Tag: Intellectual Property Rights

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

Promotion of a Company

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

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

Functions of a Promoter 

(i) Identification of Business Opportunity

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

(ii) Feasibility Studies

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

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

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

(iii) Name Approval

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

(iv) Fixing up Signatories to the Memorandum of Association

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

(v) Appointment of Professionals

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

(vi) Preparation of Necessary Documents

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

Stages of Promotion

1. Discovery of an Idea:

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

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

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

2. Detailed Investigation:

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

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

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

3. Assembling:

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

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

4. Financing the Proposition:

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

Memorandum of Association:

The Memorandum of Association is the constitution of the company and provides the foundation on which its structure is built. It is the principal document of the company and no company can be registered without the memorandum of association. It defines the scope of the company’s activities as well as its relation with the outside world.

The company law defines it as “The memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous Company Laws or of this Act.”: Section 2 (28) of the Companies Act

Purpose:

The main purpose of the memorandum is to explain the scope of activities of the company. The prospective shareholders know the areas where company will invest their money and the risk, they are taking in investing the money. The outsiders will understand the limits of the working of the company and their dealings with it should remain within the prescribed scope.

Clauses of memorandum:

The memorandum of association contains the following clauses:

1. The Name Clause:

A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company and it should not contain the words like king, queen, emperor, government bodies and the names of world bodies like U.N.O., W.H.O., World Bank, etc.

The name should not be objectionable in the opinion of the government. The word ‘Limited’ must be used at the end of the name of a Public and ‘Private Limited’ is used by a Private Company. These words are used to ensure that all persons dealing with the company should know that the liability of its members is limited.

The name of the company must be painted outside every place, where business of the company is carried on. If the company has a name which is undesirable or resembles the name of any other existing company, this name can be changed by passing an ordinary resolution.

2. Registered Office Clause:

Every company should have a registered office, the address of which should be communicated to the Registrar of Companies. This helps the Registrar to have correspondence with the company. The place of registered office can be intimated to the Registrar within 30 days of incorporation or commencement of business, whichever is earlier.

A company can shift its registered office from one place to another in the same town with an intimation to the Registrar. But, if the company wants to shift its registered office from one town to another town in the same state, a special resolution is required to be passed. If the office is to be shifted from one state to another state it involves alteration in the memorandum.

3. Object Clause:

This is one of the important clauses of the Memorandum of Association. It determines the rights and power of the company and also defines its sphere of activities. The object clause should be decided carefully because it is difficult to alter his clause later on. No activity can be taken up by the company which is not mentioned in the object clause.

Moreover, the investors i.e., shareholders will know the sphere of activities which the company can undertake. The choice of the object clause lies with the subscribers to the memorandum. They are free to add anything to it provided it is not contrary to the provisions of the Companies Act and other laws of the land.

The object clause can be altered to enable a company to carry on its activities more economically, or by improved means to carry on some business which under existing circumstances may conveniently be combined with the object clause.

4. Liability Clause:

This clause states that the liability of the members is limited to the value of shares held by them. It means that the members will be liable to pay only the unpaid balance of their shares. The liability of the members may be limited by guarantee. It also states the amount which every member will undertake to contribute to the assets of the company in the event of its winding up.

5. Capital Clause:

This clause states the total capital of the proposed company. The division of capital into equity shares capital and preference share capital should also be mentioned. The number of shares in each category and their value should be given. If some special rights and privileges are conferred on any type of shareholders, mention may also be made in the clause to enable the public to know the exact nature of capital structure of the company.

The capital clause can be altered by passing a special resolution and by obtaining the approval of Company Law Board.

6. Association Clause:

This clause contains the names of signatories to the memorandum of association. The memorandum must be signed by at least seven persons in the case of a public limited company and by at least two persons in case of private limited company. Each subscriber must take at least one share in the company. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of subscribers are attested by at least one witness each. The full addresses and occupations of subscribers and the witnesses are also given.

2. Articles of Association:

The rules and regulations which are framed for the internal management of the company are set out in a document named Articles of Association. The articles are framed to help the company in achieving its objectives set out in memorandum of association. It is a supplementary document to the memorandum.

“Articles of association of the company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act.” —Section 2(2) of the Companies Act. The private companies limited by shares, companies limited by guarantee and unlimited companies must have their articles of association. A public company limited by shares may or may not have its own Articles of Association.

As per Action 26 of Companies Act, it is not obligatory on the part of a public company limited by shares to prepare and register Articles of Association along with Memorandum of Association. However, such a company may adopt all or any of the regulations contained in the model set of Articles given in Table A in Schedule I of the Act.

It means the company can partly frame its own articles and partly incorporate some of the regulations in Table A. Unless the company prepares its own articles then regulations of Table A shall be applicable in the same manner as if they were contained in its own registered articles.

The articles cannot contain anything contrary to the Companies Act and also to the memorandum of association. If the document contains anything contrary to the Companies Act or memorandum, it will be inoperative. When articles are proposed to be registered, they must be printed, divided into paragraphs and numbered consecutively. Each subscriber to the memorandum must sign the articles in the presence of at least one witness.

The nature of Articles of Association may be explained as follows:

(i) Articles of association are subordinate to memorandum of association.

(ii) These are controlled by memorandum.

(iii) Articles help in achieving the objectives laid down in the memorandum.

(iv) Articles are only internal regulations over which members exercise control.

(v) Articles lay down the regulations for governance of the company.

Contents:

Some of the contents of articles of association are as follows:

1. The amount of share capital issued, different types of shares, calls on shares, forfeiture of shares, transfer and transmission of shares and rights and privileges of different categories of shareholders.
2. Powers to alter as well as reduce share capital.
3. The appointment of directors, powers, duties and their remuneration.
4. The appointment of manager, managing director, etc.
5. The procedure for holding and conducting of various meetings.
6. Matters relating to maintaining of accounts, declaration of dividends and keeping of reserves, etc.
7. Procedure for winding up the company.

Alteration of Articles of Association:

The articles of association can be altered by passing a special resolution. Certain restrictions are imposed on the nature and extent of the alternation that may be made.

(a) The change should not be violating the provisions of the Companies Act.

(b) It should not be contrary to the provisions of the memorandum of association.

(c) The alteration must not have anything illegal.

(d) The alteration should not adversely affect the minority shareholders.

3. Prospectus:

After getting the company incorporated, promoters will raise finances. The public is invited to purchase shares and debentures of the company through an advertisement. A document containing detailed information about the company and an invitation to the public subscribing to the share capital and debentures is issued. This document is called ‘prospectus’. Private companies cannot issue a prospectus because they are strictly prohibited from inviting the public to subscribe to their shares. Only public companies can issue a prospectus.

“A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.” —Section 2(36) of the Companies Act

The prospectus is not an offer in the contractual sense but only an invitation to offer. A document construed to be a prospectus should be issued to the public.

A prospectus should have the following essentials:

(i) There must be an invitation offering to the public.

(ii) The invitation must be made on behalf of the company or intended company.

(iii) The invitation must be to subscribe or purchase.

(iv) The invitation must relate to shares or debentures.

A prospectus must be filed with the Registrar of companies before it is issued to the public. The issue of prospectus is essential when the company wishes the public to purchase its shares or debentures.

If the promoters are confident of obtaining the required capital through private contacts, even a public company may not issue a prospectus. The promoters prepare a draft prospectus containing required information and this document is known as a statement in lieu of ‘prospectus.’ A prospectus duly dated and signed by all the directors should be field with the Registrar of Company before it is issued to the public.

A prospectus brings to the notice of the public that a new company has been formed. The company tries to convince the public that it offers best opportunity for their investment. A prospectus outlines in detail the terms and conditions on which the shares or debentures have been offered to the public. Every prospectus contains an application form on which an intending investor can apply for the purchase of shares or debentures.

A company must get minimum subscription within 120 days from the issue of prospectus. If it fails to obtain minimum subscription from the members of the public within the specified period, then the amount already received from public is returned. The company cannot get a certificate of commencement of business because the public is not interested in that company.

Contents:

The following matters are to be disclosed in a prospectus:

1. Name and full address of the company.
2. Full particulars about the signatories to the memorandum of association and the number of shares taken up by them.
3. The number and classes of shares. The interest of shareholders in the property and profits of the company.
4. Name, addresses and occupations of members of the Board of Directors or proposed Directors.
5. The minimum subscription is fixed by promoters after taking into account all financial requirements at the beginning.
6. If the company acquires any property from vendors, their full particulars are to be given.
7. The full address of underwriters, if any, and the opinion of directors that the underwriters have sufficient resources to meet their obligations.
8. The time of opening of the subscription list.
9. The nature and extent of interest of every promoter in the promotion of the company.
10. The amount payable on application, allotment and calls.
11. The particulars of preferential treatment given to any person for subscribing shares or debentures.
12. Particulars about reserves and surpluses.
13. The amount of preliminary expenses.
14. The name and address of the auditor.
15. Particulars regarding voting rights at the meetings of the company.
16. A report by the auditors regarding the profits and losses of the company.

These are some of the contents which every prospectus must include. The prospectus is an advertisement of the company therefore, the company may give any information which promotes its interest. Any information given in the prospectus must be true otherwise the subscriber can be held guilty for misrepresentation.

Promoter can be defined as any person or entity involved in the formation of a company. They are responsible for identifying a business opportunity, organizing resources, and bringing together the elements needed to form a company. The Companies Act, 2013, defines a promoter as a person who:

• Is named as such in the prospectus of the company.
• Has control over the company’s affairs, directly or indirectly.
• Is involved in the preparation of the documents or contracts required for the incorporation of a company.

Six Key Characteristics of a Promoter

1. Idea Originator:

Promoter is essentially the originator of the idea of forming a company. They identify the need or opportunity in the market and develop a concept around it. This idea is the basis for the business model the company will adopt.

2. Risk-Bearer:

During the promotion stage, the promoter assumes a significant amount of financial risk. They invest their own funds or arrange financing to cover the initial expenses of forming the company. These include feasibility studies, legal consultations, and other pre-incorporation costs.

3. Arranger of Capital:

Promoter is responsible for arranging the capital needed for the initial setup of the company. This may include securing investment from venture capitalists, angel investors, or financial institutions, as well as personal investments. They may also negotiate terms with banks for loans or other financial assistance.

4. Liaison with Legal Authorities:

Promoter is the one who ensures that the company meets all legal requirements for incorporation. This includes applying for the company name, drafting the Memorandum of Association (MoA) and Articles of Association (AoA), and submitting incorporation documents to the Registrar of Companies (RoC). The promoter handles these initial formalities to make sure the company is legally recognized.

5. Fiduciary Duty:

Promoters owe a fiduciary duty to the company they are forming, meaning they must act in the company’s best interests and avoid conflicts of interest. They must disclose any personal benefits they might gain from their dealings with the company, and they are expected to act with transparency and honesty.

6. Preliminary Contracts:

The promoter may enter into preliminary contracts with third parties on behalf of the company before its formal incorporation. These contracts often involve purchasing property, hiring personnel, or acquiring goods. The promoter may remain liable for these contracts if the company does not adopt them after incorporation.

Kinds of Promoters:

Promoters can be classified into different types depending on their involvement in the company’s formation and the role they play in bringing it into existence.

1. Professional Promoters:

These are individuals or firms that specialize in the business of forming companies. They are often experts in financial and legal matters and assist in setting up companies for others in exchange for fees. Professional promoters typically do not have a long-term interest in the company; their job is to handle the technical aspects of formation and then step back.

Example: Law firms, chartered accountants, and business consultants who assist in the formation of companies.

2. Occasional Promoters:

These promoters are typically individuals or entities who promote a company on a one-time basis. They do not regularly engage in company formation but do so when they identify a business opportunity or have a personal interest in starting a specific company. Once the company is set up, they may or may not continue to be involved in its operations.

Example: An entrepreneur who sets up a business but does not regularly promote companies.

3. Financial Promoters:

Financial institutions, such as banks or investment firms, may act as promoters by providing the necessary capital and expertise to start a company. These promoters have a vested interest in the company’s success because of their financial involvement.

Example: Venture capital firms or investment banks that promote companies in which they have made significant financial investments.

4. Institutional Promoters:

Institutions such as government bodies, development banks, or large corporations sometimes promote companies to support economic development or achieve strategic goals. Institutional promoters often help to form companies in sectors that require large-scale investments or are of national importance.

Example: State-owned enterprises (like public sector units) or large conglomerates forming subsidiaries.

5. Entrepreneurial Promoters:

These are individuals who start companies to pursue their entrepreneurial vision. They are typically the original founders and often stay involved with the company in a managerial or executive capacity after its incorporation. Entrepreneurial promoters are typically hands-on and continue to play a key role in shaping the company’s future.

Example: Startup founders like Steve Jobs (Apple) or Jeff Bezos (Amazon) who promote the company and stay involved in its operations post-incorporation.

6. Nominee Promoters:

Nominee promoters act on behalf of another party, usually a financial institution or a group of investors. They may be hired to set up a company but have no personal stake in the business. Their role is purely functional, as they serve the interests of the party that appointed them.

Example: A nominee appointed by a group of shareholders or an investment firm to handle the technicalities of company incorporation.

Bond is a fixed-income financial instrument that represents a loan made by an investor to a borrower, typically a corporation or government. It is essentially a contract in which the issuer agrees to pay periodic interest (coupon payments) and return the principal amount (face value) to the bondholder at the bond’s maturity date. Bonds are used by companies, municipalities, states, and governments to finance projects or operations.

Features of Bonds:

1. Fixed Income Instrument

Bonds are fixed-income securities, meaning they offer regular interest payments to investors. These payments, known as coupons, are typically made at fixed intervals (annually or semi-annually). The interest rate is predetermined, providing a predictable stream of income for bondholders throughout the bond’s tenure.

2. Maturity Date

Each bond has a specified maturity date, which marks the end of the bond’s life. On this date, the issuer is required to repay the bond’s face value or principal to the bondholder. Maturity periods can range from a few months to several decades, and the duration influences the bond’s interest rate and risk profile.

3. Face Value

Also known as par value, the face value is the principal amount of the bond that the issuer agrees to repay at maturity. Bonds are typically issued in denominations such as $1,000. The face value is distinct from the bond’s market price, which can fluctuate based on factors like interest rates and credit ratings.

4. Coupon Rate

The coupon rate is the interest rate that the bond issuer agrees to pay the bondholder. It is expressed as a percentage of the bond’s face value. For example, a bond with a face value of $1,000 and a coupon rate of 5% would pay $50 in interest annually. The coupon rate is fixed for the bond’s duration unless the bond has floating rates.

5. Market Price

The market price of a bond fluctuates based on interest rates, demand, and credit risk. Bonds may trade at a premium (above face value) or at a discount (below face value). If interest rates rise, bond prices usually fall, and vice versa. The market price impacts an investor’s yield.

6. Yield

Yield refers to the overall return an investor can expect from holding a bond. It is influenced by the bond’s purchase price, interest payments, and time to maturity. Yield to maturity (YTM) is a commonly used measure, representing the total return expected if the bond is held until maturity.

7. Credit Rating

Bonds are assigned credit ratings by rating agencies such as Moody’s, S&P, and Fitch. These ratings indicate the issuer’s ability to meet its debt obligations. Higher-rated bonds (AAA or AA) are considered safer, while lower-rated bonds (BB or below) are riskier but may offer higher yields.

8. Callable or Non-callable

Some bonds come with a callable feature, allowing the issuer to redeem them before the maturity date. This is often done when interest rates drop, allowing the issuer to refinance the debt at a lower rate. Non-callable bonds, on the other hand, cannot be redeemed early, providing more stability to investors.

Issues of Bonds:

Issuing bonds is a common way for governments, corporations, and other entities to raise capital. Bonds are debt instruments where the issuer borrows money from investors and agrees to pay interest periodically, with the principal repaid at maturity. The process of issuing bonds involves several important steps and considerations.

1. Purpose of Issuing Bonds

Entities issue bonds to raise funds for various purposes, such as:

• Government Bonds: Governments issue bonds to finance budget deficits, public projects (infrastructure, education, healthcare), or to manage national debt.
• Corporate Bonds: Companies issue bonds to fund expansion, acquisitions, operational needs, or to restructure debt.
• Municipal Bonds: Local governments or municipalities issue bonds to fund public infrastructure projects like schools, roads, or hospitals.

2. Bond Offering Process

The process of issuing bonds typically involves several steps:

• Board Approval and Regulatory Compliance: For corporations, the issuance of bonds must first be approved by the company’s board of directors. Additionally, regulatory approvals (such as from the Securities and Exchange Commission, or SEC, in the U.S.) must be obtained before proceeding.
• Engaging Underwriters: Issuers often work with investment banks or underwriters to manage the bond issuance. These underwriters help determine the terms of the bond, the interest rate, and market conditions.
• Pricing the Bond: The bond’s interest rate (coupon) is determined based on factors like market interest rates, the credit rating of the issuer, and the economic environment. The price of the bond is adjusted accordingly to reflect its yield.
• Credit Rating: Before issuing bonds, companies and governments typically seek credit ratings from rating agencies like Moody’s, S&P, or Fitch. A higher credit rating generally leads to lower interest rates, as the risk of default is lower. Lower-rated bonds, or “junk bonds,” must offer higher interest rates to attract investors.

3. Bond Issue Documents

Several legal documents are required for bond issuance, including:

• Prospectus: This document outlines the terms of the bond offering, including the interest rate, maturity date, and risk factors.
• Indenture Agreement: A legal document that specifies the obligations of the issuer, the rights of the bondholders, and details such as interest payments and covenants.

4. Issuance Methods

There are different methods to issue bonds:

• Public Offering: Bonds are offered to the public, often through an underwriting syndicate. In a public offering, bonds are sold to a wide range of institutional and retail investors.
• Private Placement: Bonds are sold directly to a small group of institutional investors. Private placements are often faster and involve less regulatory scrutiny than public offerings.

5. Book Building Process

In a bond issuance, especially corporate or municipal bonds, issuers often use a book-building process. Here, the underwriters gauge investor interest in the bond by soliciting bids from institutional investors. Based on demand, the final price and interest rate of the bond are determined. This process ensures that the bond is priced competitively for both the issuer and investors.

6. Risk and Yield Considerations

The interest rate offered on the bond is often related to the issuer’s creditworthiness. Higher credit ratings (AAA) indicate lower risk, resulting in lower interest rates. Conversely, lower-rated bonds (junk bonds) carry higher risk, so they must offer higher yields to attract investors.

7. Issuance Costs

Issuing bonds involves costs such as underwriting fees, legal expenses, and rating agency fees. These costs must be factored into the overall financial planning of the bond issuance.

8. Market Conditions

Bond issuers must assess current market conditions, including prevailing interest rates, inflation expectations, and investor demand for fixed-income securities. Timing the issuance when market conditions are favorable can lead to more successful bond sales and better terms for the issuer.

Types of Bonds:

1. Government Bonds

Issued by national governments, these bonds are considered one of the safest investments since they are backed by the government’s credit. In the U.S., these are called Treasury bonds, while other countries have their equivalents. They typically offer lower returns due to their safety.

2. Corporate Bonds

Issued by companies to raise capital for operations, expansion, or acquisitions. Corporate bonds carry more risk than government bonds but offer higher yields. The risk level depends on the company’s creditworthiness, ranging from investment-grade to high-yield (junk) bonds.

3. Municipal Bonds

Issued by local governments or municipalities to fund public projects like infrastructure development, schools, or hospitals. Municipal bonds offer tax advantages in many countries, such as tax-free interest income in the U.S. These bonds are relatively low risk but not as safe as government bonds.

4. Convertible Bonds

These are corporate bonds that can be converted into a pre-specified number of the company’s shares. Convertible bonds provide the safety of a bond with the potential upside of equity if the company’s stock performs well.

5. Zero-Coupon Bonds

These bonds do not pay periodic interest. Instead, they are issued at a discount to their face value, and investors receive the face value at maturity. The difference between the purchase price and the face value represents the interest earned. These bonds can be more sensitive to interest rate changes.

6. Callable Bonds

Callable bonds give the issuer the right to repay the bond before its maturity date. Companies typically call bonds when interest rates fall, allowing them to refinance at a lower rate. These bonds carry reinvestment risk for investors, as they may not find another investment with similar returns when the bond is called.

7. Floating Rate Bonds

Unlike fixed-rate bonds, floating-rate bonds have interest rates that adjust periodically based on a benchmark, such as the LIBOR (London Interbank Offered Rate). This makes them less sensitive to interest rate fluctuations and inflation.

8. Inflation-Linked Bonds

These bonds are designed to protect investors from inflation. The principal amount of the bond increases with inflation, as measured by a specific index like the Consumer Price Index (CPI). Interest is paid on the inflation-adjusted principal.

Debenture is a type of debt instrument that is unsecured by physical assets or collateral. Debentures are issued by companies to borrow money for a fixed term at a fixed interest rate. Debenture holders are not owners of the company but are creditors. The company promises to pay the debenture holder a fixed interest at predetermined intervals (typically annually or semi-annually) and return the principal on the maturity date.

Debentures can either be convertible or non-convertible, and they often have specific terms outlining the interest rate, payment schedule, and maturity date. If the company defaults on its payments, debenture holders may have legal recourse to recover their investment.

Types of Debentures:

1. Convertible Debentures:

These debentures can be converted into equity shares after a specified period or at the discretion of the debenture holder. This type allows investors to gain potential equity ownership in the company.

2. Non-Convertible Debentures (NCDs):

These debentures cannot be converted into equity shares. They remain purely a debt instrument throughout their tenure. NCDs typically offer higher interest rates since they don’t provide the opportunity to convert to equity.

3. Secured Debentures:

Although most debentures are unsecured, some may be secured by the company’s assets. In the event of default, secured debenture holders have a claim on specific company assets.

4. Unsecured Debentures:

These are not backed by any collateral, making them riskier for investors compared to secured debentures. Unsecured debentures rely entirely on the company’s creditworthiness.

5. Redeemable Debentures:

These are debentures that the company agrees to repay after a specific period. They can be redeemed at the maturity date, ensuring that investors get back their principal.

6. Irredeemable (Perpetual) Debentures:

These debentures do not have a fixed maturity date. The company is not obligated to repay the principal but must continue to pay interest to debenture holders indefinitely.

7. Registered Debentures:

These are debentures issued in the name of the holder, meaning that the company keeps a register of the debenture holders. They can only be transferred by signing a transfer deed.

8. Bearer Debentures:

These are not registered in the name of any specific holder and are transferable by mere delivery. The holder of the physical certificate is considered the owner of the debenture.

Advantages of Debentures:

• Fixed Interest Payments:

Debenture holders are entitled to a fixed rate of interest, providing a regular and predictable income stream. This makes debentures an attractive investment for individuals seeking consistent returns.

• Non-Dilutive Financing:

By issuing debentures, a company can raise capital without diluting the ownership structure. Shareholders do not lose any control over the company as they would with issuing additional equity shares.

• Priority in Payments:

In the event of liquidation, debenture holders have a higher claim on the company’s assets compared to equity shareholders. They are paid before shareholders in case of insolvency, reducing the risk of total loss.

• Tax Deductibility:

The interest paid on debentures is typically considered a business expense for the issuing company and is tax-deductible, reducing the company’s taxable income.

• Flexibility:

Companies can choose different types of debentures (secured, unsecured, convertible, etc.) depending on their financial needs and the preferences of investors. This flexibility allows companies to structure debentures in a way that aligns with their financial strategies.

• Cost-Effective:

Issuing debentures may be less expensive than issuing new equity shares or taking out a traditional bank loan. Interest rates on debentures may also be lower compared to the returns that would need to be offered to attract equity investors.

• Convertible Options:

Convertible debentures give investors the option to convert their debentures into equity shares, offering them the potential to benefit from share price appreciation in the future, in addition to regular interest payments.

Disadvantages of Debentures:

• Fixed Financial Obligation:

Debentures create a fixed financial liability for the company, as interest payments must be made regardless of the company’s profitability. If the company faces financial difficulties, it still has to meet these payment obligations, which can strain cash flow.

• Risk of Default:

If a company is unable to meet its interest payments or repay the principal amount upon maturity, it defaults on the debenture. This can damage the company’s reputation and lead to legal proceedings initiated by the debenture holders.

• Interest Rate Sensitivity:

Debenture holders receive a fixed interest rate, but market interest rates can fluctuate. If interest rates rise, debentures may become less attractive as other investment options offering higher returns become available.

• No Voting Rights:

Debenture holders do not have any voting rights in the company, unlike equity shareholders. They cannot influence the company’s management or participate in key decision-making processes.

• Inflation Risk:

Debentures provide fixed returns, which may be eroded by inflation over time. If inflation rises, the purchasing power of the fixed interest payments may decrease, making debentures less appealing to investors.

• Callable Debentures:

Some debentures may be callable, meaning the company has the right to repay the debentures before their maturity date. This can be disadvantageous for investors if the debenture is called during a period of falling interest rates, as they may have to reinvest their funds at a lower rate.

• Creditworthiness Risk:

The security of debentures depends largely on the issuing company’s financial health. If the company’s credit rating is downgraded or it experiences financial difficulties, the value of the debentures can decrease, making them riskier for investors.

Section 2(62) of Companies Act defines a one-person company as a company that has only one person as to its member. Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders. So, an OPC is effectively a company that has only one shareholder as its member.

Such companies are generally created when there is only one founder/promoter for the business. Entrepreneurs whose businesses lie in early stages prefer to create OPCs instead of sole proprietorship business because of the several advantages that OPCs offer.

The Companies Act, 2013 completely revolutionized corporate laws in India by introducing several new concepts that did not exist previously. On such game-changer was the introduction of One Person Company concept. This led to the recognition of a completely new way of starting businesses that accorded flexibility which a company form of entity can offer, while also providing the protection of limited liability that sole proprietorship or partnerships lacked.

Several other countries had already recognized the ability of individuals forming a company before the enactment of the new Companies Act in 2013. These included the likes of China, Singapore, UK, Australia, and the USA.

Features of a One Person Company

• Private company: Section 3(1)(c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies.
• Single-member: OPCs can have only one member or shareholder, unlike other private companies.
• Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.
• Company may be a One Person Company (OPC) which requires only one person as a subscriber to form a company and such a company will be treated under the Act as a private company.
• A person, who registers one-person company, is not eligible to incorporate more than one one-person company
• The memorandum of OPC must indicate the name of a person (other than the subscriber), with his prior written consent in the prescribed form, who will become a member of the OPC when the subscriber dies or is incapacitated to contract.
• The nominee to the memorandum of one person company shall not be eligible to become a nominee for more than one such company.
• No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
• Minimum one director: OPCs need to have minimum one person (the member) as director. They can have a maximum of 15 directors.
• No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as minimum paid-up capital for OPCs.
• Special privileges: OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess.

Privileges of One Person Companies

• They do not have to hold annual general meetings.
• A company secretary is not required to sign annual returns; directors can also do so.
• Provisions relating to independent directors do not apply to them.
• Their financial statements need not include cash flow statements.
• Their articles can provide for additional grounds for vacation of a director’s office.
• Several provisions relating to meetings and quorum do not apply to them.
• They can pay more remuneration to directors than compared to other companies.

Membership in One Person Companies

Only natural persons who are Indian citizens and residents are eligible to form a one-person company in India. The same condition applies to nominees of OPCs. Further, such a natural person cannot be a member or nominee of more than one OPC at any point in time.

It is important to note that only natural persons can become members of OPCs. This does not happen in the case of companies wherein companies themselves can own shares and be members. Further, the law prohibits minors from being members or nominees of OPCs.

Formation of One Person Companies

A single person can form an OPC by subscribing his name to the memorandum of association and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum must state details of a nominee who shall become the company’s sole member in case the original member dies or becomes incapable of entering into contractual relations.

This memorandum and the nominee’s consent to his nomination should be filed to the Registrar of Companies along with an application of registration. Such nominee can withdraw his name at any point in time by submission of requisite applications to the Registrar. His nomination can also later be canceled by the member.

Advantages

• Compliance Burden:

The One-person Company includes in the definition of “Private Limited Company” given under section 2(68) of the Companies Act, 2013. Thus, an OPC will be required to comply with provisions applicable to private companies. However, OPCs have been provided with a number of exemptions and therefore have lesser compliance related burden.

• Organized Sector of Proprietorship Company:

OPC will bring the unorganized sector of proprietorship into the organized version of a private limited company. Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The organized version of OPC will open the avenues for more favorable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited.

Minimum Requirements:

• Minimum 1 Shareholder
• Minimum 1 Director
• The director and shareholder can be same person
• Minimum 1 Nominee
• No Need of any Minimum Share Capital
• Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies

Limited Liability Protection to Directors and Shareholder:

• The most significant reason for shareholders to incorporate the ‘single-person company’ is certainly the desire for the limited liability.
• All unfortunate events in business are not always under an entrepreneur’s control; hence it is important to secure the personal assets of the owner, if the business lands up in crises
• While doing business as a proprietorship firm, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur.
• If the business is unable to pay its liabilities, the individual has to pay such liabilities off in the case of sole proprietorship; and the individual is not responsible for such liabilities in the case of a one-person company.
• An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.

Legal Status and Social Recognition For Your Business

One Person Company is a Private Limited Structure; this is the most popular business structure in the world. Gives suppliers and customers a sense of confidence in business. Large organizations prefer to deal with private limited companies instead of proprietorship firms. Pvt. Ltd. business structure enjoys corporate status in society which helps the entrepreneur to attract quality workforce and helps to retain them by giving corporate designations, like directorship. These designations cannot be used by proprietorship firms.

Adequate Safeguards:

In case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.

Easy to Get Loan from Banks

Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm into a Private Limited company before sanctioning funds. So, it is better to register your startup as a One Person private limited rather than proprietary firm.

Perpetual Succession:

An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. The OPC is an artificial entity distinct from its owner. Creditors should therefore be warned that their claims against the business cannot be pressed against the owner.

Tax Flexibility and Savings

In an OPC, it is possible for a company to make a valid contract with its shareholder or directors. This means as a director you can receive remuneration, as a lessor you can receive rent, as a creditor you can lend money to your own company and earn interest. Directors’ remuneration, rent and interest are deductible expenses which reduces the profitability of the Company and ultimately brings down taxable income of your business.

Ownership limitations:

As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company.

Thus, the person incorporating the OPC must be a natural person implying that it cannot be formed by a juristic person or an artificial person e.g. any type of company incorporated under Companies Act 2013.  This restricts the ownership of only individuals and not corporations.

This provision also discourages foreign direct investment by disallowing foreign companies and multinational companies to incorporate their subsidiaries in India as a One Person Company. Hence, an OPC will have to change their legal status to a private limited company to bring in investors. Foreigners and NRIs are allowed to invest in a Private Limited Company under the Automatic Approval route where 100% FDI is available in most sectors.

Restrictions on conversion

An OPC cannot be incorporated under Section 8 (Formation of companies with charitable objects etc) of Companies Act 2013. An OPC is also not allowed to carry out Non-Banking Financial Investment activities. This includes investing in securities of any body corporate.

An OPC can only convert into either a private or public company once the following conditions are met:

1. The OPC must have been in existence for a minimum of two years; or
2. It must have a paid up share capital which has increased beyond Rs. 50,00,000/- (rupees fifty lakh); or
3. Its average turnover must have exceeded Rs. 2,00,00,000/- (rupees two crore).

Such restrictions stifle an entrepreneur’s desire for diversity and expansion.

ESOPs

Since an OPC can have only one shareholder, there can be no sweat equity shares or ESOPs to incentivize employees. ESOPs can only be implemented if OPC converts into a private or public limited company. A private or public limited company can easily expand by an increase of authorized capital and further allotment of shares to even third parties.

Hence, a private company is a preferable option for start-ups who want to encourage their employees by way of stock options.

One of the major issues that gained attention after the 2007 and 2009 financial crisis due to Wall Street movement was the unduly high compensation being paid to executives of financial institutions even when the corporations were in a state of collapse. This movement against the executive remuneration gained momentum throughout the world. In U.S and many other countries there was a lot of hue and cry about excessive compensation being paid to top executives. Even though in India the situation regarding excessive executive remuneration has not reached alarming levels yet this issue needs to be taken seriously at this stage itself. If not given proper attention then it is not long enough when this problem would be quite glaring in India too.

Many recent corporate frauds such as Satyam fraud, Kingfisher’s fraud and many others have brought into light the dark side of Indian corporate governance practices. In almost all these frauds the executives were drawing a huge salary from the company at the expense of other stakeholders of the company be it shareholders or creditors etc.They used tricks to defraud the investors as well as creditors. Thus, this issue needs adequate attention else it would lead to more such frauds.

Various studies on remuneration schemes of executives in Indian Companies have reflected majorly 3 issues:

1. The remuneration is not strictly based on performance. The highest paid executives are usually not from the best performing companies and many a times even when the value of shares is declining constantly there is no major effect on the remuneration of top executives.
2. There is a huge gap in the compensation level of executives and median employees. The supports for high remuneration state that this is due to the dearth of talent at the top level but even then such a glaring difference in the basic pay as well as in the % increase in pay as compared to median employees is not justified.
3. Also, the studies have found that the promoter CEOs are paid much more in comparison to Non promoter CEOs.

In this paper I would basically study the reasons behind the above findings and would majorly focus on efficiency of current regime in curbing the same and also the role of other interested entities which can serve as a control mechanism on executive remuneration.

For this purpose firstly, analyze the context of executive remuneration and the issues associated with it wherein will focus on agency problem and also the role of ownership structure in enhancing the problem. Then would annalyse the efficacy of checks provided by the current regime on Executive remuneration i.e. Shareholders say on pay, Remuneration committee and linking Remuneration to performance. Lastly, examine the role of Institutional investors as a control mechanism against executive remuneration.

Meaning of Remuneration

Remuneration has been described in section 2(78) of the Companies Act 2013.As per this definition any payment in the form of money or its equivalent would be counted as remuneration. Perquisites would also be included in determining total remuneration. Perquisites in this case are those as defined under the Income tax Act, 1961.

Remuneration can be paid in various forms like cash, medical benefits, retirement benefits, share options, shares, sitting fee and perks and allowances like contribution to provident fund, rent free accommodation, travelling expenses, car etc. It is usually a combination of various forms. Certain perquisites and compensations are explicitly exempted from being counted as a part of remuneration

Role of Executive Remuneration

The role of executive remuneration is to attract and retain top talent at executive position and incentivize them in the way that they work for the benefit of the company while furthering the objective of the company and increasing the value of the firm.

Interplay Between Fixed and Variable Component

The role of fixed component is to fulfill the immediate needs of the employees. All types of companies are open to certain sector specific risks and fixed component reduces the effect of this risk by assuring certain determined amount of income.

On the other hand, variable component can be used to align the interest of executives to the interest of company. For example, if the executives are provided with certain number of shares as a part of remuneration then better performance would lead to increase in the share value of the company and would also increase executive’s compensation.

If the executives receive just fixed remuneration with no variable component then instead of working as incentive, it would actually dilute its effect and if the compensation would include only variable component then this would also frustrate the employee.

Thus, there must be combination of fixed as well as variable component wherein the fixed component work as an incentive to work and the variable component makes sure that the work is done in the interest of the company. Also, it is necessary that there must be interaction between various forms of compensation and the remuneration scheme must be arranged in a way that it is incentive based.

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’:

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

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:

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:

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:

* Terminal Depreciation/Balancing Charge:

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

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).