a public company is a long and arduous process. First, the company is floated by its promoters, and the process of gathering financial backing begins. The promotion of a company is the very first step in this long process.

Promotion of a Company

It is the first stage in the formation of a company. It begins with a person or a group of persons having thought of or conceived a possible future business opportunity and then taking an initiative to give it a practical shape by way of forming a company. Such a person or a group of persons who proceed to form a company are known as promoters of the company.

Promoters not only conceive a business opportunity but also analyze its prospects and bring together the men, materials, machinery, managerial abilities and financial resources that are necessary for the formation and existence of the company.

Functions of a Promoter 

(i) Identification of Business Opportunity

The promoter first identifies a potential business opportunity. This opportunity may be regarding the production of a new product or service or making a product available through a different channel than before or production of an old product with new updated features or any other such opportunity having an investment potential.

(ii) Feasibility Studies

The promoter after having conceived a business opportunity analyzes the opportunity to see whether it is feasible, technically as well as economically. All identified business opportunities cannot be converted into real projects.

Therefore, the promoters undertake detailed feasibility studies so as to investigate all aspects of the business that they intend to begin with the help of various tools like a study of the market trend, industry trend, market survey, etc. and with the help of specialists like engineers, chartered accountants etc. A venture is only feasible when it passes all the three below mentioned tests.

• Technical feasibility: Sometimes an idea may be good and unique but technically not possible to execute because the required raw material or technology may not be easily available. Every business requires funds.
• Financial feasibility: Sometimes it may not be feasible to arrange a large amount of funds needed for the business in the limited available means. Also, financial institutions may hesitate to grant huge amounts of loan for the new businesses.
• Economic feasibility: A business opportunity may be technically and financially feasible but not economically feasible. It may not be a profitable venture or may not yield enough profits. In such a case, the promoters refrain from starting the business.

(iii) Name Approval

Once the promoters have decided to launch a company next step is to select a name for the company and get it registered with the registrar of companies of the state in which the registered office of the company is to be situated. An application with three names, in the order of their priority, is filed with the registrar to get the name approved.

(iv) Fixing up Signatories to the Memorandum of Association

The promoters decide upon the members who will be signing the Memorandum of Association of the proposed company. Usually, the signatories of the memorandum are the first Directors of the Company. However, the written consent of the persons signing the memorandum is required to act as Directors and to take up the qualification shares in the company.

(v) Appointment of Professionals

Promoters are also required to appoint certain professionals. These professionals help them in the preparation of necessary documents that are required to be filed with the Registrar of Companies such as mercantile bankers, auditors, lawyers, etc.

(vi) Preparation of Necessary Documents

The promoters are required to prepare necessary legal documents that have to be submitted to the Registrar of the Companies for getting the company registered. These documents are return of allotment, Memorandum of Association, Articles of Association, consent of Directors and statutory declaration.

Stages of Promotion

1. Discovery of an Idea:

When a person or persons get an idea that there is the possibility of starting a new business to take advantage of the untapped natural resources or a new invention, discovery of some business opportunities begins.

Such an idea may also be to start a business unit to supply the product at a lower price by breaking the monopoly of existing concern in a particular line of business or to expand an existing concern by converting partnership into private limited company or into public limited company or by combining some going concerns.

But the promoter cannot go ahead immediately after such an idea strikes him. When a person or persons called promoters, understand that there is a possibility of starting some business concern, the idea is said to have been conceived.

2. Detailed Investigation:

Before money is invested to exploit the idea conceived through a detailed investigation of commercial feasibility of idea with reference to sources of supply, extent of demand, present and potential competition, the amount of capital necessary etc. is absolutely essential. The idea must be put to “the rigid test of cold fact of costs and inflexible law of supply and demand.”

For this purpose, promoters have to acquire the services of experts like engineers, values, accountants, statisticians, marketing experts etc. who prepare a report on the position of the market, present and potential competition, amount required for the fixed assets like land, building, machinery, furniture etc.

The report would also include the survey of supply positions of raw material, labour, transport facilities and other relevant items of expenditure. Such an investigation gives the critical appraisal of the idea conceived and reveals whether the idea is commercially feasible or not.

3. Assembling:

After a detailed investigation of the proposition has been made, the promoter decides whether he wants to take the risk of promotion and decide upon a plan of capitalisation. After this he starts to assemble the proposition.

By assembling we mean projecting the fundamental idea, securing all the property needed by enterprise and making contract with all those who are selected to file the chief management positions.

4. Financing the Proposition:

The promoter decides about the capital structure of a company. First of all the requirements of finances are estimated and after that the sources from which this money will come are determined. The financial requirements of short period and long period are estimated so that capital figures may be presented in the Memorandum of Association of a company.