Tag: Director’s Duties

The income from capital gains is not an income which accrues or arises from day-to-day during a specific period but it arises at fixed point of time, namely, on the date of the transfer of a capital asset. Specifically, the income from capital gains is the amount by which the sale price of a capital asset, net of any expense incurred in connection with the sale of the asset, exceeds the acquisition cost of the capital asset. The taxation of capital gains is justified by the taxation policy and law on the premise that capital gains increases the ‘ability to pay’ capacity of the person receiving such a gain.

The provisions related to taxation of capital gains were first introduced in 1947 and then in 1956 and then said section 12B in Income tax Act, 1922 was retained as such in the relevant provisions in Income tax Act, 1961.

Charging sections – Sections 45, 46 and 46A

The charging section explains the subject matter of taxation. Thus, there is one charging section for each head of income for salaries, income from house property, business income and income from other sources. However, for capital gains, there are three independent and separate charging sections:

(i) Section 45: Capital gains

(ii) Section 46: Capital gains on distribution of assets by companies in liquidation

(iii) Section 46A: Capital gains on purchase by company of its own shares or other securities

Section 45 is the general provision while sections 46 and 46A are special provisions.

Incomes to be taxed under the head, ‘Capital Gains’

Thus, the following incomes are taxable as ‘capital gains’:

Sr. No.	Particulars	Section
(1)	Any profits and gains arising from the transfer of a capital asset effected in the previous year.	Section 45(1) to (5)
(2)	Any profits and gains arising from the receipt of any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action taken by an enemy or in combating an enemy.	45(1A)
(3)	Capital gains in respect of any money or other assets received by shareholder of a company from the company on its liquidation	46(2)
(d)	Difference between (i) value of consideration received by shareholder or holder of specified securities from company on buyback of its own shares or other specified securities; and (ii) cost of acquisition	46A

The situs/location of capital asset matters only for non-resident assessees and not to others. In the cases of Non-resident assessees, if capital asset located outside India is transferred outside India and sale proceeds are received outside India, no taxability to capital gains arises in view of section 5 of the Act. Such assessees will be liable to be taxed under section 9(1) (i) in respect of capital gains accruing or arising “through the transfer of any capital asset situate in India”.

Important Definitions in capital gains

Sr. No.	Term	Definition	Exceptions and remarks
1	Capital Asset	A capital asset means property of any kind held by an assessee, whether or not connected with his business or profession Any securities held by an FII	Assets Listed: (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art (g) Land other than agricultural land (h) Rights in a company
2			Exclusions: (i) any stock in trade (ii) movable assets for personal use (iii) agricultural land in India (iv) Gold bonds issued by GoI (v) Special bearer bonds (vi) Gold Deposit Bonds
2	Agricultural land	Land not situated within municipal jurisdiction or Cantt. Board and having population of more than 10000 Within 2 kms of municipal limits of jurisdiction with a population 10000>100000 and 6 kms for jurisdiction with population 100000>1000000 and 8kms for population >1000000	This amendment is applicable from A Y 2014-15 and the distance from municipal limits has to be measured aerially and not on the ground.
3	Transfer	Sale, exchange or relinquishment of the asset Extinguishment of rights in the asset Compulsory acquisition under the law Conversion of asset into stock in trade Maturity or redemption of a zero coupon bond Part performance of a contract Enjoyment of a property through acquisition of shares
	Indexed Cost of acquisition	an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;	From A Y 2018-19, the year 1981 shall be replaced by 2000
	Indexed Cost of any improvement	An amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place
	Cost Inflation Index	Such Index as the Central Government may, having regard to seventy-five per cent of average rise in the (Consumer Price Index (urban)) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf

Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

Transactions which are not regarded as transfer [Section 47]

Following transactions shall not be regarded as transfer (subject to certain condition). Hence, following transaction shall not be charged to capital gains:

Section	Particulars
46(1)	Distribution of asset in kind by a company to its shareholders at the time of liquidation
47(i)	Distribution of capital asset on total or partial partition of HUF
47(iii)	Transfer of capital asset under a gift or will or an irrevocable trust
47(iv)	Transfer of capital asset by a company to its wholly owned subsidiary company
47(v)	Transfer of a capital asset by a wholly owned subsidiary company to its holding company
47(vi)	Transfer of capital assets in a scheme of amalgamation
47(via)	Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of the two foreign companies
47(viab)	Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation (subject to conditions)
47(viaa)	Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution
47(vib)	Transfer of capital assets by the demerged company to the resulting company in a demerger
47(vic)	Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company
47(vica)	Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization.
47(vicb)	Any transfer of capital asset (being shares) held by a shareholder in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any shares in the successor co-operative bank in a scheme of business reorganization
47(vicc)	Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a demerged foreign company to resulting foreign company in case of demerger (subject to conditions)
47(vid)	Transfer or issue of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger
47(vii)	Allotment of shares in amalgamated company in lieu of shares held in amalgamating company
47(viia)	Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident
47(viiaa)	Any transfer made outside India, of a capital asset (being rupee denominated bond of an Indian company issued outside India) by a non-resident to another non-resident
47(viiab)	Any transfer of following capital assets by a non-resident on a recognised stock exchange located in any International Financial Services Centre: a) Bond or GDR b) Rupee Denominated Bond of an Indian Co. c) Derivative d) Such other Securities as may be prescribed.
47(viib)	Transfer of capital assets (being a Government security carrying periodic payment of interest) outside India through an intermediary dealing in settlement of securities by a non-resident to another non- resident
47(viic)	Redemption of capital asset being sovereign gold bond issued by RBI under the Sovereign Gold Bond Scheme, 2015
47(ix)	Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government, University, National museum, etc.
47(x)	Transfer by way of conversion of bonds or debentures into shares
47(xa)	Transfer by way of conversion of bonds [as referred to in section 115AC(1)(a)] into shares or debentures of any company
47(xb)	Any transfer by way of conversion of preference shares into equity shares
47(xi)	Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company
47(xii)	Transfer of land by a sick industrial company which is managed by its workers’ co-operative
47(xiii)	Transfer of a capital asset by a firm to a company in the case of conversion of firm into company
47(xiiia)	Transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India
47(xiiib)	Transfer of a capital asset by a private company or unlisted public company to an LLP, or any transfer of shares held in the company by a shareholder, in the case of conversion of company into LLP
47(xiv)	Transfer of a capital asset to a company in the case of conversion of proprietary concern into a company
47(xv)	Transfer involved in a scheme of lending of securities
47(xvi)	Transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Government
47(xvii)	Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor
47(xviii)	Transfer of units of a mutual fund pursuant to consolidation of two or more schemes of equity oriented mutual fund or of two or more schemes of a mutual fund other than equity oriented mutual fund
47(xix)	Transfer of units of a mutual fund from one plan to another pursuant to consolidation of plans within scheme of mutual funds.

Full Value of Consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of consideration.

However, in the following cases “full value of the consideration” shall be determined on notional basis as per the relevant provisions of the Income-tax Act, 1961:

S. No.	Nature of transaction	Section	Full Value of Consideration
1.	Money or other asset received under any insurance from an insurer due to damage or destruction of a capital asset	45(1A)	Value of money or the FMV of the asset (on the date of receipt)
2.	Conversion of capital asset into stock-in-trade	45(2)	FMV of the capital asset on the date of conversion
3.	Transfer of capital asset by a partner or member to firm or AOP/BOI, as the case may be, as his capital contribution	45(3)	Amount recorded in the books of accounts of the firm or AOP/BOI as the value of the capital asset received as capital contribution
4.	Distribution of capital asset by Firm or AOP/BOI to its partners or members, as the case may be, on its dissolution	45(4)	FMV of such asset on the date of transfer
5.	Money or other assets received by share- holders at the time of liquidation of the company	46(2)	Total money plus FMV of assets received on the date of distribution less amount assessed as deemed dividend under section 2(22)(c)
6.	Buy-back of shares and other specified securities by a company	46A	Consideration paid by company on buyback of shares or other securities would be deemed as full value of consideration. The difference between the cost of acquisition and buy-back price (full value of consideration) would be taxed as capital gain in the hands of the shareholder. However, in case of buy-back of shares by a domestic company (whether listed* or unlisted), the company shall be liable to pay additional tax at the rate of 20% under section 115QA on the distributed income (i.e., buy-back price as reduced by the amount received by the company for issue of such shares). Consequently, capital gain arising in hands of shareholder shall be exempt by virtue of section 10(34A) in such cases. *With effect from 05/07/2019, section 115QA has been amended to levy additional tax on buy back of shares by listed companies as well. Consequently, section 10(34A) has also been amended to exempt income arising in hands of shareholder on account of buy back of shares by listed companies. x
7.	Shares, debentures, warrants (‘securities’) allotted by an employer to an employee under notified Employees Stock Option Scheme and such securities are gifted by the concerned employee to any person	Fourth Proviso to Section 48	Fair Market value of securities at the time of gift
7A.	Conversion of capital asset into stock-in-trade	49	FMV of the inventory as on the date of conversion
8.	In case of transfer of land or building, if sale consideration declared in the conveyance deed is less than the stamp duty value	50C	The value adopted or assessed or assessable by the Stamp Valuation Authority shall be deemed to be the full value of consideration. However, no such adjustment is required to be made if value adopted for stamp duty purposes does not exceed 110% of the sale consideration. Note: Where the date of agreement (fixing the amount of consideration) and the date of registration for the transfer of property are not the same, the value adopted or assessed or assessable by Stamp Valuation Authority on the date of agreement may be taken as full value of consideration.
8A.	Where consideration for transfer of unquoted shares is less than the Fair Market Value	50CA	The Fair Market Value (so determined in prescribed manner) shall be deemed to be the full value of consideration Note: The Board may prescribe transactions undertaken by certain class of persons to which the provisions of Section 50CA shall not be applicable. (w.e.f. Assessment Year 2020-21)
9.	If consideration received or accruing as a result of transfer of a capital asset is not ascertainable or cannot be determined	50D	FMV of asset on the date of transfer

Cost of Acquisition

Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property.

However, in cases given below, cost of acquisition shall be computed on notional basis:

S. No.	Particulars	Notional Cost of Acquisition
1.	Additional compensation in the case of compulsory acquisition of capital assets	Nil
2.	Assets received by a shareholder on liquidation of the company	FMV of such asset on the date of distribution of assets to the shareholders
3.	Stock or shares becomes property of taxpayer on consolidation, conversion, etc.	Cost of acquisition of such stock or shares from which such asset is derived
4.	Allotment of shares in an amalgamated Indian co. to the shareholders of amalgamating co. in a scheme of amalgamation	Cost of acquisition of shares in the amalgamating co.
5.	Conversion of debentures into shares	That part of the cost of debentures in relation to which such asset is acquired by the assessee
5A.	Conversion of preference shares into equity shares	The part of the cost of preference shares in relation to which such asset is acquired by the assessee.
6.	Allotment of shares/securities by a co. to its employees under ESOP Scheme approved by the Central Government	a) If shares are allotted during 1999-2000 or on or after April 1, 2009, FMV of securities on the date of exercise of option b) If shares are allotted before April 1, 2007 (not being during 1999-2000), the amount actually paid to acquire the securities c) If shares are allotted on or after April 1, 2007 but before April 1, 2009, FMV of securities on the date of vesting of option (purchase price paid to the employer or FBT paid to employer shall not be considered)
6A.	Listed Equity Shares or Units of Equity Oriented Funds or Units of Business Trust as referred to in Section 112A acquired before February 1, 2018.	Higher of : (i) Cost of acquisition of such asset; and (ii) Lower of: (A) The fair market value of such asset; and (B) The full value of consideration received or accruing as a result of transfer of such asset. Note: For meaning of ‘Fair market Value’ refer Explanation to Section 55(2)(ac).
7.	Property covered by section 56(2)(vii) or (viia) or (x)	The value which has been considered for the purpose of Section 56(2)(vii) or (viia) or (x)
8.	Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger	Cost of acquisition of shares in demerged company ? Net book value of assets transferred in demerger ? Net worth of the demerged company immediately before demerger
9.	Cost of acquisition of original shares in demerged company after demerger	Cost of acquisition of such shares minus amount calculated above in point 8.
10.	Cost of acquisition of assets acquired by successor LLP from predecessor private company or unlisted public company at the time of conversion of the company into LLP in compliance with conditions of Section 47(xiiib)	Cost of acquisition of the assets to the predecessor private company or unlisted public company
11.	Cost of acquisition of rights of a partner in a LLP which became the property of the taxpayer due to conversion of a private company or unlisted public company into the LLP	Cost of acquisition of the shares in the co. immediately before conversion
12.	Depreciable assets covered under Section 50	Opening WDV of block of assets on the first day of the previous year plus actual cost of assets acquired during the year which fall within the same block of assets
13.	Depreciable assets of a power generating unit as covered under Section 50A*	WDV of the asset minus terminal depreciation plus balancing charge
14.	Undertaking/division acquired by way of slump sale as covered under Section 50B	Net worth of such undertaking
15.	New asset acquired for claiming exemptions under sections 54,  54B, 54D, 54G or 54GA if it is transferred within three years	Actual cost of acquisition  minus exemption claimed under these sections
16.	Goodwill of business or trade mark or brand name associated with business or right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy right, stage permits or loom hours	a) If these assets were acquired by gift, will, etc., under section 49(1) and the previous owner had purchased these assets: Cost of acquisition to the previous owner b) If the owner has purchased these assets: Actual cost of acquisition c) If these assets are self-generated: Nil
17.	Right shares	Amount actually paid by assessee
18.	Right to subscribe to shares (i.e., right entitlement)	Nil
19.	Bonus shares	a) If allotted to the assessee before April 1, 1981: Fair market value on that date b) In any other case: Nil
20.	Allotment of equity shares and right to trade in stock exchange, allotted to members of stock exchange under a scheme of demutualization or corporatization of stock exchanges as approved by SEBI	a) Cost of acquisition of shares: Cost of acquisition of original membership of the stock exchange b) Cost of acquisition of trading or clearing rights of the stock exchange: Nil
21.	Capital asset, being a unit of business trust, acquired in consideration of transfer as referred to in section 47(xvii)	Cost of acquisition of shares as referred to in section 47(xvii) [applicable from AY 2015-16]
	Units allotted to an assessee pursuant to consolidation of two or more scheme of a mutual fund as referred to in Section 47(xviii)	Cost of acquisition of such units shall be the cost of acquisition of units in the consolidating scheme of the mutual fund
	Shares in a company acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC(1)(b)	Cost of acquisition of such shares shall be calculated on the basis of the price prevailing on any recognized stock exchange on the date on which a request for such redemption was made.
24.	Any other capital asset:	a) If it became property of taxpayer before April 1, 2001 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner or FMV as on April 1, 2001, whichever is higher. Note: The FMV on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available. (this amendment will be applicable w.e.f. AY 2021-22) b) If it became property of taxpayer before April 1, 2001 : Cost of acquisition or FMV as on April 1, 2001, whichever is more Note: The FMV on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available. (this amendment will be applicable w.e.f. AY 2021-22) c) If it became property of taxpayer after April 1, 2001 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner d) If it became property of taxpayer after April 1, 2001 : Actual cost of acquisition

* Terminal Depreciation/Balancing Charge:

1. a) Balancing Charge = Sales Consideration – WDV of the depreciable asset
2. b) Terminal Depreciation = WDV – Sales Consideration

New issue can be made in any of the following ways:

1) Public Issue through Prospectus

2) Through offer for sale

3) Private placement

4) Right Issue

5) Issue of bonus shares

6) IPOs through secondary market

7) Book-building

8) Stock option

1. Public Issue through Prospectus: company issue a prospectus which is an invitation for subscription by the investing public. It is a direct offer by the company to the public. Normally the shares of new company are issued at par and shares of existing company can be issued at premium. Prospectus contains all the details of the company and its promoters, prospects and risk associated.

Key Features simple way of issuing shares.

• Wide distribution of share is possible.
• floatation costs, administrative costs, publicity costs and
• Legal costs are high.

2. Offer for Sale: The Company does not offer shares directly to the public, but through intermediaries, such as, issuing houses or stock broker firms. Sale of securities done in two stages. In the first stage, the issuing company makes an en bloc sale of securities to the issue house at an agreed fixed price. The second stage involves re-issue of securities by issue houses to the ultimate investor at higher price. The difference between the sale and purchase price of issue house is called as turn. All the costs related with the issue like underwriting, advertisement etc. have to meet by issuing houses, out of the turn.

Major benefit of the method is issuing company is free of hassles involved in issuing shares. 

3. Private Placement: Under this method, the securities are acquired by the issuing company at an agreed price and then these are placed only with their investor-clients, both individual and institutional investors, at a higher price and hence earning turn. In this case no underwriting is required. The advantage of this method is no advertisement costs or no underwriting fee is to be paid.

Advantages SEs requirement regarding prospectus is also less stringent.

On the other hand, the major limitation of this method is – fear of issue getting concentrated in few hands. This method is more common for Government Owned Institutions.

4. Right Issue: A fresh issue of shares by an existing company to its existing shareholders in proportion to the number of shares already held by them is called as right issue. Only a company whose shares are already listed can make right issue. It is offered on pro-rata basis.

Major advantage of this method is economical and do not disturb the existing shareholding pattern. Limitations are only existing company can issue it, shares may get concentrated in few hands and there may be conflict between the rights of existing shareholders and overall societal considerations of diffusion of share ownership for promoting dispersal of wealth and economic power. 

5. Bonus Shares: It does not result in raising fresh capital. It is merely a conversion of existing reserves and surpluses into share capital. It represents just a book entry subject to certain rules and regulation. Total resource base of the company does not change nor it results into entry of new shareholders
6. IPOs through Secondary Market: In October 1999, SEBI accepted the proposal for marketing IPOs through the secondary market, i.e. using existing infrastructure. Here the brokers place orders on behalf of clients through a special window on trading terminal. After finalisation of allocation, brokers are advised to inform the allottees. Successful allottees submit the application form and the amount payable through the broker to the clearing house. Subsequently the share certificates would be delivered to the investors by crediting the depositories account in the name of investor.

The major advantage of the method is investors need not to park their funds until allotment. 

7. Book Building: Most commonly used method now-a-days. In this case the issuer company does not directly issue shares to the public but invites bids from public. Therefore this method is also called as “Price Discovery Through book Building Process”. In this method the bids are collected from investors at various prices which are above or equal to the floor price. The offer price is determined after the bid closing date. In this case the issuer company advertise about the issue in the national newspaper. The advertisement will have the information about floor price, price band and cap price. Floor price is the minimum price of the issue and cap price is the maximum price, and the spread between these two prices are called as price band. Here the cap price must not be more than 120 percent of the floor price. The book shall remain open minimum for three days. The price band can be revised also and in that case the bidding process can be extended to three more days subject to total bidding period not exceeding ten days. The actual discovered issue price can be any price between the price band.

The issue price is called as “Cut-Off Price”, which is decided by issuer and lead managers looking at the demand of issue in the market. As per SEBI guidelines, the basis of allotment should be completed within 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account /allotment advice and dispatch of refund order needs to be completed.

So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not. It should take around three weeks, after the closure of book, to get listed the shares on SEs. The role of Registrar to an Issue is to finalize the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent.

The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. Specially for book building process the lead managers are also called as “Book Running Lead Managers (BRLMs)”.

According to the disclosure guidelines of SEBI, the issuer company have to give all details about the issue like – the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. The prospectus is called as “Red Herring Prospectus (RHP)”, which also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company. the RHP also contains about the information regarding listing of shares on the SEs. The regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.

If shares are issued first time in the market then it is called as “Initial Public Offer (IPO)”, otherwise for an existing company whose shares are already listed with SE, the further issue is called as “Follow-on Public Offer (FPO)”. 

Eligibility Norms: Any company issuing security through the offer document has to satisfy the following conditions:

A company making a public issue of securities has to file a draft prospectus with SEBI, through eligible merchant banker, at least 21 days prior to the filing of prospectus with Registrar of the Companies (RoCs). Filing of application is mandatory for listed company even in case of right issue, if the issue amount is more than Rs 50 lakhs (including premium).

Moreover listing of securities to the SEs is mandatory.

Prior agreement with depositories regarding dematerialisation of share certificates is also important.

A company can not make public issue if it has been prohibited by SEBI.

An unlisted company can also make a public issue at a fixed price or by book building method provided:

(i) it has pre-issue net worth of not less than Rs1 crore in 3 out of the preceding 5 years and has minimum net worth in immediately preceding two years.

(ii) it has a track record of distributable profits for at least 3 out of immediately preceding 5 years

(iii) the issue size should not exceed five times its pre-issue net worth. If the company, listed or unlisted, does not meet the above criteria then the issue have to be compulsorily made through book building route and in such case, 60% of the issue size will have to be allotted to Qualified Institutional Buyers (QIBs)

Failing which the full subscription monies shall be refunded. Infrastructure companies are exempt from the eligibility norms if their project has been appraised by PFIs or Infrastructure Development Finance Corporation. Banks and right issues of listed companies are also exempt from the eligibility norms. The companies eligible to make public issues can freely price their securities subject to disclosure norms of SEBI. Contribution of Promoters and Lock-In: The promoters’ contribution in case of public issue of unlisted companies should not be less than 20% of the post-issue capital. In case of public issues of listed companies, promoter should contribute to the extent of 20% of the proposed issue or should ensure post-issue holding to the extent of 20 % of the post-issue capital.

The requirement of promoters’ contribution is not required in case of:

(i) public issue of securities which has been listed in the SE for at least 3 years and has track record of dividend payment for at least 3 immediate preceding years.

(ii) companies where no identifiable promoter or promoter group exists.

(iii) right issues. 

Listing of Securities: Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading.

Listing Agreement: The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange.

Delisting of Securities: The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

Foreign currency cash flows:

• Record cash flows (those cash flows which arise from transactions in foreign currency) in functional currency.
• Cash flows of a foreign subsidiary shall be translated at the exchange rates between functional currency and foreign currency.
• Exchange rate at the date of cash flows shall be applied. Ind AS 21 permits the use of exchange rate that approximates the actual rate.
• Unrealized gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities.

Change in ownership (no such concept under AS 3):

1. Cash flows from obtaining / losing control in businesses (including subsidiary) shall be presented separately and classified as Investing activity and disclose the following:

• Total amount of consideration
• Portion of consideration consisting of cash and cash equivalents
• Amount of cash and cash equivalent over which control is obtained / lost
• Assets and liabilities (other than cash and cash equivalent) over which control is obtained / lost summarised in each major category.

2. Cash flow effects of losing control are not deducted from those of obtaining control.
3. Cash paid / received as consideration is reported net of cash and cash equivalents acquired / disposed on account of such transaction.
4. Cash flows arising from changes in ownership in subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities, unless subsidiary is held by investment entity.

Non-cash Transactions:

Many investing and financing activities do not impact cash flows although they do affect the capital and asset structure of an entity. These shall be excluded from the statement of cash flows. Examples:

• Acquisition of assets by means of a finance lease;
• Conversion of debt to equity.
• Issue of bonus shares
• Conversion of term loan into equity shares

Such transactions shall be disclosed in the financial statements indicating investing / financing activity.

Changes in liabilities arising from financing activities (It was an amendment in Ind AS 7 and this provision was not there in AS 3):
• An entity shall provide the following disclosures to evaluate changes in liabilities arising from financing activities including both changes arising from cash flows and non-cash changes:
o changes from financing cash flows
o changes arising from obtaining or losing control of subsidiaries or other businesses;
o the effect of changes in foreign exchange rates;
o changes in fair values; and
o other changes.
• It also applies to changes in financial assets (for example, assets that hedge liabilities arising from financing activities) if cash flows from those financial assets included in cash flows from financing activities.
• Disclosure requirement can be fulfilled by: Reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities.
• If an entity discloses the same with disclosures of changes in other assets and liabilities, it shall disclose financing activities separately.
Disclosures:
• Components of cash and cash equivalents and reconciliation with amount appearing in balance sheet
• Policy adopted in determining composition of cash and cash equivalents
• Significant cash and cash equivalent that are not available for use by the entity (with commentary by management).
Examples: balance in unpaid dividend account, bank balance subject to legal restrictions, earmarked balances, bank balance for share application money / pending allotment of shares.
• Additional information (optional but standard encouraged the following disclosure):
o amount of undrawn borrowing facilities (indicating any restrictions on use)
o cash flows representing increases in operating capacity separately from cash flows required to maintain operating capacity;
o cash flows from operating, investing and financing activities of each reportable segment (same is required by Ind AS 108).

Demat System (short for Dematerialization system) refers to the process of converting physical share certificates into electronic form, enabling investors to hold and trade shares digitally through a dematerialized account. Introduced in India in 1996, the dematerialization process revolutionized the stock market by eliminating the need for physical certificates, streamlining the trading process, and making securities transactions safer, faster, and more efficient. The demat system is managed by depositories such as the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), which function under the regulation of the Securities and Exchange Board of India (SEBI).

Key Features of the Demat System

• Electronic Form of Securities:

In the demat system, shares, bonds, debentures, and other securities are held in electronic form, eliminating the need for physical certificates. This offers ease of access and ensures that investors can quickly buy, sell, and transfer securities.

• Demat Account:

Similar to a bank account for money, a demat account is an electronic account where securities are stored. Each investor must open a demat account with a Depository Participant (DP), such as a bank, brokerage firm, or financial institution. The DP acts as an intermediary between the investor and the depository (NSDL or CDSL).

• Speed and Efficiency:

Dematerialization process allows for faster trading and settlement of securities. Before dematerialization, the physical transfer of shares took weeks or even months, involving paperwork and delays. Now, transactions are completed in a few days, with real-time updates.

• Safety and Security:

Holding securities in dematerialized form reduces the risk of theft, loss, forgery, and damage associated with physical certificates. The electronic form ensures greater transparency, and investors can track their holdings online through their demat account.

• No Stamp Duty:

No stamp duty is charged on the transfer of dematerialized securities, reducing transaction costs for investors.

• Nomination Facility:

Investors can assign a nominee to their demat account, ensuring that in the event of the account holder’s death, the securities are smoothly transferred to the designated individual.

• Multiple Securities in One Account:

In a demat account, an investor can hold various types of securities, such as shares, bonds, mutual funds, and government securities, in a single account, which offers greater convenience.

Process of Dematerialization:

Dematerialization is the process of converting physical share certificates into electronic form.

1. Opening a Demat Account:

An investor must first open a demat account with a Depository Participant (DP) by filling out an account opening form and submitting the required Know Your Customer (KYC) documents such as proof of identity, proof of address, and a PAN card.

DP provides the investor with a unique Beneficiary Owner Identification (BO ID) number, which is used to identify the account holder in all transactions.

2. Submission of Physical Certificates:

   • After opening a demat account, the investor submits the physical share certificates they wish to dematerialize to the DP along with a Dematerialization Request Form (DRF).
   • The DRF includes details such as the company’s name, the number of shares, and the certificate numbers.

3. Verification and Approval:

   • The DP sends the physical certificates to the relevant company’s Registrar and Transfer Agent (RTA) for verification.
   • Once verified, the RTA approves the dematerialization request, and the physical certificates are canceled.

4. Credit to the Demat Account:

   • After the RTA’s approval, the depository (NSDL or CDSL) credits the corresponding number of shares to the investor’s demat account.
   • The investor receives a notification confirming that the shares have been successfully dematerialized and credited to their account.

5. Trading of Dematerialized Securities:

After dematerialization, the shares can be bought, sold, and transferred electronically through the stock exchanges. Investors can monitor their holdings and transactions online, with settlement occurring in a shorter time frame (T+2 days, where T is the trading day).

Advantages of the Demat System:

• Elimination of Physical Risks:

In the physical form, share certificates were vulnerable to theft, forgery, loss, and damage. The demat system eliminates these risks by holding securities electronically, ensuring safety and security.

• Reduction in Paperwork:

Demat system removes the need for paperwork related to the issuance, transfer, and maintenance of share certificates. This reduces administrative burdens and streamlines the entire process for companies and investors alike.

• Faster Settlement of Trades:

In the pre-demat era, transferring shares involved a lengthy process of physical delivery, verification, and approval, taking several weeks. Now, trades are settled electronically within two days (T+2 settlement), ensuring faster and more efficient transactions.

• Lower Transaction Costs:

By eliminating physical transfers, the demat system reduces costs associated with paperwork, stamp duties, courier charges, and handling fees. Investors benefit from lower transaction costs, making trading more cost-effective.

• Enhanced Liquidity:

Dematerialization has enhanced liquidity in the stock market. Shares held in electronic form can be quickly and easily traded, increasing market efficiency and providing investors with greater flexibility.

• Access to a Broader Range of Securities:

Through a demat account, investors can hold a variety of securities, such as equity shares, bonds, debentures, government securities, mutual funds, and exchange-traded funds (ETFs), all in one place, offering convenience and diversification.

• Transparency and Monitoring:

Investors can easily monitor their holdings, transactions, and portfolio through online access to their demat account. Real-time updates ensure transparency in the management of securities.

• Simplified Pledging of Securities:

Securities held in a demat account can be pledged for loans, offering liquidity to investors. The dematerialized form makes it easier to pledge shares with financial institutions for credit or loan purposes.

Disadvantages of the Demat System:

• Technological Dependency:

Demat system relies on technology, and any system failures or glitches can disrupt trading and access to accounts. Cybersecurity threats and hacking risks are also present in the digital environment.

• Charges and Fees:

While the demat system reduces some costs, investors must pay account maintenance fees, transaction charges, and other service fees to the DP. These charges can add up over time, especially for small investors.

• Loss of Paper Certificates:

Some investors may still prefer holding physical certificates for sentimental reasons or for tangible proof of ownership. The transition to a demat system eliminates the physical representation of ownership.

• Fraud Risks:

Although the Demat system reduces physical fraud risks, it is not immune to other types of fraud, such as unauthorized access to demat accounts, hacking, or insider fraud.

Legal Framework for the Demat System in India

• Depositories Act, 1996:

This act provides the legal framework for the establishment of depositories and facilitates the dematerialization of securities.

• SEBI (Depositories and Participants) Regulations, 1996:

These regulations lay down the rules for the functioning of depositories and DPs.

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Companies listed on stock exchanges must ensure that their securities are available for trading in dematerialized form.

Understanding your roles and responsibilities should be your first task when appointed. The board of directors is appointed to act on behalf of the shareholders to run the day to day affairs of the business. The board are directly accountable to the shareholders and each year the company will hold an annual general meeting (AGM) at which the directors must provide a report to shareholders on the performance of the company, what its future plans and strategies are and also submit themselves for re-election to the board.

The objects of the company are defined in the Memorandum of Association and regulations are laid out in the Articles of Association.

The board of directors’ key purpose is to ensure the company’s prosperity by collectively directing the company’s affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. In addition to business and financial issues, boards of directors must deal with challenges and issues relating to corporate governance, corporate social responsibility and corporate ethics.

It is important that board meetings are held periodically so that directors can discharge their responsibility to control the company’s overall situation, strategy and policy, and to monitor the exercise of any delegated authority, and so that individual directors can report on their particular areas of responsibility.

Every meeting must have a chair, whose duties are to ensure that the meeting is conducted in such a way that the business for which it was convened is properly attended to, and that all those entitled to may express their views and that the decisions taken by the meeting adequately reflect the views of the meeting as a whole. The chair will also very often decide upon the agenda and might sign off the minutes on his or her own authority.

Individual directors have only those powers which have been given to them by the board. Such authority need not be specific or in writing and may be inferred from past practice. However, the board as a whole remains responsible for actions carried out by its authority and it should therefore ensure that executive authority is only granted to appropriate persons and that adequate reporting systems enable it to maintain overall control.

The chairman of the board is often seen as the spokesperson for the board and the company.

Appointment of directors

The ultimate control as to the composition of the board of directors rests with the shareholders, who can always appoint, and more importantly, sometimes dismiss a director. The shareholders can also fix the minimum and maximum number of directors. However, the board can usually appoint (but not dismiss) a director to his office as well. A director may be dismissed from office by a majority vote of the shareholders, provided that a special procedure is followed. The procedure is complex, and legal advice will always be required.

Roles of the board of directors

The roles of the board of directors include:

Establish vision, mission and values

• Determine the company’s vision and mission to guide and set the pace for its current operations and future development.
• Determine the values to be promoted throughout the company.
• Determine and review company goals.
• Determine company policies

Set strategy and structure

• Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company.
• Determine strategic options, select those to be pursued, and decide the means to implement and support them.
• Determine the business strategies and plans that underpin the corporate strategy.
• Ensure that the company’s organizational structure and capability are appropriate for implementing the chosen strategies.
• PEST and SWOT analyses
• Determining strategic options
• Strategies and plans

Delegate to management

• Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans.
• Determine monitoring criteria to be used by the board.
• Ensure that internal controls are effective.
• Communicate with senior management.

Exercise accountability to shareholders and be responsible to relevant stakeholders

• Ensure that communications both to and from shareholders and relevant stakeholders are effective.
• Understand and take into account the interests of shareholders and relevant stakeholders.
• Monitor relations with shareholders and relevant stakeholders by gathering and evaluation of appropriate information.
• Promote the goodwill and support of shareholders and relevant stakeholders.

Responsibilities of directors

Directors look after the affairs of the company, and are in a position of trust. They might abuse their position in order to profit at the expense of their company, and, therefore, at the expense of the shareholders of the company.

Consequently, the law imposes a number of duties, burdens and responsibilities upon directors, to prevent abuse. Much of company law can be seen as a balance between allowing directors to manage the company’s business so as to make a profit, and preventing them from abusing this freedom.

Directors are responsible for ensuring that proper books of account are kept.

In some circumstances, a director can be required to help pay the debts of his company, even though it is a separate legal person. For example, directors of a company who try to ‘trade out of difficulty’ and fail may be found guilty of ‘wrongful trading’ and can be made personally liable. Directors are particularly vulnerable if they have acted in a way which benefits themselves.

• The directors must always exercise their powers for a ‘proper purpose’ – that is, in furtherance of the reason for which they were given those powers by the shareholders.
• Directors must act in good faith in what they honestly believe to be the best interests of the company, and not for any collateral purpose. This means that, particularly in the event of a conflict of interest between the company’s interests and their own, the directors must always favour the company.
• Directors must act with due skill and care.
• Directors must consider the interests of employees of the company.

Calling a directors’ meeting

A director, or the secretary at the request of a director, may call a directors’ meeting. A secretary may not call a meeting unless requested to do so by a director or the directors. Each director must be given reasonable notice of the meeting, stating its date, time and place. Commonly, seven days is given but what is ‘reasonable’ depends in the last resort on the circumstances

Non-executive directors

Legally speaking, there is no distinction between an executive and non-executive director. Yet there is inescapably a sense that the non-executive’s role can be seen as balancing that of the executive director, so as to ensure the board as a whole functions effectively. Where the executive director has an intimate knowledge of the company, the non-executive director may be expected to have a wider perspective of the world at large.

The chairman of the board

The articles usually provide for the election of a chairman of the board. They empower the directors to appoint one of their own number as chairman and to determine the period for which he is to hold office. If no chairman is elected, or the elected chairman is not present within five minutes of the time fixed for the meeting or is unwilling to preside, those directors in attendance may usually elect one of their number as chairman of the meeting.

The chairman will usually have a second or casting vote in the case of equality of votes. Unless the articles confer such a vote upon him, however, a chairman has no casting vote merely by virtue of his office.

Since the chairman’s position is of great importance, it is vital that his election is clearly in accordance with any special procedure laid down by the articles and that it is unambiguously minuted; this is especially important to avoid disputes as to his period in office. Usually there is no special procedure for resignation. As for removal, articles usually empower the board to remove the chairman from office at any time. Proper and clear minutes are important in order to avoid disputes.

Role of the chairman

The chairman’s role includes managing the board’s business and acting as its facilitator and guide. This can include:

• Determining board composition and organisation;
• Clarifying board and management responsibilities;
• Planning and managing board and board committee meetings;
• Developing the effectiveness of the board.

Find out more about director development and training.

Shadow directors

In many circumstances, the law applies not only to a director, but to a ‘shadow director’. A shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Under this definition, it is possible that a director, or the whole board, of a holding company, and the holding company itself, could be treated as a shadow director of a subsidiary.

Professional advisers giving advice in their professional capacity are specifically excluded from the definition of a shadow director in the companies legislation.

Dividends are a portion of a company’s profits distributed to its shareholders as a reward for their investment in the company. The decision to declare dividends is made by the board of directors, but the process is governed by several legal and regulatory frameworks to ensure fairness, transparency, and adherence to corporate governance norms. In India, the declaration and distribution of dividends are primarily regulated by the Companies Act, 2013, along with rules set forth by the Securities and Exchange Board of India (SEBI) for listed companies.

Meaning and Types of Dividends:

Dividend is a return on investment for shareholders, paid from the profits of the company. It can be issued in several forms:

1. Interim Dividend:

Declared by the board of directors during the financial year before the finalization of accounts. This is typically paid out of the profits earned during the current financial year.

2. Final Dividend:

Declared at the company’s Annual General Meeting (AGM) after the financial year has ended and the accounts are finalized. It is recommended by the board but requires shareholder approval.

3. Special Dividend:

Paid in extraordinary circumstances when the company has a significant surplus of profits or cash. This dividend is not a regular payout.

4. Stock Dividend (Bonus Shares):

Instead of cash, the company issues additional shares to its shareholders in proportion to their existing holdings.

5. Scrip Dividend:

The company issues a promissory note to the shareholders, promising to pay the dividend at a later date, which can be considered a form of deferred payment.

Legal Provisions for Declaration of Dividends Under the Companies Act, 2013

The provisions governing the declaration and distribution of dividends are laid down under Section 123 of the Companies Act, 2013, along with the Companies (Declaration and Payment of Dividend) Rules, 2014.

1. Declaration of Dividend

Profit Requirement:

Dividends can only be declared out of the following:

• • Current year profits after providing for depreciation and any necessary reserves.
  • Previous year profits that have not been transferred to reserves or used for dividends earlier.
  • Government Grant: If a company has received government assistance in certain situations, this may be considered in specific circumstances.

Free Reserves:

If the company’s profits are insufficient, it can declare a dividend out of its accumulated profits or free reserves, provided that:

• • The rate of dividend does not exceed the average rate of dividends declared in the preceding three financial years.

  • The amount withdrawn from the reserves is not more than 10% of the paid-up share capital and free reserves of the company.

Interim Dividend:

The board may declare an interim dividend out of profits available after providing for depreciation. However, if the company suffers a loss up to the quarter immediately preceding the interim dividend declaration, the interim dividend cannot be declared at a rate higher than the average dividend declared during the preceding three financial years.

2. Depreciation

• The company must provide for depreciation in accordance with Schedule II of the Companies Act, 2013 before declaring dividends.
• Any dividend declared without taking into account depreciation can be considered illegal and can attract penalties for the company and its directors.

3. Transfer to Reserves

Before declaring dividends, companies are required to transfer a certain percentage of their profits to reserves, as per the discretion of the board of directors. However, the Companies Act no longer mandates a specific minimum percentage to be transferred.

4. Dividend on Preference Shares

Preference shareholders are entitled to dividends at a fixed rate before any dividends are declared for equity shareholders. The dividend for preference shares must be paid first, and any arrears of preference dividends must be cleared if applicable.

5. Payment in Cash

Dividends must be paid in cash, cheque, or electronic means. A company cannot declare dividends in kind (i.e., through assets). However, stock dividends (bonus shares) are permissible.

6. Dividend Distribution Tax (DDT)

Finance Act, 2020, abolished the Dividend Distribution Tax (DDT). Earlier, companies were required to pay tax on the dividends distributed. Now, shareholders are liable to pay tax on the dividends they receive based on their individual income tax slabs.

7. Timeframe for Payment

Once a dividend is declared at the AGM, the company must pay the dividend to the shareholders within 30 days from the date of declaration. If the company fails to do so, it attracts penalties and interest charges.

8. Unpaid or Unclaimed Dividend

• If a dividend remains unpaid or unclaimed for 30 days from the date of declaration, it must be transferred to a special Unpaid Dividend Account within 7 days of the expiration of the 30-day period.
• If the dividend remains unclaimed for seven years, it must be transferred to the Investor Education and Protection Fund (IEPF).

Process for Dividend Distribution:

1. Board Meeting:

The process begins with a board meeting where the directors review the financial performance of the company. Based on profitability and liquidity, the board decides whether to recommend a dividend to the shareholders.

2. Declaration at AGM:

In the case of a final dividend, the declaration is made at the Annual General Meeting (AGM) of the company. The shareholders must approve the dividend recommended by the board. Without this approval, the company cannot distribute the dividend.

3. Record Date:

Company must set a record date, which is the cut-off date for determining the shareholders who are entitled to receive the dividend. Only those shareholders whose names appear in the company’s register on this date are eligible for the dividend.

4. Payment of Dividend:

Dividend can be paid via cheque, demand draft, or electronic transfer. The payment must be completed within 30 days of the declaration, failing which the company is subject to penalties.

Penalties for Non-Compliance:

Failure to comply with the rules regarding dividend declaration and distribution can result in penalties for both the company and its officers.

• Imprisonment and Fines:

Under Section 127 of the Companies Act, if the company fails to pay the dividend within 30 days of its declaration, every director who is knowingly a party to this default may be punished with imprisonment for up to 2 years and a fine of ₹1,000 for each day the default continues.

• Interest:

In case of a delayed payment, the company is liable to pay interest on the unpaid dividend at the rate of 18% per annum until the payment is made.

The rate of interest is a prefix value to the debenture, say 9% Debentures and, therefore, is payable even if the company incurs a loss. It is a charge against profit. Interest payment may be subject to tax deducted at source (TDS).

Accounting Entries

Entries for interest on debentures and Tax Deducted at Source are as follows:

1. When interest is due and we ignore Tax:

Date	Particulars		Amount (Dr)	Amount (Cr)
	Interest on Debentures A/c	Dr.	XXX
	To Debentureholders’ A/c	Cr.		XXX
	(Being interest payable)

2. When interest is due and tax is deducted at source:

Date	Particulars		Amount (Dr)	Amount (Cr)
	Interest on Debentures A/c	Dr.	XXX
	To Debentureholders’ A/c	Cr.		XXX
	To TDS Payable A/c	Cr.		XXX
	(Being interest is payable on debentures and TDS)

3. On payment of interest:

Date	Particulars		Amount (Dr)	Amount (Cr)
	Debentureholders’ A/c	Dr.	XXX
	To Bank A/c	Cr.		XXX
	(Being interest paid is deposited in bank)

4. On deposit of TDS in Government Account:

Date	Particulars		Amount (Dr)	Amount (Cr)
	TDS Payable A/c	Dr.	XXX
	To Bank A/c	Cr.		XXX
	(Being TDS deposited in bank)

5. On transfer of Interest to Statement of Profit and Loss at the end of the year:

Date	Particulars		Amount (Dr)	Amount (Cr)
	Statement of Profit and Loss	Dr.	XXX
	To Interest on Debentures A/c	Cr.		XXX
	(Being the interest in debentures transferred to Statement of Profit and Loss)

 Points To Remember for Interest on Debentures:

1. Interest on Debentures is a charge against the profit of the company.
2. We calculate Interest on Debentures at a fixed rate of interest on the nominal value.
3. Interest is not payable on debentures issued as collateral security.
4. The interest rate is prefixed.
5. We need to transfer the balance in Interest on Debenturesto the Statement of Profit and Loss at the end of the year.
6. If the amount of interest accrued and due is not paid, it is known as Interest Accrued and Due or Interest Outstanding.
7. If the date of paymentof interest and accounting date is different, we will credit the Interest Accrued and Due account at the end of the year to maintain accounting record on an accrual basis.
8. We show the Interest Accrued (whether due or not) on debentures is under the head ‘Current Liabilities,’ and sub-head ‘Other Current Liabilities’

‘Underwriting’ refers to the functions of an under-writer. An under-writer may be an individual, firm or a joint stock company, performing the under-writing function. Under-writing may be defined as a contract entered into by the company with persons or institutions, called under-writers, who undertake to take up the whole or a portion of such of the offered shares or debentures as may not be subscribed for by the public. Such agreements are called ‘Under-writing agreement’.

Underwriting services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee. An underwriting arrangement may be created in a number of situations including insurance, issues of security in a public offering, and bank lending, among others. The person or institution that agrees to sell a minimum number of securities of the company for commission is called the Underwriter.

A newly formed company enters into an agreement with an under-writer to the effect that he will take up shares or Debentures offered by it to the public but not subscribed for in fully by the public. Such an agreement may become necessary when a company issues shares or debentures for the first time to the public, or subsequently when it is in need of working capital.

When the company does not receive 90 per cent of issued amount from public subscription, within 120 days from the date of opening the issue, the company cannot proceed with allotment. In such a case, the company must refund the amount of subscription. In the case of a new company, it cannot obtain a certificate to commence function.

A company is not sure whether the shares or debentures offered for subscription may be taken up by the public. There arises a risk to ensure the success of issue. Therefore, companies resort to underwriting in order to ensure that sufficient number of shares or debentures would subscribed for. Thus, risk-bearing or uncertainty bearing is an important function of an underwriter.

Thus, an underwriter is a person who undertakes to take up the whole or a portion of the shares or debentures offered by a company to the public for subscription as may not be subscribed for by the public, prior to making such an offer. The company has to pay a commission to such an underwriter. It is known as underwriting commission. It is, of course, a type of insurance against under-subscription.

Need for underwriting

Investigate your credit history. Underwriters look at your credit score and pull your credit report. They look at your overall credit score and search for things like late payments, bankruptcies, overuse of credit and more.

Order an appraisal. Your underwriter will order an appraisal to make sure that the amount that the lender offers for the home matches up with the home’s actual value.

Verify your income and employment. Your underwriter will ask you to prove your income and employment situation.

Look at your debt-to-income ratio (DTI). Your DTI is a percentage that tells lenders how much money you spend versus how much income you bring in. An underwriter examines your debts and compares them to your income to ensure you have more than enough cash flow to cover your monthly mortgage payments, taxes and insurance.

Verify your down payment and savings. The underwriter also looks at your savings accounts to make sure you have enough savings to supplement your income or to use as a down payment at closing.

Functions of a Broker in Underwriting:

Broker is a person who helps in subscribing the shares. A broker is one who finds buyers for the shares or debentures of the company and gets the brokerage on the number of shares or debentures subscribed by the public through him. Underwriter is different from a broker. An underwriter is a person who agrees to take a specified number of shares or debentures, in case, not subscribed by the public.

That is, an underwriter is liable to take up shares in case the public fails to subscribe whereas a broker is not liable. Underwriter gets underwriting commission and a broker gets brokerage. Underwriter gives a guarantee whereas a broker does the service of placing the shares.

Thus, the function of an underwriter is of great economic significance since he himself assumes the risk of uncertainty on behalf of the company making public issue of shares or debentures. A broker, on the other hand, does not assume any such risk. Underwriting acts as a sort of insurance or guarantee against the danger of not receiving minimum subscription.

Sub Underwriting:

An underwriter may himself enter into a sub-agreement with other persons, called sub- underwriters, whereby he transfers a part of his underwriting risk. Just like re-insurance, sub- underwriting helps in spreading the risk. An underwriter may appoint several underwriters to work under him. However, the sub-underwriters have no privacy of contract with the company. They get their commission from the underwriter and are also responsible to him.

Importance of Underwriting:

1. Underwriting acts as a sort of insurance or guarantee against the danger of not receiving minimum subscription, in the absence of underwriting agreement, there is always uncertainty regarding subscription of shares of debentures by the public. The guarantee of the underwriters removes the uncertainty.
2. When shares or debentures are sold through underwriters, there arise more confidence amongst the public. This is because underwriters undertake shares or debentures of only those companies which are sound concerns and whose future is bright.
3. Underwriting creates an impression regarding sound status of a company. It increases the goodwill of the company.

Managing director is someone who is responsible for the daily operations of a company, organization, or corporate division. In some countries, the term is equivalent to CEO (Chief Executive Officer) the executive head of a company. In other countries, managing directors primarily work as the heads of individual business units within a company rather than heading up the company as a whole. As a member of senior management, the managing director is also expected to keep a company solvent and to promote expansion and innovation within the industry.

An analysis of the definition shows that:

(i) The managing director must be an indi­vidual

(ii) He must be a member of the Board of Directors

(iii) He must be appointed by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of Di­rectors or by virtue of its Memorandum or Articles of Association

(iv) He is entrusted with substantial power of management

(v) He is not entrusted with powers of rou­tine nature

(vi) He shall exercise his powers subject to superintendence, control and direction of its Board of Directors

Appointment of Managing Director

A managing director is appointed by the Board of Directors subject to the approval of the Central govt. He is appointed at the first instance for the period of five years which can extend for a period of another five years.

The appointment of a person as managing director in a public or its subsidiary private company shall not have effect unless it is approved by the Central Govt. In case of a new company, the approval must be made within three months of his appointment.

The Central Govt. shall not accord its approval unless it is satisfied that:

(i) It is the interest of the company to have a managing director,

(ii) The proposed incumbent is a fit and proper person for such appointment,

(iii) His appointment is not against public interest,

(iv) The terms and conditions of the appoint­ment of the proposed managing director is not against public interest.

If his appointment is not approved by the Central Govt., the incumbent must vacate his office from the date of receipt of the disapproval of the Govt.

Power of Managing Director

To have the power to administer the operations of the Company pursuant to policies, law, objectives, Articles of the Company, resolutions of the meeting of shareholders, resolutions of the Board of Directors, resolutions of the Executive Committee, as well as relevant regulations and procedures.

2. To have the power to issue orders and carry out any act as necessary and appropriate in order to satisfactorily carry out the functions under article 1., and in the case of an important matter, a report shall be made and/or notice shall be given to the Board of Directors and/or the Executive Committee.
3. To consider the recruitment, appointment, transfer, removal, including appraisals and disciplinary measures, as well as to determine remuneration and welfare benefits of employees. In any event, any action taken must not be contrary to or inconsistent with the authority of the Executive Committee.
4. To have the power to issue regulations on the Company’s operations, such regulations not being inconsistent with or contrary to the policies, articles, regulations, rules, orders and resolutions of the Board of Directors and/or Executive Committee.
5. To grant and/or delegate powers to other persons to perform specific tasks on behalf of the Managing Director.
6. To promote and develop adherence to good conduct, legal compliance, ethics and culture in the Company’s business operations while observing good governance principles.
7. To carry out any other act as entrusted by the Board of Directors and/or Executive Committee.
8. Any question or ambiguity arising from the exercise of such powers shall be submitted to the Board of Directors for determination.
9. The above powers of the Managing Director shall not be exercised in the event of the Managing Director’s having a potential personal interest in or a conflict of interests of any character with the Company.

Duties and Responsibilities of the Managing Directors are:

1. As a member of the Board of Directors he participates in formulating the objectives and policy-making functions of the Board.
2. To execute policies laid down by the Board of Directors.
3. He is the liaison officer between the Board of Directors and the rest of the organization.
4. To interpret and communicate policies of the company to subordinate employees.
5. To review the operations of the company and present to the Board periodically accounts and statistics showing the progress and the present po­sition of the company.
6. To formulate the employment and compen­sation plan in accordance with the accepted poli­cies of the company.
7. To appoint high officials of the company.
8. To plan the development and expansion of business.
9. To organize meetings with department heads.
10. To promote high morale among the employees of company by creating a sense of belonging.
11. To maintain contact with the govt., chamber of commerce, trade unions and community at large.
12. To maintain a harmonious relationship between line and staff managers.
13. To approve or disapprove development plans submitted by the senior executives and place before the Board for final approval.
14. To establish a system of budgetary control by which the actual performance of the company may be evaluated against the planned course of action.
15. To administer production and sales activities of the company.
16. To give due attention to consumer satisfaction which is ensured by the continued supply of goods and services to the market.

Company Secretary is a senior position in private and public sector organizations, typically responsible for ensuring that the company follows proper corporate governance practices. The Institute of Company Secretaries of India (ICSI) is the statutory body that regulates and governs the profession of Company Secretaries in India. CS is considered an expert in corporate laws, governance, and regulatory compliance, and their advice is invaluable in legal and financial matters.

As per Section 203 of the Companies Act, 2013, companies falling under specific criteria are required to appoint a whole-time company secretary.

Roles of a Company Secretary:

The role of a Company Secretary is multifaceted, involving advisory, administrative, and compliance functions.

• Corporate Governance

One of the primary roles of a company secretary is to ensure the company adheres to principles of good corporate governance. This includes ensuring transparency in the company’s operations, protecting the interests of stakeholders, and ensuring the board’s decisions are in compliance with applicable regulations.

• Compliance Officer

CS ensures that the company complies with statutory and regulatory requirements such as the Companies Act, 2013, SEBI regulations, and other corporate laws. They are responsible for maintaining accurate records and filing necessary documents with regulatory bodies.

• Advisory Role

Company Secretary provides legal and strategic advice to the board of directors on matters related to corporate laws, mergers and acquisitions, taxation, and financial structuring. They play a crucial role in corporate decision-making by advising on the legal implications of board decisions.

• Liaison Officer

CS acts as a liaison between the company and various stakeholders, such as shareholders, regulatory authorities, and government bodies. They ensure that all communications between these entities are timely, transparent, and accurate.

• Board and General Meetings Management

Company Secretary is responsible for organizing and managing board meetings, annual general meetings (AGMs), and extraordinary general meetings (EGMs). They ensure that proper notices are sent out, and minutes of the meetings are recorded accurately.

• Documentation and Record-Keeping

CS is responsible for maintaining statutory registers, including the register of members, directors, charges, and contracts. They also ensure the safekeeping of company documents, such as the Memorandum of Association (MoA) and Articles of Association (AoA).

• Ensuring Transparency and Disclosure

CS ensures that the company adheres to the necessary disclosure requirements, including the timely publication of financial reports, audits, and shareholder communications.

Responsibilities of a Company Secretary:

The responsibilities of a Company Secretary vary depending on the size and complexity of the company, but key responsibilities:

1. Statutory Compliance

• Ensuring compliance with the Companies Act, 2013, SEBI regulations, and other applicable laws.
• Filing returns, forms, and reports with the Registrar of Companies (RoC), SEBI, and other regulatory authorities within the stipulated deadlines.
• Ensuring proper maintenance of the company’s statutory books and registers, such as the register of directors, register of members, and register of charges.

2. Corporate Governance

• Advising the board on good governance practices and ensuring compliance with corporate governance norms as per the Companies Act and SEBI guidelines.
• Assisting the board in understanding their legal and fiduciary responsibilities, ensuring board procedures are followed and decisions are compliant.

3. Meeting Coordination

• Calling and convening board meetings, annual general meetings (AGMs), and extraordinary general meetings (EGMs).
• Preparing meeting agendas, sending notices, and recording minutes of the meetings.
• Ensuring that resolutions passed by the board are in accordance with legal requirements.

4. Filing and Documentation

• Ensuring timely filing of annual returns, financial statements, and other documents with the RoC and other regulatory authorities.
• Managing the company’s legal documents and ensuring that they are securely stored and updated as per legal requirements.

5. Shareholder Relations

• Acting as a point of contact for shareholders, addressing their grievances, and ensuring that dividends and other payments are made on time.
• Facilitating the transfer and transmission of shares and maintaining the register of members.

6. Advisory Role

• Advising the board on legal issues, mergers and acquisitions, restructuring, and other corporate actions.
• Providing advice on corporate policies, financial strategies, and risk management.

7. Ethical Conduct

• Ensuring that the company adheres to ethical business practices and complies with its own internal rules and regulations.
• Promoting transparency in the company’s operations and ensuring the protection of shareholders’ interests.

Types of Company Secretaries:

Depending on the nature and structure of the organization, Company Secretaries can assume different types of roles:

1. Whole-Time Company Secretary

This is a full-time position, where the individual is employed by the company and works exclusively for that organization. Under the Companies Act, certain companies are required to appoint a whole-time company secretary. Public companies with a paid-up capital of Rs. 10 crores or more are mandated to have a whole-time company secretary.

2. Part-Time Company Secretary

Company may engage a company secretary on a part-time basis, especially if it does not meet the threshold requirement for a whole-time CS. However, this is more common in smaller organizations or private companies where the responsibilities are less demanding.

3. Practicing Company Secretary (PCS)

Company Secretary may practice independently by providing professional services to various clients rather than working for one specific company. A PCS provides services such as corporate compliance, audits, legal advice, secretarial audits, and certification of documents. They also assist in filings, mergers, and the winding up of companies.

4. Company Secretary in Practice (CSP)

These professionals operate as consultants, providing companies with expert guidance on legal matters, governance, and compliance without being full-time employees. Their services are invaluable in corporate structuring, auditing, and advising on regulatory changes.

5. Government Company Secretary

Company Secretaries are also appointed in government-owned companies or Public Sector Undertakings (PSUs). They play a vital role in ensuring that such companies adhere to the legal and regulatory framework while maintaining transparency and accountability.

Qualification of a Company Secretary

To qualify as a Company Secretary in India, an individual must:

• Complete the Company Secretary Course offered by the Institute of Company Secretaries of India (ICSI).
• Pass three stages of the CS examination:
  • CSEET (CS Executive Entrance Test)
  • CS Executive
  • CS Professional
• Undergo mandatory practical training as prescribed by ICSI.
• Hold membership with ICSI, designated as an Associate Member (ACS) or Fellow Member (FCS).

Additionally, a CS should have strong legal, corporate, and managerial knowledge and skills.

Appointment of a Company Secretary

Legal Provisions

• As per the Companies Act, 2013, every company with a paid-up capital of ₹10 crores or more is required to appoint a full-time Company Secretary.
• The board of directors is responsible for the appointment through a resolution.

Procedure for Appointment

1. Board Resolution: The board passes a resolution for the appointment of the Company Secretary.
2. Letter of Appointment: An official letter is issued to the selected candidate.
3. Filing with ROC: The company files Form DIR-12 with the Registrar of Companies (ROC) within 30 days of the appointment.

Position of a Company Secretary

A Company Secretary holds a dual role:

1. As an Employee: A salaried officer bound by the terms of employment.
2. As a Principal Officer: Acting as a key managerial personnel responsible for legal compliance, governance, and advising the board.

The Company Secretary’s responsibilities span various domains, including:

• Maintaining statutory registers and records.
• Advising the board on legal and governance matters.
• Coordinating shareholder meetings and preparing reports.

Liabilities of a Company Secretary

Legal Liabilities

• Non-compliance with statutory duties: Liable for penalties if the company fails to adhere to regulatory requirements.
• Signing False Statements: Held accountable for any false or misleading certifications.
• Fraudulent Activities: Liable for criminal proceedings under the Companies Act or other laws.

Professional Liabilities

• Responsible for maintaining confidentiality and professional integrity.
• Answerable to the board and regulatory authorities for professional misconduct.

Removal or Dismissal of a Company Secretary

Grounds for Removal

• Misconduct: Breach of confidentiality or unethical practices.
• Inefficiency: Failure to perform duties effectively.
• Legal or Regulatory Issues: Violation of corporate laws or rules.
• Mutual Agreement: If the secretary and company agree to terminate the contract.

Procedure for Dismissal

1. Board Decision: A resolution is passed by the board of directors to terminate the Company Secretary.
2. Notice Period: A formal notice period, as specified in the employment contract, is served.
3. Settlement of Dues: Final settlement of salary, benefits, and dues is made.
4. Filing with ROC: The company must inform the ROC by filing Form DIR-12 about the cessation of the Company Secretary’s employment.

Post-Dismissal

• The Company Secretary can seek legal recourse if the dismissal was unjustified or violated the employment agreement.