Meaning, Contents, Forms and Alteration of Memorandum of Association

Memorandum of Association (MoA) is a fundamental legal document required for the incorporation of a company. It serves as the company’s constitution, defining its relationship with the external world and outlining the scope of its operations. Every company in India, whether public or private, must have a Memorandum of Association to be registered under the Companies Act, 2013. The MoA sets the foundation for a company’s legal existence and binds the company, its shareholders, and all those who interact with the company to the terms contained within it.

Meaning of Memorandum of Association:

Memorandum of Association is essentially a charter or a framework that outlines the objectives, powers, and scope of the company. It defines the company’s boundaries and specifies what the company can and cannot do. The MoA acts as a contract between the company and the shareholders, as well as between the company and the external parties it deals with.

The purpose of the MoA is to ensure that the company operates within its defined objectives, and it provides clarity to shareholders, creditors, and third parties regarding the nature and scope of the company’s business. Any action taken by the company beyond the scope of the MoA is considered ultra vires (beyond the powers) and may be deemed invalid.

Contents of the Memorandum of Association:

Companies Act, 2013, specifies the mandatory contents of the MoA, and each clause plays a significant role in determining the company’s structure and operational framework. The key components of a Memorandum of Association are:

  1. Name Clause

The name clause specifies the name of the company. The name must be unique and not identical or similar to any existing registered company. The name must also comply with naming guidelines under the Companies Act:

  • For a Private Limited Company, the name must end with “Private Limited.”
  • For a Public Limited Company, the name must end with “Limited.”

Additionally, the name should not infringe on any trademarks or offend public morality.

  1. Registered Office Clause

This clause specifies the registered office of the company, which serves as its official address. It is the location where legal documents, notices, and other communications can be sent. The company must provide the complete address of the registered office upon incorporation, and any changes to the address must be notified to the Registrar of Companies (RoC).

  1. Object Clause

The object clause is one of the most critical sections of the MoA, as it outlines the main objectives for which the company is formed. The object clause is divided into:

  • Main Objects: The primary activities the company will undertake. Any business conducted by the company must be aligned with these objects.
  • Ancillary or Incidental Objects: Activities necessary to achieve the main objects.

The object clause restricts the company’s activities to those mentioned in the MoA. Any business conducted outside the scope of this clause is considered ultra vires.

  1. Liability Clause

This clause defines the extent of the liability of the company’s shareholders. In a company limited by shares, the liability of shareholders is limited to the unpaid amount on their shares. If the company is limited by guarantee, the liability is limited to the amount each member agrees to contribute in the event of liquidation.

  1. Capital Clause

The capital clause specifies the company’s authorized share capital. It mentions the total amount of capital with which the company is registered and the division of this capital into shares of a fixed value. This clause sets a limit on the amount of share capital that the company can issue unless it is altered through a formal process.

  1. Subscription Clause

Subscription clause lists the names of the initial subscribers to the Memorandum, who agree to take up shares in the company. It also indicates the number of shares each subscriber agrees to take. Each subscriber must sign the MoA in the presence of at least one witness.

  1. Association or Declaration Clause

This clause includes a declaration by the original members, stating their intent to form the company and agree to become its first shareholders. The subscribers to the MoA declare that they wish to associate themselves with the company.

Forms of Memorandum of Association:

Under the Companies Act, 2013, companies can be formed in various categories, and the MoA must reflect the company’s type. The MoA can be drafted in different forms depending on the type of company:

  1. Table A: For companies limited by shares.
  2. Table B: For companies limited by guarantee but not having share capital.
  3. Table C: For companies limited by guarantee and having share capital.
  4. Table D: For unlimited companies.
  5. Table E: For unlimited companies having share capital.

Each form provides a template for the drafting of the MoA according to the specific type of company being incorporated.

Alteration of Memorandum of Association:

Although the MoA is a rigid document that outlines the company’s operational limits, it can be altered under specific circumstances. The process for altering the MoA is governed by the provisions of the Companies Act, 2013. The alteration is allowed only if it is approved by a special resolution of the shareholders and is registered with the RoC.

  1. Alteration of the Name Clause

The name of the company can be changed by passing a special resolution in the general meeting. However, if the company is changing its status from a private company to a public company or vice versa, it must also obtain approval from the National Company Law Tribunal (NCLT). The change must be registered with the RoC, and a fresh certificate of incorporation must be issued.

  1. Alteration of the Registered Office Clause

The registered office can be changed:

  • Within the same city or town: By passing a board resolution and informing the RoC.
  • From one city or town to another within the same state: By passing a special resolution and informing the RoC.
  • From one state to another: Requires approval from both the shareholders and the Regional Director, and a special resolution must be passed. After approval, the RoC must be notified, and the alteration registered.
  1. Alteration of the Object Clause

The object clause can be altered by passing a special resolution in the general meeting. Additionally, if the alteration affects the rights of existing creditors, their consent is required. The revised object clause must be filed with the RoC within 30 days of passing the resolution.

  1. Alteration of the Liability Clause

The liability clause can be altered only if the company is converting from an unlimited liability company to a limited liability company, or vice versa. Such a change requires the approval of shareholders through a special resolution and must be registered with the RoC.

  1. Alteration of the Capital Clause

The authorized share capital of the company can be increased by passing an ordinary resolution at the general meeting. The company must file the relevant forms with the RoC and pay the requisite fees. The change is effective once the alteration is registered.

Allotment of Shares, Types, Rules, Restrictions

Allotment of Shares refers to the process by which a company distributes its shares to applicants who have subscribed during an offering, such as an Initial Public Offering (IPO) or private placement. Once the subscription period ends, the company reviews the applications, determines the allocation of shares, and officially assigns them to the investors. Allotment is done based on the availability of shares and the demand. If the offering is oversubscribed, shares may be distributed on a proportionate basis or through a lottery system, ensuring fairness to applicants.

Types of Allotment of Shares:

  1. Public or Initial Allotment:

This occurs when a company issues shares for the first time through an Initial Public Offering (IPO) or a Follow-on Public Offer (FPO). Shares are allotted to the public based on their applications and may be determined through a fixed price or book-building process. If oversubscribed, allotment is done proportionally.

  1. Private Placement:

Shares are allotted to a select group of investors, such as institutional investors, private equity firms, or wealthy individuals. It doesn’t involve public participation and is often quicker and subject to fewer regulatory hurdles.

  1. Rights Issue Allotment:

Existing shareholders are given the opportunity to purchase additional shares in proportion to their current shareholding, often at a discounted price. Shares are allotted based on the shareholder’s entitlement and their decision to take up the offer.

Rules Regarding Allotment of Shares:

  1. Minimum Subscription Rule:

A company can allot shares only if it receives a minimum subscription of 90% of the total issue within a specified period. If the company fails to achieve this, the issue must be canceled, and the application money is refunded to investors.

  1. SEBI Guidelines (for Public issues):

Securities and Exchange Board of India (SEBI) sets rules for public issues, including requirements for disclosing financial details, ensuring fair pricing, and the process for allotting shares. Companies must follow these guidelines when issuing shares through IPOs or public offers.

  1. Time Limit for Allotment:

Shares must be allotted within a prescribed time frame, usually 60 days from the date of receiving the application. If the company fails to allot shares within this period, it must refund the application money within 15 days. Otherwise, the company is liable to pay interest on the amount.

  1. Return of Allotment:

After allotting shares, the company must file a Return of Allotment (Form PAS-3) with the Registrar of Companies (ROC) within 30 days. This document details the number of shares allotted, the shareholders, and the allotment process.

  1. Listing Requirements:

If the shares are issued through an IPO or public offer, the company must ensure that the shares are listed on a recognized stock exchange. The allotment must comply with the rules and regulations of the stock exchange as well.

  1. Proper Allotment Procedures:

The company must follow proper procedures during the allotment, including board approval, maintaining proper records of applicants, and ensuring fairness in case of oversubscription (proportional allotment or lottery system).

  1. Non-Payment of Allotment Money:

If a shareholder fails to pay the allotment money, the company has the right to forfeit the shares after providing due notice.

Restrictions on Allotment of Shares:

  1. Minimum Subscription:

Company cannot proceed with the allotment of shares unless it receives at least 90% of the total issue as a minimum subscription. If this threshold is not met, the company must refund the application money to investors. This ensures that the company raises adequate capital to meet its objectives.

  1. Approval by Regulatory Authorities:

In the case of public offers, companies must receive approvals from regulatory authorities such as the Securities and Exchange Board of India (SEBI) and comply with its guidelines. Any non-compliance can lead to a restriction on the allotment process.

  1. Time Limit for Allotment:

Shares must be allotted within 60 days from the date of receiving the share application. If the company fails to allot shares within this period, the application money must be refunded to the investors within the next 15 days. If not, the company must pay interest at a specified rate.

  1. Prohibition on Allotment Before Filing the Prospectus:

Companies issuing shares to the public must file a prospectus with the Registrar of Companies (ROC) before making any allotment. Allotment without issuing or filing a prospectus is prohibited and can be declared void.

  1. Return of Allotment:

After allotment, companies are required to file a Return of Allotment (Form PAS-3) with the ROC within 30 days of the allotment. If this form is not filed, further allotments may be restricted, and penalties may be imposed.

  1. Oversubscription and Proportional Allotment:

In cases of oversubscription (when applications exceed the number of shares available), the company is restricted from issuing more shares than initially offered. It must allocate shares on a proportionate basis or through a fair method, such as a lottery system, to ensure equitable distribution.

  1. Restrictions on Allotment to Certain Investors:

  • Foreign Investors: Allotment to foreign investors must comply with the Foreign Direct Investment (FDI) guidelines. Companies cannot allot shares to foreign nationals or institutions without adhering to these rules.
  • Restricted Categories: Allotments may be restricted for certain categories of investors, such as related parties or company insiders, without appropriate board approvals or shareholder resolutions.
  1. Non-Payment of Allotment Money:

If the allotment money is not paid by the applicant within the specified time, the company has the right to forfeit the shares. The allottee loses their entitlement to the shares and any amount already paid.

  1. SEBI Regulations (for Listed Companies):

For listed companies, allotment of shares must comply with SEBI’s guidelines, including transparency, proper disclosures, and fair pricing. Failure to adhere to these regulations can restrict further share allotments.

  1. Lock-in Period:

For certain types of shareholders, especially promoters and institutional investors in private placements, a lock-in period may apply. During this period, these shareholders are restricted from selling or transferring their shares.

Calls on Shares

Reputed companies require the applicants to send the full value of the shares along with the applications. This is because, the Companies Act does not prohibit companies to collect the entire amount at the time of issue itself. But the usual practice of the companies is to collect a certain percentage of the face value of the shares on application and allotment and the balance in one or more installments known as calls.

A call may be defined as a demand made by the company on its shareholders to pay a part or the whole of the unpaid balance within a specified time. Lord Lindley says that the expression “Call” denotes both the demand for money and also the sum demanded.

The following points should be noted, in this context, so that the reader can understand what a call really means.

  1. Time for Making the Call: The call can be made at any time during the life time of the company or during the course of winding up. During the life time, the call should be made by the Board of Directors and during the course of winding up, it should be made by the liquidator.
  2. Obligatory: Each shareholder is obliged to pay the amount of call as and when the call is made. But, this liability arises only when the call is made and not before.
  3. Debt Due: As soon as a call is made, the call amount shall become a debt due from the shareholders to the company.
  4. Consequences of Default: If a shareholder fails to pay the call amount, the company can enforce payment of the amount together with interest or can forfeit the shares.
  5. Calls and Other Payments: A call is different from other payments made by a shareholder. The amounts paid on application and allotment are not calls. Similarly, if a company requires the shareholders to pay the entire amount either on application or on allotment, it is not a call under this Act.

Legal Provisions Relating to the Calls

The statutory provisions relating to the making of calls can be summed up as follows:

  1. Call should Bona fide: The power to make call is generally in nature of a trust and so it can be exercised bona fide and for the benefit of the company. It should not be made for private ends. It means the directors or the liquidator can make the call only when there is a bona fide need for funds.
  2. Uniformity: The calls should be made on an uniform basis on all the shares falling under the same class. If a call is made only on some shareholders of the same class but not on others or a greater amount is demanded from some shareholders and a lesser amount from others of the same class, the call is not valid.
  3. Provisions of the Articles: The calls should be made strictly in accordance with the provisions of the Articles. If this is not done, the call will be invalid.

Procedure for making Calls

Generally, the procedure for making calls is incorporated in the Articles of most companies. If a company has its own Articles, it should follow the provisions of its Articles. If not, the regulations specified in Table A of the Act shall apply.

The following provisions of Table A can be noted at this stage.

  1. The power to make calls generally vests in the Board of Directors.
  2. The calls should be made by passing a resolution at the meeting of the Board.
  3. The call money should not exceed 50% of the face value of the share at one time. However, companies may have their own Articles and raise this limit.
  4. There must be at least 30 days interval between two successive calls.
  5. When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to all the shareholders of the same class.
  6. The notice should also specify the amount of the call, place of payment etc. and should be sent at least 14 days before the last date for payment.
  7. The Board of directors has the power to revoke or postpone a call after it is made.
  8. Joint shareholders are jointly and severally liable for payment of calls.
  9. If a member fails to pay call money, he is liable to pay interest not exceeding the rate specified in the Articles or terms of issue. The directors are free to waive the payment of interest.
  10. If any member desires to pay the call money in advance, the directors may at their discretion accept and pay interest not exceeding the rate specified in the Articles.
  11. A defaulting member will not have any voting right till call money is paid by him.

Prospectus, Statements in view of prospectus

Sec. 2(36) of the Companies Act describes a prospectus as any document issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any share in, or debentures of a body corporate.”

In other words, it is a document which invites deposits from the public or invites offers from the public for the subscription of shares in, or debentures of, a company. The words “inviting deposits from the public” were added by the Companies (Amendment) Act, 1974.

Features and Characteristics of Prospectus:

(i) It is a document issued as a prospectus;

(ii) It is an invitation to the member of the public;

(iii) The public is invited to subscribe to the shares or debentures of the company;

(iv) It includes any notice, circular, advertisement inviting deposits from the public;

(v) It is a document by which the company procures its share capital needed to carry on its activities.

Forms and Contents of the Prospectus:

Sec. 56 states that every prospectus must

  1. State the matters specified in Part I of Schedule II, and
  2. Set out the reports specified in Part II of Schedule II.

The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies ( ROC ) when the company has not issued prospectus to the public for inviting them to subscribe for shares. The statement must contain the signatures of all the directors or their agents authorized in writing. It is similar to a prospectus but contains brief information. The Statement in Lieu of Prospectus needs to be filed with the registrar if the company does not issues prospectus or the company issued prospectus but because minimum subscription has not been received the company has not proceeded for the allotment of shares.

If a public company does not invite the public to subscribe for its shares but acquires to have money from private sources it may not issue a prospectus. In the circumstances, the promoters are required to prepare a draft prospectus which is known as ‘Statement in lieu of Prospectus’ which must contain the information required to be disclosed by Schedule III of the Act.

Sec. 70(1) states that a company having a share capital which does not issue a prospectus shall not allot any of its shares or debentures unless at least 3 days before the allotment of shares or debentures there has been delivered to the Registrar for registration a statement in lieu of prospectus.

The statement shall be signed by every person who is named therein as a director or proposed director of the company or by his authorised agent in writing. It shall be in the form and contain particulars set out in Schedule III of the Act.

Sec. 70(4) lays down that, in contravention of Sec. 70(1), the company and every director of the company, who wilfully authorizes or permits the contravention shall be punishable with fine which may extent to Rs. 1,000.

Similarly Sec. 70(5) also states that where the statement in lieu of prospectus contains any untrue statement, the persons responsible, for the issue thereof, may be punished by imprisonment which may extend to 2 years or with fine which may extend to Rs. 5,000, or with both.

Red Herring Prospectus:

A Red Herring Prospectus is a document which is submitted by an issuer company who intents to have public offerings of securities (i.e.; stock or bonds). It is associated with an Initial Public Offering (IPO). It must be filed with the Securities and Exchange Commission (SEC). The term Red herring comes from the tradition where young hunting dogs in Great Britain were trained in order to follow a scent by the use of ‘Red’ (i.e. salted and smoked) herring (i.e., kipper).

It is interesting to note that this pungent fish would be dragged across a trail until the puppy learned to follow the scent. But the term is used in prospectus simply due to disclosure statement which is printed in red ink on the cover which clearly states that the issuing company is not attempting to sell its shares.

Contents of Red Herring Prospectus:

(a) Purpose of the issue;

(b) Proposed offering Price Range;

(c) Promotion expenses;

(d) Copy of the underwriting agreement;

(e) Underwriter’s commission and discount;

(f) Disclosure of any option agreement;

(g) Balance Sheet;

(h) Net proceeds to the issuing company;

(i) Earning statement for .last three years;

(j) Legal option on the issue;

(k) Copies of the Articles of Incorporation of the issuer; and

(l) Names and addresses of all offices, underwriters, directors and stockholders owning 10% or more of the existing outstanding stock.

Share Warrant, Share Certificate

Share Warrant is a negotiable instrument issued by a company that entitles the holder to acquire a specific number of shares at a predetermined price within a certain period. It is often used by companies as a means of raising capital or offering incentives to investors. Share warrants can be traded on the stock market like shares, but they do not carry voting rights or entitle the holder to dividends until the warrant is exercised, i.e., converted into shares.

Key Characteristics of Share Warrants:

  • Negotiable Instrument:

Share warrant is a transferable instrument that can be freely traded. The holder of a share warrant can sell it in the market, offering flexibility in investment decisions.

  • Right to Subscribe to Shares:

Share warrant grants the holder the right, but not the obligation, to purchase shares at a specified price (called the exercise price) within a set time frame. This option is attractive to investors because they can benefit from price fluctuations of the company’s shares.

  • No Ownership Rights:

Share warrant holders do not own the shares until they exercise the warrant. They are not considered shareholders and do not have voting rights or dividend entitlements.

  • Specified Time Period:

Warrants have an expiration date by which they must be exercised. After this period, the warrant becomes void, and the holder loses the opportunity to purchase shares at the pre-agreed price.

  • Issued by the Company:

Share warrants are issued by the company directly and are different from other market instruments like options, which are often issued by financial institutions or traded in the derivatives market.

  • Discounted Pricing:

Companies sometimes offer warrants at a price lower than the market price to make them attractive to investors. This can be particularly beneficial if the company’s share price increases before the warrant’s expiration, as the holder can buy the shares at a lower price.

Advantages of Share Warrants:

  • Capital Raising:

Companies can raise capital without immediately diluting shareholder equity. If warrants are exercised, the company will receive the exercise price as additional capital.

  • Incentive for Investors:

Share warrants can serve as a sweetener for investors, providing an additional benefit that increases the attractiveness of the investment.

  • Leverage Opportunity:

Investors can potentially gain leverage through warrants by buying shares at a lower price, benefiting from future appreciation in the company’s stock price.

Disadvantages of Share Warrants:

  • No Immediate Shareholder Rights:

Until exercised, the warrant holder has no claim to dividends or voting rights, limiting their influence in the company.

  • Expiration Risk:

If the company’s stock price does not rise above the exercise price before the warrant’s expiration, the warrant can become worthless.

Legal Provisions in India:

Under the Companies Act, 2013, the concept of share warrants is not commonly used by private companies, as the Act mandates all securities to be fully paid up before being issued. However, listed companies often use share warrants as part of capital raising or financial restructuring strategies.

Share Certificate

Share Certificate is an official document issued by a company that certifies ownership of a specific number of shares in that company. It serves as evidence of the title of a shareholder and acts as a legal proof of the ownership of shares. Share certificates are issued to shareholders after the shares have been allotted and fully paid up.

Key Characteristics of Share Certificates:

  • Proof of Ownership:

Share certificate is the primary document that certifies ownership of shares in a company. It acts as proof that the shareholder owns the shares mentioned in the certificate.

  • Physical or Dematerialized Form:

In the past, share certificates were issued in physical form, but with the rise of dematerialization, most companies now issue shares in electronic form. However, in cases where shares are still held in physical form, a physical certificate is provided.

  • Essential Information:

A share certificate contains key information such as:

  1. The name and address of the shareholder.
  2. The number of shares held by the shareholder.
  3. The unique share certificate number.
  4. The distinctive numbers of the shares.
  5. The face value of each share.
  6. The date of issue of the certificate.
  • Legal Document:

Share certificates are legal documents that can be presented in court as evidence of ownership. They must be signed by authorized company officers (usually the company secretary and one director) and bear the company’s seal.

  • Transferability:

Shares represented by share certificates are transferable, and the certificate plays a role in the transfer process. When shares are transferred, the old certificate is typically surrendered to the company, and a new certificate is issued to the new owner.

  • Issuance Timeline:

Under Indian law, the company is required to issue the share certificate within two months from the date of allotment of shares or within one month from the date of transfer of shares.

Advantages of Share Certificates:

  • Legal Recognition:

Share certificate legally proves that a shareholder owns a part of the company. This is crucial in situations like litigation or disputes over ownership.

  • Ease of Transfer:

In the case of physical shares, the certificate facilitates the transfer process, as it must be surrendered and reissued when ownership changes.

  • Historical Importance:

Before dematerialization, physical share certificates were important records of ownership and were often kept for long periods.

Disadvantages of Share Certificates:

  • Risk of Loss:

Physical share certificates can be lost, stolen, or damaged, leading to complications in proving ownership and requiring reissuance by the company.

  • Cumbersome Transfer Process:

In the case of physical share certificates, the transfer process can be time-consuming, as it requires physical handling and verification by the company.

Legal Provisions in India:

Under the Companies Act, 2013, companies are required to issue share certificates within the prescribed time frame (as mentioned above). Share certificates must be signed by authorized officers and stamped with the company’s seal. If a shareholder loses a certificate, the company must follow due legal procedures for reissuing a duplicate certificate.

Appointment of Directors, Legal Position

SECTION 152 OF THE COMPANIES ACT, 2013: APPOINTMENT OF DIRECTOR

An individual who is appointed or elected as the member of the board of Directors of a Company, who, along with the other directors, has the responsibility for determining and implementing the policies of the company.

Director is an individual who directs, manages, oversees or controls the affairs of the Company.

A director is a person who is appointed to perform the duties and functions of a company in accordance with the provisions of The Company Act, 2013.

As per Section 149(1): Every Company shall have a Board of Directors consisting of Individuals as director.

They play a very important role in managing the business and other affairs of Company. Appointment of Directors is very crucial for the growth and management of Company.

APPOINTMENT OF DIRECTORS UNDER COMPANIES ACT 2013: 

TYPE OF COMPANY APPOINTMENT MADE
Public Company or a Private Company subsidiary of a public company 1. 2/3 of the total Directors appointed by the shareholders.

2.Remaining 1/3 appointment is made as per Articles and failing which, shareholders shall appoint the remaining.

Private Company which is not a subsidiary of a public company 1. Articles prescribe manner of appointment of any or all the Directors.

2. In case, Articles are silent, Directors must be appointed by the shareholders

 *Nominee Directors can be appointed by a third party or by the Central Government in the case of oppression or mismanagement.

REQUIREMENT OF A COMPANY TO HAVE BOARD OF DIRECTORS: 

Private Limited Company Minimum Two Directors
Public Limited Company Minimum Three Directors
one person Company Minimum One Director

 * A company may appoint more than (15) fifteen Directors after passing a special resolution.

*Further, every Company should have one Resident Director (i.e. a person who has lived at least 182 days in India during the financial year)

Director’s appointment is covered under section 152 of Companies Act, 2013, along with Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

QUALIFICATIONS FOR DIRECTORS:

According to The Companies Act no qualifications for being the Director of any company is prescribed. The Companies Act does, however, limit the specified share qualification of Directors which can be prescribed by a public company or a private company that is a subsidiary of a public company, to be five thousand rupees (Rs. 5,000/-).

New Categories of Director

Resident Director:

 This is one of the most important changes made in the new regime, particularly in respect of the appointment of Directors under section 149 of the Companies Act, 2013. It states that every Company should have at least one resident Director i.e. a person who has stayed in India for not less than 182 days in the previous calendar year.

Woman Director

Now the legislature has made mandatory for certain class of the company to appoint women as director. As per section 149, prescribes for the certain class of the company their women strength in the board should not be less than 1/3. Such companies either listed company and any public company having-

  1. Paid up capital of Rs. 100 cr. or more, or
  2. Turnover of Rs. 300 cr. or more.

Foreign National as a Director under Companies Act, 2013

Under Indian Companies Act, 2013, there is no restriction to appoint a foreign national as a director in Indian Companies along with six types of Directors which are appointed in a company, i.e., Women Director, Independent Director, Small Shareholders Director, Additional Director, Alternative and Nominee Director. By complying with the Companies Act, 2013 (hereinafter referred as “The Act”) read along with the Companies (Appointment and Qualifications of Directors) Rules, 2014 (hereinafter referred as “The Rules”)

Restrictions on number of Directorships

The Companies Act prevents a Director from being a Director, at the same time, in more than fifteen (15) companies. For the purposes of establishing this maximum number of companies in which a person can be a Director, the following companies are excluded:

A “pure” private company;

An association not carrying on its business for profit, or one that prohibits the payment of any dividends; and

A company in which he or she is only appointed as an Alternate Director.

Failure of the Director to comply with these regulations will result in a fine of fifty thousand rupees (Rs. 50,000/-) for every company that he or she is a Director of, after the first fifteen (15) so determined.

Company Meetings: Statutory, Annual general meeting, Extraordinary Meeting

Statutory Meeting

Statutory Meeting is the first meeting of the shareholders of a public company. It must be held within a period of not less than one month nor more than 6 months from the date at which the company is entitled to commence business. It is held only once in the lifetime of a company. A private company and a company limited by guarantee and not having a share capital need not hold such a meeting.

The purpose of the statutory meeting with its statutory report is to put the shareholders of the company in the possession of all the important facts relating to the new company, what shares have been taken up, what the moneys received etc. This also provides an opportunity to the shareholders of meeting to discuss the whole situation, the management and prospects of the company.

The Board of Directors must, atleast 21 days before the day on which the meeting is to be held, A forward a report, called the ‘statutory report’ to every member of the company. This report contains all the necessary information relating to formational aspects of the company for the information of the shareholders.

Contents of Statutory Report

  1. The total number of shares allotted, distinguishing those allotted as fully or partly paid up otherwise than in cash, the extent to which they are partly paid up, the consideration for which they have been allotted and total amount received in cash;
  2. An abstract of the receipts and payments under distinctive heads upto a date within seven days of the date of report;
  3. An account of estimate of the preliminary expenses of the company.
  4. The names, addresses and occupations of the managing director, director, and also its secretary and auditors of the company;
  5. The particulars of any contract which, and the modification or proposed modification of which, are to be submitted to the meeting for approval;
  6. The extent to which underwriting contracts, if any, have not been carried out and the reason therefor;
  7. The arrears, if any, due on calls from directors, managing director or manager; and
  8. The particulars of any commission or brokerage paid, or to be paid, in connection with the issue or sale of shares to any director, managing director or manager.

Annual General meeting

Annual General Meeting (AGM) is a yearly meeting of stockholders or shareholders, members of company, firm and organizations. Annual General Meeting is held every financial year and it is mandatory for everyone. In AGM functions like reviewing company account, approving audited accounts, elections, fiscal records of the past year are discussed.

As per Companies Act, an annual general meeting must be held by every company once a year without fail. There cannot be a gap of more than 15 months between two AGMs.

However, the first AGM of a company can be held at any date, within a period of 18 months, since the date of incorporation of the company. Annual general meetings help members understand the company’s rate of growth and potential for improvement.

An AGM gives insights into what steps made the company more successful and which steps caused loss. it helps the members and the board to decide the future course of action. An AGM must be held on a working day.

If the Government declares a public holiday on the day of the meeting, it will be considered a working day by the members attending the meeting. The annual general meeting can be held at the registered office of the company.

Legal Requirements for holding an Annual General Meeting

Legally, a notice period of 21 days must be given to all the members before the meeting. However, there is an exception to this rule. If all the voting members consent, the meeting may be held at an earlier date. Further, the following documents are also to be sent with the notice. Articles of Association, company bylaws, and jurisdiction specifies the rules that govern annual general meeting.

  • Copy of annual accounts of the company
  • Director’s report on the company’s position for the given year
  • Report by the Auditor of the annual accounts.

Members are allowed to use proxies in their absence. The proxy does not need to be a member of the company. However, the proxy forms have to be submitted to the company at least 48 hours before the meeting.

Quorum for Annual General Meeting

Unless the articles of the company state otherwise, the quorum for an Annual General Meeting is as follows

  • Public companies: At least 5 members must be present.
  • Other companies:At least 2 members must be present within half an hour of the commencement of the meeting.

Issues Undertaken at Annual General Meeting

The functions of business undertaken at a typical annual general meeting are listed as follows:

  • The declaration of dividend among shareholders
  • Consideration of annual accounts
  • Discussion of the director’s report and the auditor’s report
  • Appointment and fixing of the remuneration of the statutory auditors
  • Appointing replacement directors in place of existing directors retiring

Extraordinary meeting

An Extraordinary General Meeting (an EGM) can be defined as a meeting of shareholders which is not an Annual General Meeting (an AGM). It is held when some urgent issue becomes about the company arises or any situation of crisis and it requires the input of all senior executives and the Board.

As we know, an EGM is held in case of emergency situations and requires the attention of senors execs and the Board. Members, shareholders, and execs must be instructed on the purpose of the meeting so they have time to prepare their valuable input and then, collectively decide further course of action.

Who can Call for an EGM

The members/shareholders of a company can call for an extraordinary general meeting. However, only certain members with a significant stake in the company are allowed to call for an EGM. They are listed in the Companies Act,2013 as follows.

  • In the case of a company having a share capital, members holding not less than one-tenth of such paid-up capital of the company that carry voting rights in regard to that matter as on the date of depositing the requisition;
  • In the case of a company not having a share capital, members holding not less than one-tenth of the total voting power in regard to that matter as at the date of deposit of the requisition.
  • EGM called by Board.  Upon the receival of a valid requisition, the Board has a period of 21 days to call for an EGM. The EGM must be then held with 45 days from the day of the EGM being called.
  • EGM called by the requisitionists: In case the Board fails to call for an EGM, it can be called for by the requisitionists themselves during a period of 3 months from the day the requisition was deposited. If the EGM is held within this specified period of 3 months, it can be adjourned to any day in the future after the 3 months.

Essentials of a Valid Requisition

  1. Specify the issue for which the meeting is called
  2. Signed by requisitionists
  3. Must be deposited at the company’s registered office.

Requirements for holding an EGM

A notice period of 21 days must be given to the members. However, there is an exception to this rule. Where if 95% of the voting members consent, the EGM can be held at a shorter notice.

Quorum Required for EGM

Unless the company’s Articles state otherwise, the following number of members are required for a quorum.

  • In the case of a public company: Five(5) members personally present
  • In the case of any other company: Two (2) members personally present

Meeting of Board of Directors

Board meetings are meetings at the highest level, i.e. a meeting where board members or their representatives are present. A company is not an actual entity but a legal one so it cannot take actions and make decisions. The board of directors act as agents through which the company takes actions as well as makes decisions.

The board of directors is the supreme authority in a company and they have the powers to take all major actions and decisions for the company. The board is also responsible for managing the affairs of the whole company.

For the effective functioning and management, it is imperative that board meetings be held at frequent intervals. For this, Section 173 of Companies Act, 2013 provides:

In the case of a Public Limited Company, the first board meeting has to be held within the first 30 days, since the incorporation date. Additionally, a minimum of 4 board meetings must be held in a span of one year. Also, there cannot be a gap of more than 120 days between two meetings.

In the case of small companies or one person company, at least two meetings must be conducted, one in each half of the financial year. Additionally, the gap between the two meetings must be at least 90 days. In a situation where the meeting is held at a short notice, at least one independent director must be attending the meeting.

Notice of Board Meeting

The notice of Board Meeting refers to a document that is sent to all directors of the company. This document informs the members about the venue, date, time, and agenda of the meeting. All types of companies are required to give notice at least 7 days before the actual day of the meeting.

Quorum for the Board Meeting

The quorum for the Board Meeting refers to the minimum number of members of the Board to conduct a valid Board Meeting. According to Section 174 of Companies Act, 2013, the minimum number of members of the board required for a meeting is 1/3rd of a total number of directors.

At any rate, a minimum of two directors must be present. However, in the case of One Person Company, the rules of Section 174, do not apply.

Participation in Board Meeting

All directors are encouraged to actively attend board meetings and in case that’s not possible at least attend the meetings through a video conference. This is so that all directors can take part in the decision-making process.

Requirements for Conducting a Valid Board Meeting

  • Right Convening Authority 

The board meeting must be held under the direction of proper authority. Usually, the company secretary (CS) is there to authorize the board meeting. In case the company secretary is unavailable, the predetermined authorized person shall act as the authority to conduct the board meeting.

  • Adequate Quorum 

The proper requirements of the quorum or the minimum number of Directors required to conduct a Board meeting must be present for it to be considered a valid board meeting.

  • Proper Notice 

Proper notice is one of the major requirements to be fulfilled when planning a board meeting. Formal notice has to be served to all members before conducting a board meeting.

  • Proper Presiding Officer 

The meeting must always be conducted in the presence of a chairman of the board.

  • Proper Agenda

Every board meeting has a set agenda that must be followed. The agenda refers to the topic of discussion of the board meeting. No other business, which is not mentioned in the meeting must be considered.

Quorum for Different Meetings

Quorum means the minimum number of persons who being entitled to attend a meeting must be present at the meeting so that the business of the meeting can be transacted validly. Such a number is desirable so that a meeting gets a representative character and no decisions are taken with a very small number of persons being present.

At the same time the quorum shall not be too big so that a meeting falls through on account of small attendance.

Features of Quorum:

(1) What shall be the quorum for different types of meetings of an organisation are usually mentioned in its bye-laws or in the Articles of Association in case of a company. Some statutes also make such provisions. For example Sec. 174 of the Companies Act makes such provisions. The bye-laws or the Articles cannot provide smaller quorum than what are provided in the statutes, if any.

(2) A meeting cannot be started if quorum is not present. The quorum might be continuously present. If any member or members leaves or leave earlier and by that the quorum falls, then any decision taken afterwards will not be binding, if the by-laws or Articles so provide.

(3) It is the duty of the chairman to see that the quorum is present. The secretary helps him in counting the quorum. If at the middle of the meeting quorum falls, any member present may draw the attention of the chairman to this fact by raising a ‘point of order’.

(4) If quorum is not present at the scheduled hour of a meeting already notified, then the members present will wait for half an hour.

After half an hour the following alternative effects can take place:

(A) In Case of an Informal Meeting:

(i) The chairman may allow informal discussions but no binding decisions can be taken. The meeting is adjourned and can be held afterwards after giving fresh notice.

(ii) If the quorum is missing by a small margin, the chairman may allow discussions and decisions may be taken which, however, have to be formally ratified at a next meeting where quorum must be present.

(B) In Case of Any Meeting of a Company:

The Act provides that the meeting shall be adjourned:

(i) In case of a general meeting to the same day in the next week, at the same time and place or to such other day and at such other time and place as the Board may determine.

(ii) In case of a Board meeting, unless the Articles otherwise provide, to the same day in the next week, at the same time and place or if that day is a holiday till the next succeeding day which is not a public holiday, at the same time and place.

(iii) In case of an extraordinary general meeting requisitioned by members the meeting is not adjourned and the meeting just fails.

(5) In case of a members’ meeting of a company where proxy is allowed only members present in person are counted for quorum and not the proxies but representatives are counted

(6) When fraction comes out while calculating quorum (like one-third, one-fourth) the next round number is taken into account.

(7) Conflicting views exist with regard to counting when there are joint holders of shares. Generally it is accepted that joint holders of shares shall be treated as a single member. Some people think that each joint holder is a separate member if his name appears in the Register of Members.

Where Quorum is Strictly not Necessary:

Normally the quorum is necessary for a valid meeting.

But in the following circumstances a less number of persons may make the quorum:

(1) Whenever a meeting is adjourned for want of quorum, any number of members present at the adjourned meeting shall make the quorum.

(2) At a Board meeting when a matter comes up in which one or more than one director is or are interested then, director or directors concerned cannot take part in the discussion. The remaining directors shall make the quorum. If only on- director is left out then of course there cannot be a quorum and the matter shall be referred to a general meeting of members for decision.

(3) In case of class meetings if one person alone holds all the shares of that particular class of shares then he alone shall make the quorum.

(4) In case of an annual general meeting of a company (ailed by the order of the Central Government on the complaint by only one member of the company, or a general meeting called by the Company Law Board on the application of one member of the company then the member alone present in person or by proxy, shall make the quorum when the meeting is held.

The General Patterns of Quorum:

Every company in its Articles of Association or an association in its bye laws or a Com­mittee or Sub-Committee in its own rules and regulations usually provides what shall be the quorum for the different kinds of meetings to be held under it. The quorum for a general meeting is usually one-fourth or one-third of the total number of members or a fixed number like ten, fifteen etc. taking into consideration the total strength of the members.

The Companies Act is very liberal and provides that if nothing is mentioned in the Articles then any two members in case of a private company and any five members in case of a public company, present in person at a general meeting, shall make the quorum.

The quorum for the meeting of an important committee, like the Executive Committee or Managing Committee, is generally fixed at one-third. The Companies Act provides that the quorum for Board meeting, if nothing is provided in the Articles, shall be one-third or two whichever is bigger.

The directors themselves at the first Board meeting may fix the quorum for Board meetings. In some special cases, the quorum is fixed at a big percentage of the total number of members. For example, the quorum for a class meeting in a company is very often fixed by the Articles to be two- thirds or three-fourths or all the shareholders belonging to that class.

Sometimes all the members make the quorum. For example, in a private company having only two directors, both the directors shall make the quorum at a Board meeting. Again, in a private company having only two shareholders, both the members shall make the quorum at a general meeting.

Issue of Debentures

Company debenture is one of the important sources of finance for large companies, in addition to equity stocks, bank loans, and bonds. Companies need to follow certain procedures for issue of debentures to raise money. There are several ways of issuing a debenture viz. at a par, premium or discount and even for consideration other than cash.

Issue of Debentures

The procedure of issuing debentures by a company is similar to the one followed while issuing equity stocks. The company starts by releasing a prospectus declaring the debenture issuance. The interested investors, then, apply for the same. The company may need the entire amount while applying for the debentures or may ask for installments to be paid while submitting the application, on allotment of debentures or on various calls by the company. The company can issue debentures at a par, at a premium or at a discount as explained below.

Different ways for issuing of Debenture

Once the company invites the applications and the investors apply for the debentures, the company can issue debentures in one of the following ways:

Issue of Debenture at par

When the issue price of the debenture is equal to its face value, the debenture is said to be issued at par. When a debenture is issued at par, the long-term borrowings in the liabilities section of the balance sheet equals the cash in the assets side of the balance sheet. Thus, no further adjustment is required to balance the assets and the liabilities of the company. The company can collect the whole amount in one installment i.e on an application or in two installments i.e. on an application and subsequent allotment. However, there might be a scenario in which money is collected in more than two installments i.e. on an application, on an allotment and at various calls by the company.

Issue of debenture at discount

The debenture is said to be issued at a discount when the issue price is below its nominal value. Let us take an example – a Rs. 100 debenture is issued at Rs. 90, then Rs.10 is the discount amount. In such a scenario, the liabilities and the assets sides of the balance sheet do not match. Thus, the discount on debentures’ issuance is noted as a capital loss and is charged to ‘Securities Premium Account’ and is reflected as an asset. The discount can be written off later.

Issue of Debenture At Premium

When the price of the debenture is more than its nominal value, it is said to be issued at a premium. For example, a Rs. 100 debenture is issued for Rs.105 and Rs.5 is the premium amount. Again, assets and liabilities do not match in such situation. Therefore, the premium amount is credited to Securities Premium Account and is reflected under ‘Reserves and Surpluses’ on the liabilities side of the balance sheet.

The Issue of Debenture as Collateral

The debentures can be issued as a collateral security to the lenders. This happens when the lenders insist on additional assets as security in addition to the primary security. The additional assets may be used if the complete amount of loan cannot be realized from the sale of the primary security. Therefore, the companies tend to issue debentures to the lenders in addition to some other physical assets already pledged. The lenders may redeem or sell the debentures on the open market if the primary assets do not pay for the complete loan.

Issue of Debenture for Consideration Other Than Cash

Debentures can also be issued for consideration other than cash. Generally, companies follow this route with their vendors. So, instead of paying the cash for the assets purchased from the vendor, the companies issue debentures for consideration other than cash. In this case, also, the debentures can be issued at a par, premium or discount and are accounted for in the similar fashion.

Over Subscription

The company invites the investors to subscribe to its debenture issue. However, it may happen that the applications received for the debentures may be more than the original number of debentures offered. This scenario is referred to as oversubscription. In the case of over-subscription, a company cannot allocate more debentures than it had originally planned to issue. So, the company refunds the money to the applicants to whom debentures are not allotted. However, the excess money received from applicants who are allocated debentures is not refunded. The same money is used towards allotment adjustment and the subsequent calls to be made.

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