COMPANY LAW
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UNIT - I
After the end of World War II the need for a further revision of the company law was felt. Many changes had taken placed in the organization and management of joint stock companies.
The government of India therefore appointed, on 25th October, 1950, a committee of 12 members representing various interests under the chairmanship of Mr.H.C.BHABHA.
The Bhabha Committee submitted a comprehensive report on all aspects of company law in April 1952. The recommendations of the Committee culminated in the most comprehensive and voluminous law on the subject in the Companies Act of 1956.
Objects of the Act:
The Companies Act of 1956 is a comprehensive piece of legislation covering the entire field of company organization and management.
All the statutory rules are intended-
1) To protect the interest of creditors in view of the limited liability of the members of a company.
2) To protect the interest of investors.
3) To help the growth of companies on healthy business lines.
APPLICATION OF THE ACT:
The act applies to the following companies:
1) Companies formed and registered under the Companies Act, 1956.
2) Companies formed and registered under previous companies laws,[Sec.561]
3) Companies registered but not formed under any previous companies laws to the extent and in the manner declared in part IX of the Act.[Sec.562]
4) Unlimited companies registered as limited companies in pursuance o any previous company's laws.[Sec.563]
5) Unregistered companies for the purpose of winding up under Part X of the Act.[Sec.582,583 and 589]
6) Foreign companies [Sec.592 to 602]
7) Insurance companies, banking companies electricity companies and any other company governed by any Special Act for the time being in force except in so far as the provisions of the Companies Act,1956.
8) Such body corporate incorporated by any Act for the time being in force as the Central Government may, by notification in the Official Gazette, specify in this behalf subject to such exceptions, modifications or adaptations as may be specified therein.[Sec. 616]
9) Government companies [Sec.617]
10) Nidhis or Mutual Benefit Societies declared as such by the Central Government by notification in the Official Gazette[Sec.620-A]
THE ACT DOES NOT APPLY TO-
1) Companies established under Special Act of Parliament, such as LIC, Indian Airlines Corporation, Industrial Finance Corporation.
2) Partnership firms.
3) Co-operative societies
4) Trusts
5) Societies, not engaged in trade or business, which are governed by the Societies Registration Act 1860.
SCHEME OF THE ACT:
The Act provides a basic legal framework for the regulation of companies in India. It makes provision for the legal incorporation of Companies and lays down rules for their constitution, management and winding up. The scheme of the act may consider broadly under four heads, namely:-
a) Establishment of the a company [parts II to IV of the Act]
b) Management and administration of the company[part VI of the Act]
c) Winding up of the company[part VII of the Act]
d) Miscellaneous provisions[Parts V and VIII to XIII of the Act]
e) Producer Companies[Part IX-A of the Act]
NATURE OF COMPANY
A company means a group of persons associated together for the attainment of a common end, social or economic. It represents different kinds of association, both business and otherwise. The term registered company means a company incorporated under the Companies Act, 1956.
A company is an artificial person. A company does not have no body, no soul and no conscience nor is it subject to imbecilities of the body.
Salient features:
The salient features of a company are:
1) It has independent corporate existence.
2) It has perpetual succession.
3) It can sue and be sued.
4) The property of the company belongs to the company and not its members.
5) The members have only a limited liability.
6) The shares of the members are transferable.
7) Common seal.
1) INDEPENDENT CORPORATE EXISTENCE (Sec.34):
A company is in law regarded as an entity separate from its members. It has corporate existence independent of its members.
The feature of separate independent existence of a company may be illustrated by referring to the case of
SALOMON V/S SALOMON & Co., Ltd.
Aron Salomon, who was a leather and shoe manufacturer, sold his business to a company, the company limited by shares and having a share capital of 40,000 shares of $ 1 each. The company was named Salomon & Co., and the seven subscribers to the memorandum were, Salomon himself, his wife, daughter and four sons. In consideration for the transfer of his business to Salomon took 20,000/- shares of $ 1 each and debentures worth $ 10,000/-. Salomon's wife and the five children had one share of $ 1 each. There was a trade depression and after about one year of its formation, the company went into liquidation. The assets realized were merely $ 6,000, whereas the liabilities of the company were debentures held by Salomon $ 10,000 and unsecured creditors $ 7,000. If the assets realized were applied to pay off the debentures held by Salomon, the unsecured creditors were to remain unsatisfied.
The unsecured creditors questioned the right of Salomon to be treated as a debenture-holder for getting priority in payment. According to them, though the company was incorporated, it did not have an independent existence. It was in fact Salomon under another name. He was the managing director and all other directors were his family members, under his control. His preponderance of shares made him absolute master. The business solely belonged to Salomon, conducted solely for and by him, and the company as a mere sham and fraud, entirely contrary to the intent and meaning of the Companies Act. The unsecured creditors, therefore, contended that no payment should be made to the debenture-holder until the outside creditors had been paid off.
The contention of the creditors was rejected and it was held that on incorporation, the company became an independent legal person, and not an alias or agent of Salomon. Even though the debenture-holder was Salomon himself, he was held entitled to priority in payment over the unsecured creditors of the company.
It was observed: "It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not in law their agent or trustee".
2) PERPETUAL SUCCESSION:
A company being an artificial person has a perpetual succession, i.e., it continues to live practically for ever. Unlike partnership, a company having a distinct legal personality continues to live in spite of the death, insolvency, or some other incapacity of the members.
3) IT CAN SUE AND BE SUED:
A company is a juristic person, i.e., it has a distinct legal personality. Being a legal person, a company can sue and be sued in its own name. Unlike partnership and action against a company does not mean an action against its members.
4) IT HAS ITS OWN SEPARATE PROPERTY;
The property of the company belongs to the company itself, rather than to its members. A company is a legal entity and there, it has a right like any other person to own, enjoy or dispose of its property without any specific rights of the shareholders in respect of such property.
5) LIMITED LIABILITY OF THE MEMBERS:
A company is distinct legal person and, therefore, the debts of the company have to be paid by the company itself rather than by its members. The feature of limited liability of a company is of great advantage to each member of the company in so far as he cannot be required to pay more than the nominal value of the shares held by him.
6) TRANSFERABLE SHARES:
Section 82 recognizes the shares or other interest of any member in a company as movable property, transferable in a manner provided by the Articles of the company.
7) COMMON SEAL:
Since a company has no physical existence it must act through its agent and all such contracts entered into by its agents must be under the seal of the company. The common seal acts as the official signature of the company.
It has been noted above that the company is a separate legal entity, different from its members. It has independent legal existence. Its assets are not the assets of the members, not is its liability or the debts to be discharged by the members.
Lifting the corporate veil:
In some exceptional cases the corporate veil may be lifted and corporate personality of the company may be ignored and the principle of piercing the corporate veil may be applied in the interest of justice. The courts may look at the things as if the company did not have separate corporate existence.
Exceptions:
The various a case in which corporate veil has been lifted are as follows:
1) Protection of revenue:
The courts may ignore the corporate entity of a company where it is used for tax evasion.
2) Prevention of fraud or improper conduct:
The legal personality of a company may also be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose like defrauding creditors or defeating law.
3) Determination of character of a company whether it is enemy:
A company may assume an enemy character when persons in de facto control of its affairs are residents in an enemy country. In such case, the court may examine the character of persons in real control of the company, and declare the company to be enemy company.
4) Where the company is a sham:
The courts also lift the veil where a company is a mere cloak or sham.
5) Company avoiding legal obligations:
Where the use of an incorporated company is being made to avoid legal obligations, the court may disregard the legal personality of the company and proceed on the assumption as if no company existed.
6) Company acting as agent or trustee of the shareholders:
Where a company is acting as agent for its shareholders, the shareholders will be liable for the acts of the company.
7) Avoidance of welfare legislation:
Avoidance of welfare legislation is as common as avoidance of taxation and the approach of the courts in considering problems arising out of such avoidance is generally the same as avoidance of taxation.
8) Protecting public policy:
The courts invariably lift the corporate veil to protect the public policy and prevent transactions contrary to public policy.
Statutory exceptions:
1) Number of members below statutory minimum (Sec.45):
if a company carries on business for more than 6 months after the number of its members has been reduced below 7 in case of a public company or 2 in case of a private company, every person who knows this fact and is a member during the time that the company so carries on business after the six months, is severally liable for the whole of the debts of the company contracted during that time.
2) Failure to refund application money (Sec.69(5)
3) Misdescription of company's name (Sec.147(4)
4) Fraudulent trading (Sec.542)
5) Holding and subsidiary companies.
A COMPANY IS NOT A CITIZN
Although a company is regarded as a legal person or artificial person, it is not a citizen either under the Constitution of India or the Citizenship Act, 1955.
A company has a nationality and residence. Although a company cannot be a citizen, yet it has a nationality, domicile and residence.
Gasque V/S Inland Revenue Commissioner,
In this case Macnaghten held: "It is quite true that a body corporate cannot have a domicile in the same sense as an individual. But by analogy with a natural person the attributes of residence, domicile and nationality can be given to a body corporate.
KINDS OF COMPANIES:
I. CASSIFICATION ON THE BASIS OF INCORPORATION
1. Statutory companies. - These are the companies which are created by a special Act of the Legislature, e.g., the Reserve Bank of India, the State Bank of India, the Life Insurance Corporation, the Industrial Finance Corporation, the Unit Trust of India. These are mostly concerned with public utilities.
2. Registered companies.- These are the companies which are formed and registered under the companies Act, 1956, or were registered under any of the earlier Companies Acts.
II. CLASSIFICATION ON THE BASIS OF LIABILITY
On the basis of liability companies may be classified into :
1. Companies with limited liability. These may be -
a. Companies limited by shares, or
b. Companies limited by guarantee, or
2. Companies with unlimited liability [Sec. 12(2)].
1. Companies with limited liability.
(1) Companies limited by shares.- Where the liability of the members of a company is limited to the amount unpaid on the shares, such a company is known as a company limited by shares. The liability can be enforced during the existence of the company as also during the winding up of the company.
(2) Companies limited by guarantee.- Where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up, the company is called a company limited by guarantee.
Companies limited by guarantee are not formed for the purpose of profit but for the promotion of art, science, culture, charity, sports, commerce or for some similar purpose. They may or may not have a share capital.
2. Unlimited companies
Sec. 12 specifically provides that any 7 or more persons (2 or more in case of a private company) may form an incorporated company, with or without limited liability. A company without limited liability is known as an unlimited company. In case of such a company, every member is liable for the debts of the company, as I an ordinary partnership, in proportion to his interest in the company.
III. CLASSIFICATION ON THE BASIS OF NUMBER OF MEMBERS
From the point of view of the general public and on the basis of number of members, a company may be.-
a) Restricts the right to transfer its shares, if any. This restriction is meant to preserve the private character of the company;
b) Limits the number of its members to 50 not including its employee-members in present or past.
It may be noted that the number of debenture-holders in a private company may exceed 50 as there is no restriction on their number in the definition. The only restriction is that a private company cannot issue debentures to the public at large.
Joint holders of shares are treated as a single member.
A private company must have its own Articles of Association which contains the conditions as laid down in Sec. 3(1) (iii) (Sec. 26).
a) Has a minimum paid-up capital of Rs. 5 lakh or such high paid-up capital, as may be prescribed;
b) Is a private company which is a subsidiary of a company which is not a private company.
Every public company, existing on the commencement of the Companies (Amendment) Act, 2000, with a paid-up of less than Rs. 5,00,000 shall, within a period of two years from such commencement, enhance its paid-up capital to Rs. 5,00,000.
IV. CLASSIFICATION ON THE BASIS OF CONTROL
On the basis of control, companies may be classified into :
1) Company controlling composition of Board of directors.
2) Holding of majority of shares. Where a company (Company H) holds more than half is nominal value of equity share capital of another company.
3) Subsidiary of another subsidiary.
V. CLASSIFICATION ON THE BASIS OF OWNERSHIP
On the basis of ownership, a company may be a -
The latter is controlled and operated by private capital.
Government company:-
A Government company means any company in which not less than 51 percent of the paid-up share capital is held by
a) The Central Government, or
b) Any State Government or Governments, or
c) Partly by the Central Government and partly by one or more State Governments. For example, State Trading Corporation of India Ltd. and Minerals and Metals Trading Corporation of India Ltd. are Government companies. The subsidiary of a Government company is also a Government company (Sec. 617).
Rules applicable to Government companies
1. Appointment of auditor and audit reports (Sec. 619). The auditor of a Government company shall be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India. The Comptroller and Auditor-General shall have power to direct the manner in which the company's accounts shall be audited by the auditor.
Audit reports to be submitted to Comptroller and Auditor-General of India. The auditor of the Government Company shall submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon, or supplement, the audit report. Any such comments upon, or supplement to, the audit report shall be placed before the annual general meeting of the company.
2. Annual report to be placed before Parliament (Sec. 619-A). Where the Central Government is a member of a Government Company, it shall cause an annual report on the working and affairs of the company to be prepared within 3 months of its annual general meeting before which the audit report is placed. The report shall be laid before both Houses of Parliament and together with a copy of the audit report, and any comments upon, or supplement to, the audit, made by the Comptroller and Auditor-General of India.
3. Certain provisions of the Companies Act not to apply (Sec. 620).- The Central Government may, by notification in the Official Gazette, direct that any of the provisions of the Companies Act (other than Secs. 618, 619 and 619-A), specified in the notification.-
a) Shall not apply to any Government Company; or
b) Shall apply to any Government Company, with such exceptions, modifications, and adaptations, as may be specified in the notification.
Foreign Company :-
It means any company incorporated outside India which has an established place of business in India [Sec. 591 (1)]. Where, for example, representatives of a foreign company frequently come and stay in a hotel in India for purchasing raw material, machinery, cotton etc., the foreign company has a place of business in India.
Where a minimum of 50 percent of the paid-up share capital (whether equity or preference or partly equity and partly preference) of a foreign company is held by one or more citizens of India or/and by one or more bodies corporate incorporated in India, whether singly or jointly such company shall comply with such provisions as may be prescribed as if it were an Indian company [Sec. 591(2)].
VI. Rules applicable to foreign companies
A) Private Company.
B) Public Company.
C) Company limited by shares.
D) Company limited by guarantee.
E) Unlimited company.
F) Government Company.
G) Foreign Company.
H) Unlawful association.
WHO IS A PROMOTER?
A promoter is a person who does the necessary preliminary work incidental to the formation of a company. It is a companendious term used for a person who undertakes, does and goes through all the necessary and incidental preliminaries, keeping in view the object, to bring into existence and incorporated company.
The first persons who control a company's affairs are its promoters. It is they who conceive the idea of forming the company with reference to a given object and then to set it going. It is they who take the necessary steps to incorporate the company.
Functions of a promoter:
1) Formulation of an idea.
2) To make judicious enquiry about the idea.
3) To find the necessary resources and gather the people.
4) To make arrangement for the finance of the company.
Status of a promoter:
The position of a promoter may be summed up as follows:
1) Not to make any profit at the expense of the company.
2) To give benefit of negotiations to the company.
3) To make a full disclosure of interest or profit.
4) Not to make unfair use of position.
Duty of promoter as regards prospectus:
The promoter must see, in connection with the prospectus, if any is issued, that the prospectus-
If the promoter fails to perform this duty:-
a) allotment of shares may be set aside in the case of a fraudulent or innocent misrepresentation;
b) he may be sued for damages;
c) he may be sued for compensation for misrepresentation;
d) he me sued for damages by shareholders who have suffered by reason of his non-compliance with the statutory requirements as to the contents of the prospectus;
e) he may become liable to criminal proceedings.
Remuneration of promoters:
A promoter has no right to get compensation from the company for his services in promoting the company unless there is a contract to that effect.
A promoter takes remuneration for his services in one of the following ways:
a) He may sell his own property at a profit to the company for cash or fully paid shares provided he makes a disclosure to this effect.
b) He may be given an option to buy a certain number of shares in the company at par.
c) He may take a commission on the shares sold.
d) He may be paid a lump sum by the company.
FORMATION OF COMPANY
Before a company is formed, certain preliminary steps are necessary; all these steps are taken by certain persons known as "promoters". They do the entire necessary preliminary work incidental to the formation of a company.
INCORPORATION OF COMPANY
Mode of forming incorporated company (Sec.12):
Any 7 or more persons associated for any lawful purpose may form an incorporated company, with or without limited liability. They shall subscribe their names to a Memorandum of Association and also comply with other formalities in respect of registration.
A company so formed may be:
A company comes into existence when the same is registered and the certificate on incorporation of the company is issued by the Registrar.
Procedure for registration (Sec.33):
According to Sec.33 (1), application for registration has to be made to the Registrar of the State in which the Registered Office of the company is to be situated.
The same is to be accompanies by:
Such declaration shall be signed by any of the following persons: namely:
a) an Advocate of the Supreme Court or of a High Court;
b) an attorney or a pleader entitled to appear before a High Court;
c) A secretary or a chartered accountant in whole-time practice in India.
d) A person named in the Articles as a director, manager or secretary of the company.
CERTIFICATE OF INCORPORATION:
On the issue of the certificate of incorporation by the Registrar, the company gets its existence as a body corporate. When the requisite documents are filed with the Registrar, the Registrar shall satisfy himself that the statutory requirements regarding registration have been duly compiled with.
JUBILEE COTTON MILLS LTD., V/S LEWIS (1924) A.C.958
On 6th January, the necessary documents were delivered to the Registrar for registration. Two days after, the Registrar issued the certificate of incorporation but dated it 6th January instead of 8th January the day on which the certificate was issued. On 6th January some shares were allotted to Lewis, before the certificate of incorporation was issued. The question arose whether the allotment was void. Held, the certificate of incorporation is conclusive evidence of all that it contains. In law the company was formed on 6th January and, therefore, the allotment of shares was valid.
MOOSA GOOLAM ARIFF V/S EBRAHIM GOOLAM ARIFF, (2913) I.L.R. 40 CAL.1
A company was issued the certificate of incorporation by the Registrar on the basis of the Memorandum of Association which was signed by 2 adult persons and by a guardian of the other 5 members who were minors at the time. The guardian signed separately for all the 5 minors. The plaintiff contended that the certificate of incorporation should be declared void. Held, the certificate of incorporation was valid.
EFFECTS OF REGISTRATION (SEC.34):
1. On the registration of the Memorandum of a company, the registrar shall certify under his hand that the company is limited.
2. From the date of incorporation mentioned in the certificate of incorporation, the subscribers to the Memorandum and other persons, who are members of the company, shall be body corporate.
3. The body corporate shall be known by the name contained in the Memorandum.
4. It shall be capable forthwith of exercising all the functions of an incorporated company.
5. It shall have perpetual succession and a common seal.
6. The liability of the members to contribute to the assets of the company in the event of its being wound up shall be limited.
The first step in the formation of a company is to prepare Memorandum of Association. Memorandum means the Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous company's law or of the Companies Act 1956.
A fundamental document. The Memorandum of Association is a document of great importance in relation to the proposed company. It contains the fundamental conditions upon which alone the company is allowed to be incorporated.
PURPOSE OF MEMORANDUM:
The purpose of the Memorandum is two fold:
PRINTING AND SIGNING OF MEMORANDUM: Sec-15
The Memorandum of Association of a company shall be
a) Printed,
b) Divided into paragraphs numbered consecutively,
c) Signed by 7 (2 in case of a private company) subscribers,
d) Each subscriber shall sign ( and add his address, description and occupation, if any)
e) In the presence of at least 1 witness who shall attest the signature and shall likewise add his address, description and occupation,
f) The Memorandum of Association printed on computer laser printers should be accepted by the Registrar for registration of a company provided it is neatly and legibly printed,
FORM OF MEMORANDUM-Sec-14
The Memorandum of Association of a company shall be in such one of the Forms in Tables B, C, D and E in Schedule I of the Companies Act 1956.
Table B relates to Memorandum of Association of a company limited by shares.
Table C relates to Memorandum of Association & Articles of Association of a company limited by guarantee and not having a share capital.
Table D relates to Memorandum and Articles of Association of a company limited by guarantee and having a share capital.
Table E relates to Memorandum and Articles of Association of an unlimited company.
CONTENTS OF MEMORANDUM (Sec-13)
They are 6 contents of memorandum of association them as follows:
a) The name clause;
b) The registered office clause;
c) The objects clause;
d) The capital clause;
e) The liability clause;
f) The association clause.
a) The name clause:
The name of a company establishes its identity and is the symbol of its existence.
1. Undesirable name to be avoided;
A company cannot be registered by a name which in the opinion of the Central Government is undesirable. A company should not adopt a name which is identical with or closely resembles the name of an existing company.
2. Injunction if identical name adopted;
If a company gets registered with a name which resembles the name of an existing company, the other company with whom the name resembles can apply to the court for an injunction to restrain the new company from adopting the identical name. an injunction will not be granted to prevent the use of a purely descriptive word with a definite meaning and in common use.
ASIATIC GOVT. SECURITY LIFE INSURANCE CO., LTD., V/S NEW ASIATIC INSURANCE CO., LTD., (1939 9 COMP. CASE 208.
In this case although the names of the 2 companies, Asiatic Government Security Life Insurance Co., and New Asiatic Insurance Co., Ltd., resembled to a large extent, it was held by the Court that the two names were not identical, and therefore, the defendants were not restrained from using their name.
If a company does not paint or affix its name and the address of its registered office in the prescribed manner, the company and every officer of the company who is in default shall be punishable with fine of Rs. 5,000/-
2. The Registered office clause (Sec.146);
Every company shall have a registered office from the day on which it begins to carry on business, or as from the 30th day after the date of its incorporation, whichever is earlier. If default is made in complying with these requirements, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 500 for every day during which the default continues.
3. The objects clause (Sec.13 (1):
The objects of a company shall be clearly set forth in the Memorandum for a company can do what is within, or incidental to, the objects stated in the Memorandum.
The objects clause in the Memorandum of every company has to state;
a) Main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects;
b) Other objects of the company not included in the above Clause.
4. The capital clause {Sec.13 (4)}:
The Memorandum of a company having a share capital, shall state the amount of the share capital with which the company is to be registered and the division thereof into shares of a fixed amount. The capital with which a company is registered is called registered authorized or nominal capital.
5. The liability clause [Sec.13 (2)];
The Memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited.
The association clause states; we the several persons whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names. The Memorandum shall be signed by at least 7 subscribers in the case of a public company, and by at least 2 subscribers in the case of private company. The signature of each subscriber shall be attested by at least 1 witness who cannot be any of the other subscribers.
ALTERATION OF MEMORANDUM
According to Sec.2 (1) 'alteration includes' the making of additions and omissions.
For the purpose of alteration, the provisions of the Memorandum can be divided into two categories.
Alteration of conditions:
1. Change of name:
By special resolution (Sec.21):
A company may change its name by a special resolution and with the approval of the Central Government signified in writing. But a change of name which merely involves the deletion of the word 'Private' on the conversion of public company into a private company.
By ordinary resolution (Sec.22):
Sometimes, though inadvertence of a company is registered by a name which, in the opinion of the Central Government.
In such a case the company,
(a) May change its name, by ordinary resolution and with the previous approval of the Central Government.
(b) Shall change its name if the Central Government so directs within12 months of its registration.
If the company makes default in complying with any direction given by the Central Government in this regard, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs.1, 000/- for every day during which the default continues.
Fresh certificate of incorporation (Sec.23):
Where a company changes its name, the registrar shall enter the new name on the register in the place of the former name. It shall also issue to the company a fresh certificate of incorporation.
This may involve:
1) Change of registered office within a state. No company shall change the place of its registered office from one place to another within a state unless such change is confirmed by the Regional Director. The confirmation shall be communicated to the company within four weeks from the date of receipt of application for such change.
2) Change of registered office from one state to another (Sec.17).
Procedure of Alteration:
1) Special Resolution
2) Confirmation by the Central Government
3) Notice to affected parties
4) Notice to registrar
5) Power of the Central Government to confirm change discretionary.
6) Rights and interests of members and creditors to be taken care of the Central Government.
7) Purchase of shares of dissentient members.
8) Copy of special resolution and the order of the Central Government to be filed with the Registrar.
The objects clause is the most important clause in the Memorandum of Association. The legal personality of a company exists only for the particular purposes of incorporation as defined in the objects clause.
A company limited by shares or guarantee cannot change its Memorandum so as to impose any additional liability on the members or to compel them to buy additional shares of the company unless all the members agree in writing such change either before or after the change (Sec. 38)
For change in the capital clause which involves increase, reduction of reorganizations of the company.
DOCTRINE OF ULTRA VIRES
A company has the power to do all such things as are-
1) Authorized to be done by the Companies Act, 1956:
2) Essential to the attainment of its objects specified in the Memorandum,
3) Reasonably and fairly incidental to its objects.
Everything else is ultra vires the company. Ultra means 'beyond' and vires means 'powers'. The term ultra vires a company means that the doing of the act is beyond the legal power and authority of the company. The purpose of these restrictions is to protect-
a) investors in the company so that they may know the objects in which their money is to be employed;
b) Creditors by ensuring that the company's funds are not wasted in unauthorized activate.
Ultra vires act is void. If an act is ultra vires the company, it does not create any legal relationship. It is not necessary that an act to be considered ultra vires must be illegal; it may or may not be. The leading case on the point is:
ASHBURY RLY., CARRIAGE & IRON CO., LTD., V/S RICHE,[1875]L.R.7.H.L.653.
A company war incorporated with the following objects;
a) To make, sell, or lend on hire railway carriages and wagons;
b) To carry on the business of mechanical engineers and general contractors;
c) To purchase, lease, work, and sell mines, minerals, land and buildings.
The company entered into a contract with Riche for the financing of the construction of a railway line in Belgium. The question raised was whether that contract was covered within the meaning of 'general contractors'. The House of Lords held that the contract was ultra vires the company and void so that not even the subsequent assent of the whole body of shareholders could ratify it.
ULTRA VIRES THE DIRECTORS:
If an act or transaction is ultra vires the directors, the shareholders can ratify it by a resolution in a general meeting or even by acquiescence provided they have knowledge of the facts relating to transaction to be ratified.
ULTRA VIRES THE ARTICLES:
If an act or transaction is ultra vires the Articles, the company can ratify it by altering the Articles by a Special resolution.
Summing up:
The whole position may be summed up as follows:
1. When an act is performed or a transaction is carried out which, though legal in itself, is not authorized by the objects clause in the memorandum of association, it is said to be ultra vires the company.
2. If an act is ultra vires the company, it cannot be ratified even by the whole body of shareholders.
EFFECTS OF ULTRA VIRES TRANSACTIONA:
EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES:
SHARES
A share is the interest of a shareholder in a company. The capital of a company is divided into certain indivisible units of a fixed amount. These units are called shares. 'Share means share in the share capital of a company.
A share is evidenced by a share certificate (Sec.84).
A share certificate is issued by a company under its common seal. It specifies the shares held by a member and its prima facie evidence of the title of the member to the shares.
Under the Companies Act, 1956, a company can issue two types of shares, namely;
1. PREFERENCE SHARES (SEC.85 (1)]:
Preference shares, with reference to any company limited by shares, are those which have 2 characteristics;
a) They have a preferential right to be paid dividend during the lifetime of the company.
b) They have a preferential right to the return of capital when the company goes into liquidation.
Kinds of preference shares:
1. Cumulative preference shares:
These are the shares on which dividend goes on accumulating till it is fully paid off. The arrears of any year's dividend are carried forward as a charge upon the subsequent year's profits.
2. Non-cumulative preference shares:
These are the shares on which the dividend does not go on accumulating. If there are no profits or there are inadequate profits in any year, these shares get no dividend.
3. Participating preference shares:
These shares are not only entitled to a fixed rate of dividend but also to a share in surplus profits which remain after the claims of the equity shareholders have been met.
4. Non-participating preference shares:
These shares are entitled to only fix rate of dividend. The holders of these shares do not share in the surplus profits which go to the equity shareholders.
5. Convertible preference shares:
These are the shares which entitle their holder to covert them into equity shares within a certain period.
6. Non-convertible preference shares:
These are shares which do not confer on their holder right of conversion into equity shares.
7. Redeemable preference shares (Sec. 80):
A company limited by shares may, if so authorized by its Articles, issue preference shares which are to be redeemed.
2. EQUITY SHARES [SEC. 85(2)];
Equity shares, with reference to any company limited by shares, are those which are not preference shares.
Every person whose name is entered as member in the register of members of a company has a right to receive a certificate of his shares [Article 7 (1) of Table A, Schedule I]. A share certificate shall be under the seal of the company and shall specify -
1) the shares to which it relates,
2) the amount paid up thereon,
3) the name of the holder of the shares;
The share certificate shall be signed by at least 2 directors and the secretary. Limitation of time for issue of share certificates (Sec. 113)
The company shall deliver share certificates - Within 3 months of the allotment of shares. Within 2 months after the application for registration of the transfer of any such shares.
The share certificates issued to promoters, directors, friends, relatives and associates, etc. should carry the inscription "not transferable" for the period as may be applicable from the date of commencement of production or date of allotment whichever is later.
Default in issuing certificate:
If default is made in complying with the provisions of Sec.113, the company, and every officer of the company who is in default, shall be punishable with the fine which may extend to Rs.5, 000 for every day during which the default continues.
Objects of share certificate:
A share certificates under the seal of a company is prima facie evidence of the title of the member to the shares specified in the certificate.
Estoppel: A share certificate of a company creates two kinds of estoppel against the company, namely:
Estoppel as to title:
If a company authorizes the issue of a share certificate stating that the person named therein is the registered holder of certain shares, it cannot afterwards allege that the person is not entitled to those shares.
Estoppel as to payment:
If the share certificate states that the shares are fully paid, the company is estopped as against a bona fide purchaser from alleging that the amount stated in the share certificate as being paid on shares has not been paid.
SHARE WARRANT [SEC.114 AND 115]
Issue of share warrants to bearer [Sec.114]:
A share warrant is a document issued by a public company stating that its bearer is entitled to the shares specified therein. It is transferable by mere delivery and is a substitute for the share certificate. A public company limited by shares may convert its fully paid-up shares into share warrants.
Conditions for issue of share warrants:
1) The shares shall be fully paid up.
2) The Articles shall authorize the issue of share warrants.
3) Prior approval of the Central Government shall be obtained.
4) The share warrants shall be issued under the common seal of the company.
Share warrants and entries in register of members (Sec. 115)
Bearer of a share warrant is not a member of the company. On the issue of a share warrant, the company shall strike out of its register of members the name of the member in respect of the shares specified in the warrant as if he had ceased to be a member. The company shall enter instead in the register of members the following particulars, namely;
a) The fact of the issue of the warrant;
b) A statement of the shares specified in the warrant, distinguishing each share by its number;
c) The date of the issue of the warrant;
DISTINCTION BETWEEN A SHARE WARRANT AND A SHARE CERTIFICATE:-
All companies, whether public or private, are required to issue share certificates. Share warrants can be issued only by public companies.
1) A share warrant can be issued by a public company only if it is empowered to do so by its Articles of Association and has obtained prior approval of the Central Government.
But there is a statutory obligation on the every company issuing shares to issue a share certificate. No such power need be taken in the Articles of Association, nor is the approval of the Central Government.
2) A share warrant can be issued by only with respect to fully paid-up shares.
But a share certificate is to be issued even where the shares are partly paid-up.
3) The holder of a share certificate is a member of the company,
But the holder of a share warrant is not a member unless the Articles otherwise provide.
4) A share warrant is by mercantile usage a negotiable instrument.
But a share certificate is not.
5) Where a director is required to hold some qualification shares,
But a share warrant does not constitute such a qualification whereas a share certificate does.
6) No stamp duty is payable on transfer of a share warrant,
Whereas stamp duty is payable on transfer of shares specified in a share certificate.
7) The holder of a share certificate can present a petition for the winding up of the company.
The holder of a share warrant cannot do so.
8) A share certificate is a document showing prima facie title to the shares represented thereby.
A share warrant is the share security itself, transformed for the purpose of negotiation into a different character.
An application for shares is an offer by a prospective shareholder of a company to take shares. 'Allotment' is the acceptance by the company of the offer.
Allotment results in a binding contract between the company and the applicant.
General provisions regarding allotment of shares and debentures:
The general principles as to offer and acceptance in the law of contract apply to a contract involving an application for and allotment of shares in a company.
These principles are as follows:
Proper authority:
An allotment must be made b y a resolution of the Board of directors of the company. This duty cannot be delegated by the directors except in accordance with the provisions of the Articles.
Reasonable time:
The allotment must be made within a reasonable time otherwise the applicant is not bound to accept it.
Communication:
The allotment must be communicated to the person making the applications that it is legally complete.
Absolute and unconditional:
The allotment must be absolute and unconditional. If an application for shares is conditional and the condition is not fulfilled, the applicant is not bound to take shares.
Revocation:
An offer to take shares may be withdrawn any time before communication of its acceptance is complete as against the applicant.
Special provisions relating to application and allotment:
The Companies Act, 1956 prescribes certain restrictions regarding the allotment of shares and debentures by public companies.
These restrictions may be discussed under the following two heads:
I. When no public offer is made;
II. When public offer is made.
I. When no public offer is made:
Where a public company having a share capital does not offer shares or debentures to the public, it need not issue a prospectus. In such a case it shall not proceed to allot shares or debentures unless at least 3 days before the first allotment it has filed with the Registrar for registration a statement in lieu of prospectus.
II. When public offer is made:
In the case of a public company which offers shares and debentures to the public for subscription, the provisions relating to allotment may be studied under the following heads:
1. First allotment of shares.
2. Subsequent allotment of shares.
3. Allotment of debentures.
First allotment of shares:
A public company which offers shares to the public for subscription for the first time must comply with the following restrictions:
Registration of prospectus [Sec.60(1)]
A copy of the prospectus signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing shall be duly filed with the Registrar for registration on or before the date of its publication.
Initial offer of securities to be in dematerialized form in certain cases [Sec. 68-B as inserted by the Companies (Amendment) Act, 2000]
Notwithstanding anything contained in any other provisions of the Act, every listed public company, making initial public offer of any security for a sum of rupees 10 crores or more, shall issue the same only in dematerialized from by complying with the requisite provisions of the Depositories Act 1996.
Minimum subscription [Sec. 69(1)]
No allotment shall be made of any share capital of a company offered to the public for subscription unless -
I. the amount stated in the prospectus as the minimum amount has been subscribed,
II. the sum payable on application for such amount has been paid to and received by the company;
Application money [Sec. 69(3) to (6)]
The amount payable on application on each share shall not be less than 5 percent of the nominal amount of the share.
All moneys received form applicants for shares shall be deposited and kept deposited in a Scheduled Bank-
i) until the certificate to commence business is obtained;
ii) Where such certificate has already been obtained, until the entire amount payable on applications for shares in respect of the minimum 90 percent subscription has been received by the company.
Effect of irregular allotment [Sec. 71]
Allotment of shares is irregular when it has been made by a company in violation of Sec. 69 or 70. Thus a) where the company has issued a prospectus, the allotment is irregular if it, b) where the company has not issued a prospectus, the allotment is irregular if it does not file with the Registrar for registration, a statement in lieu of prospectus at least 3 days before the first allotment of shares.
The effects of an irregular allotment are as follows:
I. Allotment is void able: An irregular allotment is void able at the option of the application. The irregular allotment is void able even if the company is being wound up.
II. Compensation: Any director, who has knowledge of the fact of the irregular allotment of shares, shall be liable to compensate the company and the shareholder for any loss, damages or costs which the company.
Opening of the subscription list [Sec. 72]
Where shares or debentures of a company are offered in pursuance of a prospectus issued generally, these cannot be allotted at once. According to Sec. 72, allotment can be made only after the beginning of the 5th day from the date of the issued of prospectus.
Shares and debentures to be listed in on a stock exchange [Sec. 73]
The Companies Amendment Act, 1988 provides for compulsory listing of all public issues with recognized stock exchanges. According to it, every company, intending to offer shares or debentures to the public for subscription by the issue of a prospectus, shall, before such issue, make an application one or more recognized stock exchanges for permission for the listing of its shares or debentures.
Return as to allotments [Sec. 75]
Within 30days of allotment of shares by a company, the company shall file with Registrar a statement known as return as to allotments.
The return shall contain:
Subsequent allotment of shares:
In case of subsequent allotment of shares offered to the public for subscription by a public company, the special provisions applicable to 'first allotment of shares' as contained in Sec. 69 shall not apply, except the provisions relating to minimum amount payable on application.
Allotment of Debentures:
The special provisions applicable to first allotment of shares also apply to issue of debentures by a public company which invites public to apply for debentures except provisions relating to -
a) The amount payable on application,
b) deposit of application money is a Scheduled Bank.
Share capital means the capital raised by a company by the issue of shares. The word 'capital' in connection with a company is used in several senses; it may mean authorized, issued and subscribed, paid up or reserve capital of the company.
Types of capital:
1. Authorized or nominal capital:
This is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association. In the case of a limited company, the Memorandum shall state the amount of capital with which the company is proposed to be registered and the division thereof into shares of the fixed amount.
2. Issued and subscribed capital:
Issued capital is the nominal value of the shares which are offered to the public for subscription. The issued capital can never exceed the authorized capital; it can at the most be equal to the authorized capital which is the case when all the shares have been issued to the public.
3. Called-up capital:
This is that part of the issued capital which has been called up on the shares.
4. Paid-up capital:
This is that part of the issued capital which has been paid up by the shareholders or which is credited as paid-up the shares.
5. Uncalled capital:
This is that part of the issued capital which has not been called. The company may call this amount any time but this is subject to the terms of issue of shares and the provisions of the Articles.
6. Reserve Capital:
This is that part of the uncalled capital of a company which can be called only in the event of its winding up. A limited company may, by a special resolution, determine that a portion of its uncalled capital shall not be called up, except in the event and for the purposes of the company.
KINDS OF SHARE CAPITAL:
Share capital means the capital raised by a company by the issue of shares.
The capital of a company may be of two kinds, namely:
Equity share capital ---
(ii) with voting rights;
(iii) with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed.
Preference share capital ---
It means, in the case of a company limited by shares, that part of the capital of the company which carries a preferential right as to---
a) Payment of dividend during the lifetime of the company;
b) Repayment of capital on winding up.
ALTERATION OF CAPITAL
Power to alter capital (Sec.94):
A limited company having share capital may-
a) Increase nominal share capital by issuing new shares;
b) Consolidate and divide all or any part of its share capital into shares of larger amount;
c) Convert fully paid-up shares into stock or vice versa;
d) Sub-divide its shares, or any of them, into shares of smaller amount;
Cancel shares which have not been taken up and diminish the amount of authorized capital by the amount of the shares so cancelled.
REDUCTION OF CAPITAL
The law regards the capital of a company as something sacred. The general principle of law founded on principles of public policy and rigidly enforced by Courts is that no action resulting in a reduction of capital of a company should be permitted unless the reduction is effected:-
Under statutory authority or by forfeiture, in strict accordance with the procedure, if any, laid down in that behalf in the Articles of Association.
Procedure for reduction of share capital (Sections 100 to 103):
The procedure for reduction of share capital is as follows:
Special resolution (Sec.100):
A company shall first pass a special resolution for reduction of capital. Power to reduce capital must be granted in the Articles of the company.
Application to the National Company Law Tribunal (NCLT) Sec.101:
The Company shall then apply to the NCLT by petition for an order confirming the reduction. The main duty of the NCLT is to look after the interests of the creditors and different classes of shareholders.
The NCLT may fulfill this duty towards them in the following manner:
a) Interest of creditors:
(i) Every creditor of the company can object to the reduction, where reduction involves diminution of liability on any shares in respect of unpaid capital or repayment of amount already paid on any share.
(ii) The NCLT shall settle a list of creditors who are entitled to object. It may publish notice, fixing a day or days within which creditors not entered on this list may claim to be so entered.
(iii) Where a creditor entered on the list does not consent to reduction and his debt is not discharged or determined by the company, the NCLT may either have his interest secured or if it thinks fit, dispense with his consent.
b) Interest of shareholders:
Where creditors are not affected at all would be the case where the reduction does not involve the diminution of any liability of shareholders in respect of unpaid capital or the payment to any shareholder of any paid up capital.
3. Registration of order of NCLT with Registrar (Sec.103):
The order of the NCLT confirming the reduction shall be produced before the Registrar and a certified copy thereof shall be filed with him for registration.
a) The amount of the share capital,
b) The number of shares into which it is to be divided;
c) The amount of each share;
d) The amount, if any, at the date of the registration deemed to be paid on each share;
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UNIT - II
AOA - PROSPECTUS - DIRECTORS - MEETINGS - ROLE OF COMPANY SECRETARY - DIVIDENDS; BRIEF ANALYSIS OF CORPORATE ETHICS.
The Articles of Association are the rules, regulations and bye-laws for the internal management of the affairs of a company. 'Articles' mean "the Articles of Association of a company as originally framed or as altered from time to time in pursuance of this Act.
They include the regulations contained in Table A in Schedule I to the Act, in so far as they apply to the company (Sec.2 (2)].
Contents of Articles:
Articles usually contain provisions relating to the following matters:
1. Share capital, rights of shareholders, variation of these rights, payment of commissions, share certificates.
3. Lien on shares.
4. Calls on shares.
5. Transfer of shares.
6. Transmission of shares.
7. Forfeiture of shares.
8. Conversion of shares into stock.
9. Share Warrants.
10. Alteration of capital.
11. General meetings and proceedings thereat.
12. Voting rights of members, voting and poll, proxies.
13. Directors, their appointment, remuneration, qualifications, powers and proceedings of Board of directors.
14. Manager.
15. Secretary.
16. Dividends and reserves.
17. Accounts, audit and borrowing powers.
18. Capitalization of profits.
19. Winding up.
Model form of Articles:
Schedule I to the Act gives various model forms of Memorandum of Association and Articles of Association of various types of companies.
The Schedule is divided into Tables which serve as a model for various companies.
Table A deals with regulations for management of a company limited by shares.
Table B contains a model form of Memorandum of Association of a company limited by shares.
Table C gives model forms of Memorandum of Association of a company limited by shares.
Table D gives model forms of Memorandum and Articles of Association of a company limited by guarantee and having a share capital.
Table E contains the model forms of Memorandum and Articles of Association of an unlimited company.
Form and Signature of Articles (Sec. 30);
The Articles shall be ----
1. printed,
2. divided into paragraphs,
3. Signed by each subscriber of the Memorandum (who shall add his address, description and occupation, if any) in the presence of at least 1 witness who will attest the signature and likewise add his address, description and occupation, if any.
ARTICLES AND MEMORANDUM - DISTINCTION
1. It is the charter of the company indicating the nature of its business, its, nationality, and its capital. It is also defines and company's relationship with outside world, BUT they are the regulations for the internal management of the company and are subsidiary to the Memorandum.
2. It defines the scope of the activities of the company or the area beyond which the actions of the company cannot go but AOA rules for carrying out of the objects of the company as set out in the Memorandum.
3. Memorandum of Association being the charter of the company, it the supreme document but AOA are subordinate to the Memorandum.
4. Every company must have its own Memorandum but AOA Company limited by shares need not have Articles of its own.
5. Any act of the company which is ultra vires the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders but AOA any act of the company which is ultra vires the Articles can be confirmed by the shareholders.
ALTERATION OF ARTICLES
Companies have been given very wide powers to alter their Articles. The right to alter the Articles is so important that a company cannot in any manner, ieither by express provision in the Articles or by an independent contract, deprive itself of the power to alter its Articles.
Procedure of alteration (Sec.31);
A company may, by passing a special resolution, alter its Articles any time. Again any Articles may be adopted which could have been lawfully included originally. A copy of every special resolution altering the Articles shall be filed with the Registrar within 30 days of its passing and attached to every copy of the Articles issued thereafter.
Limitations to alteration:
1. Must not be inconsistent with the Act.
2. Must not conflict with the Memorandum.
3. Must not sanction anything illegal.
4. Must be for the benefit of the company.
5. Must not increase liability of members.
6. Alteration by special resolution only.
7. Approval of Central Government when a public company is converted into a private company.
8. Breach of contract.
9. Must not result in expulsion of a member.
10. No power of the Tribunal to amend articles.
11. Alteration may be with retrospective effect.
LEGAL EFFECT OF MEMORANDUM AND ARTICLES:
The Memorandum and Articles, when registered, bind a company and the members thereof to the same extent if they -
a) had been signed by the company and each member,
b) contained covenants by the company and each member to observe all the provisions of the Memorandum and of the Articles (Sec.36)
The effect of these provisions is to constitute, through the Memorandum and the Articles of a company. The legal implications of these documents may be discussed as to how far these documents bind -
The memorandum and the articles constitute a binding contract between the members and the company.
A company is bound to the individual members in terms of their ordinary rights as members e.g., the right to receive notice of general meetings, the right to receive dividend, etc. The company can exercise its right, as against any member, only in accordance with the provisions in the Memorandum and the Articles.
As between the members inter se the Memorandum and the Articles constitute a contract between them and are also binding on each member as against the other or others. Such a contract can, however, be enforced through the medium of the company.
The Articles do not constitute any binding contract as between a company and an outsider. An outsider cannot take advantage of the Articles to found a claim against the company. This is based on the general rule of law that a stranger to a contract cannot acquire any rights under the contract.
Constructive Notice of Memorandum and Articles:
Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and the Articles of Association. These documents, on registration with Registration, assume the character of the public documents. This is known as constructive notice of Memorandum and Articles.
The doctrine of constructive notice of the Memorandum and Articles, however, is not a positive doctrine but a negative one. It is like doctrine of estoppel. It does not operate against the company. It operates only against an outsider dealing with the company. It prevents him from alleging that he did not know that Memorandum and Articles rendered a particular act ultra vires of the company.
DOCTRINE OF INDOOR MANAGEMENT
The doctrine of indoor management constitutes an exception to the principle of constructive notice. The doctrine of constructive notice is based on the fact that Memorandum and Articles, being public documents, their contents are supposed to be known to everyone dealing with the company. The doctrine of indoor management relates to the internal matters, and an outsider can presume that the internal working documents.
This limitation of the constructive notice is known as-
a) the "doctrine of indoor management",
b) the rule in Royal British Bank V/S Turquand,
c) Just Turquand Rule.
An outsider can act on the basis of a certified copy of the Board of Directors delegating borrowing powers, with certain limitations, to the Managing Director of the company.
The doctrine of indoor management is also known as the rule in
Royal British Bank V/s Turquand,
As it had its genesis in that case.
In the above mentioned case the directors of a company borrowed money from the Royal British Bank and issued a bond in respect of the same. The directors had a power to issue the bonds provided they had been so authorized by a resolution passed at the general meeting of the company. No such resolution had actually been passed. The shareholders contended that the company should not be bound by the bond, as the same had not been authorized in the general meeting o the company. It was, however, and held that the outsider (Bank) need not enquire whether the internal formality of the resolution was gone through or not. It was a matter of internal management. The bank could presume that the required process had been gone through in a regular way. The company was held liable.
The above stated rule means that the principle of constructive notice does not apply to the internal proceedings of a company.
Exceptions to the doctrine of Indoor Management:
1) Knowledge of irregularity:
When the person dealing with the company has the actual knowledge of the irregularity, the doctrine of Indoor management does not apply. The reason is that in such a case the affected person cannot say that he believed that there was no irregularity.
2) Negligence:
Where a person dealing with a company could discover the irregularity it he had made proper inquires, he cannot claim the benefit of the rule of indoor management.
3) Forgery:
The rule in Turquand's case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery.
4) Acts outside the scope of apparent authority:
If an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound.
In order to finance its activities, a company needs capital which is raised by public company by the issue of a prospectus inviting deposits or offers for shares and debentures from the public. A private company is prohibited from making any invitation of the public to subscribe for any shares in, or debentures of the company.
Definition:
Sec. 2 (36) of the companies act 1956 defines a prospectus as "any document described or 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 shares in, or debentures of, a body corporate".
A prospectus must be in writing. An oral invitation to subscribe for shares in, or debentures of a company.
A document is not a prospectus unless it is an invitation to the public to subscribe for shares in or debentures of a company.
Dating or prospectus (Sec.55):
A prospectus issued by or in relation to an intended company must be dated and that is, unless the contrary is proved, taken as the date of publication of the prospectus.
Registration of prospectus (Sec.60):
A prospectus can be issued by or on behalf of a company only when a copy thereof has been delivered to the Registrar for registration.
The copy for registration must be accompanied with the following documents:
The prospectus must be issued within 90 days of the date of the registration.
Penalty for non-registration of prospectus: If a prospectus is issued without a copy thereof being delivered to the Registrar for registration. If a non- registration of prospectus shall be punishable with fine which may extend to Rs. 50,000/-.
When prospectus is not required to be issued:
The issue of a prospectus for not necessary in the following cases:
CONTENTS OF PROSPECTUS
Prospectus is the window through which an investor can look into the soundness of a company's venture. The investor must, therefore, be given a complete picture of the company's intended activities and its position.
The important contents of prospectus are as follows:
Part I of Schedule II
1. General Information:
2. Capital structure of the company;
3. Terms of the present issue;
4. Company, management and project.
5. Particulars of the issue.
6. Particulars in regard to the company and other listed companies under the same management.
7. Outstanding litigation pertaining to matters likely to affect operation and finance of the company.
8. Management perception of risk factors.
Part II of Schedule II
Part III of Schedule II
Provisions applying to Parts I and II of Schedule II
REMEDIES FOR MISSTATEMENTS OF PROSPECTUS:
The 'Golden Rule' as to framing of prospectus. If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact there may arise -
I. Civil Liability:
A person who has been induced to subscribe for shares on the faith of a misleading prospectus has remedies against the company, and the directors, promoters and experts.
1. Remedies against the company:
If there is a misstatement or withholding of material information in a prospectus, and if it has induced any shareholder to purchase shares,
He can -
a) Rescind the contract;
b) Claim damages from the company whether the statement is fraudulent or an innocent one.
(1) Rescission of the contract:
Any person, who takes shares on the faith of statements of fact contained in a prospectus, can apply to the Court for the rescission of the contract if those statements are false or fraudulent or if some rescission within a reasonable time and before the company.
The contract can be rescinded if the following conditions are satisfied:
a) The statement must be a material misrepresentation of fact.
b) The statement must have induced the shareholder to take the shares.
c) The statement must be untrue.
d) The deceived shareholder is an allottee and he must have relied on the statement in the prospectus.
e) The omission of material fact must be misleading before rescission is granted.
f) The proceedings for rescission must be started as soon as the allot tee comes to know of a misleading statement in the prospectus on the faith of which he had subscribed for shares and before the company goes into liquidation.
(2) Damages for deceit:
Any person induces by a fraudulent statement in a prospectus to take shares is entitled to issue the company for damages. He must prove the same matters in claiming damages for deceit as in claiming rescission of the contract. He cannot both retain the shares and get damages against the company.
2. Remedies against the directors, promoters and experts:
The persons who are liable to pay compensation for any loss or damage to subscribes for any shares or debentures on the faith of a prospectus containing untrue statements are the -
a) directors at the time of the issue of the prospectus;
b) persons who have authorized themselves to be named as directors in the prospectus;
c) promoters;
d) Persons who have authorized the issue of the prospectus.
(1) Liability for damages for misstatement in prospectus (Sec.62):
Every director, promoter and every person who authorizes the issue of the prospectus is liable to pay compensation to the aggrieved party for loss or damage he may have incurred by reason of any untrue statement in the prospectus.
(2) Liability for damages for non-compliance with Sec.56;
The omission from the prospectus of a matter required to be included by Sec.56 may give rise to an action for damages at the instance of a subscriber for shares who has suffered loss thereby, even if the omission does not make the prospectus false or misleading.
Under the general law, a shareholder can hold all or any of the persons responsible for the issue of a prospectus liable for any misstatement or fraud on their or his part if he was actually deceived by reason of his having acted on the faith of the misstatement or fraud in the prospectus.
II. Criminal Liability:
Where a prospectus contains any untrue statement, every person who authorized the issue of the prospectus is punishable with imprisonment which may extend to 2 years, or with fine which may extend to Rs. 50,000 or with both.
A company in the eyes of the law is an artificial person. It has not physical existence. It has neither soul nor a body of its own. The persons who are in charge of the management of the affairs of a company are termed as directors. The directors are the brain of a company.
Definition [Sec.2 (13)]:
'Director' includes any person occupying the position of director, by whatever name called. The important factor to determine whether a person is or is not a director is to refer to the nature of the office and its duties.
A director may be defined as a person having control over the direction, conduct, management or superintendence of the affairs of a company.
Minimum number [Sec.253];
Every public company shall have at least 3 directors and every other company. A private company shall have at least 2 directors.
APPOINTMENT OF DIRECTORS:
1. First directors [Sec.254 and Clause 64 of Table A];
The articles of company usually name the first directors by their respective names or prescribe the method of appointing them. If the first directors are not named in the Articles, the number of directors and the names of the directors shall be determined in writing by the subscribers of the Memorandum or a majority or them.
2. Appointment of directors by the company Sec.255 to 257, 263 and 264]:
Directors must be appointed by shareholders in general meeting. In the case of a public company or a private company which is a subsidiary of a public company, at least 2/3rds of the total number of directors shall be labile to retire by rotation.
3. Appointment of directors by directors [Sec. 260, 262 and 313];
The directors of company may appoint directors -
A) As additional directors (Sec.260) any additional directors appointed by the directors shall hold office only up to the date of the next annual general meeting of the company.
B) In a casual vacancy [Sec.262] a person appointed in a casual vacancy shall hold office only up to the date up to which the director in whose place he is appointed would have held office.
C) As alternate director [Sec.313] an alternate director can be appointed by the board. He shall act for a director, called the 'original director' during his absence for a period of at least 3 months from the State in which Board meetings are ordinarily held.
4. Appointment of directors by third parties:
The Articles under certain circumstances give power to the debenture holders or other creditors. The number of directors so appointed shall not exceed 1/3rd of the total number of directors, and they are not liable to retire by rotation.
5. Appointment by proportional representation [Sec.265];
The Articles of a company may provide for the appointment of not less then 2/3rd of the total number of directors of a public company or of a private company which is a subsidiary of a public company according to the principle of proportional representation.
6. Appointment of directors by Central Government[Sec.408];
Sec.408 empowers the Central Government to appoint such number of directors on the Board of a company as the company Law Board may, by order in writing, specify as necessary to effectively safeguard the interests of the company or its shareholders or the public interest.
QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS;
Qualifications:
a) A director must be an individual.
b) A director must be competent to contract.
c) A director must be holding a share qualification, if so required by the Articles.
Disqualifications:
The following persons are disqualified for appointment as directors of a company;
a) A person of unsound mind.
b) A person discharged insolvent.
c) A person who has applied to be adjudicated as an insolvent and his application is pending.
d) A person who has been convicted by a court of any offence involving moral turpitude and a period of 5 years has not elapsed from the date of expiry of the sentence.
e) A person whose calls in respect of shares of the company held for more than 6 months have been in arrear.
f) A person who is disqualified for appointment as director by an order of the Court under Sec.203 on the ground of fraud or misfeasance in relation to the company.
DUTIES OF DIRECTORS:
The statutory duties of directors have been discussed at appropriate places. Again, there are certain duties of a general nature of the following type:
a) Exercise their powers honestly and bona fide for the benefit of the company as whole;
b) Not place them in a position in which there is a conflict between their duties to the company and their personal interests. They must not make any secret profit out of their position.
Directors should carry out their duties with reasonable care and exercise such degree of skill and diligence as is reasonably expected of persons of their knowledge and status. And that the director of a life insurance company is not expected to guarantee that the has the skill of an actuary or physician. The standard of care, skill and diligence depends upon the nature of the company's business and circumstances of the case.
There are various standards of the care depending upon:
a) The type and nature of work;
b) Division of powers between directors and other officers;
c) General usages and customs in that type of business;
d) Whether directors work gratuitously or remuneratively.
The other duties of a director are -
a) To attend board meetings,
b) Not to delegate his functions except to the extent authorized by the Act,
c) To disclose his interest.
POWERS OF DIRECTORS:
General Powers of the Board [Sec.291]:
The Board of directors of a company is entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do. This means the powers of the Board of directors are co-extensive with those of the company.
Directors and shareholders control; it is the first and elementary principle of company law that when powers are vested in the Board of directors by the Articles of a company.
Powers to exercise at Board Meetings [Sec.292]:
The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at the meetings of this Board, namely the power to-
a) make calls on shareholders in respect of money unpaid on their shares;
b) issue debentures;
c) borrow moneys otherwise than on debentures;
d) invest the funds of the company;
e) make loans;
Other powers:
There are certain other powers which must be exercised by the Board of directors only at the meeting of the Board.
These powers are:
i) to fill vacancies in the Board [Sec.262]
ii) to sanction or give consent for certain contracts in which particular directors, their relatives and firms are interested[Sec.297]
iii) to receive notice of disclosure of directors interest in any contract or arrangement with the company[Sec.299]
iv) to receive notice of disclosure of shareholdings of directors[Sec308]
v) to appoint as managing director or manager a person who is already managing director of another company,
vi) to make investments in companies in the same group[Sec.372]
EXCEPTIONS;
In the following cases, the general meeting of shareholders is competent to intervene and act in respect of a matter delegated to the Board of directors.
LIABILITIES OF DIRECTORS:
The liabilities of directors may be discussed under following four heads;
Liability of directors to third parties may arise in connection with the issue of a prospectus which does not contain the particulars required by the companies Act.
The liability of directors towards the company may arise from-
a) Ultra vires acts:
Directors are personally liable to the company in respect of ultra vires acts and it is not necessary to prove fraud in such cases;
b) Negligence:
A director may incur liability for the negligence in the exercise of his duties. There is no statutory definition of negligence, and as such each case has to be decided after due consideration of the particular facts thereof;
c) Breach of trust;
Directors of a company, being in a fiduciary position hold the position of trustees as regards its money and property which comes into their hands and of the powers entrusted to them by the Articles;
d) Misfeasance:
Directors are liable to the company for misfeasance which means 'willful misconduct' of directors for which they may be sued in a Law Court.
There are numerous statutory duties of directors which they must carry out. Must of these duties relate to maintenance of proper accounts, filing of returns or observance of certain statutory formalities?
A director is not liable for the acts of his co-directors provided he has no knowledge and he is not a party. His co-directors are not his servants or agents who can their acts impose liability on him.
POSITION OF DIRECTORS:
It is very difficult to pinpoint the exact legal position of the directors of company. They have been described by various names, sometimes as agents, sometimes as trustees, and sometimes as managing partners of the company.
We may now consider the position of the directors from all these points of view;
Directors as agents:
A company as an artificial person acts through directors who are elected representatives of the shareholders. A director is in the position of an agent of the company; charged with the obligation of carrying on its business. The nature of his duties is determined partly by statute and partly by the law of the agency.
Directors as employees:
Although the directors of a company are its agents, they are not employees or servants of the company for being entitled to privileges and benefits which are granted und the companies Act to the employees.
Directors as officers:
For certain matters under the Companies Act, the directors are treated as officers of the company. As such they are liable to certain penalties if the provisions of the Companies Act are not strictly complied with.
Directors as trustees:
Directors are treated as trustees-
a) Of the company's money and property;
b) Of the powers entrusted to them.
Directors are trustees for the company and not for third persons who have made contracts with the company or for the individual shareholders.
REMOVAL OF DIRECTORS:
Directors may be removing by;
a) The shareholders,
b) The Central Government,
c) The company Law Board.
a) Removal by shareholders (Sec.284):
The shareholders may remove a director before the expiry of his period of office by passing an ordinary resolution. A special notice be required of any proposed resolution to remove a director or to appoint somebody instead of a director so removed at the meeting at which he is removed.
b) Removal by Central Government [Sec.388-B to 388-E]:
The Central Government may, in certain circumstances, remove managerial personnel from office on the recommendation of the Tribunal.
c) Removal by Tribunal (NCLT)[Sec.402]:
Where, on an application to the NCLT for prevention of oppression or mismanagement, the NCLT finds that the relief ought to be granted, it may terminate, set aside or modify any agreement between the company and the managing director or the manager.
The management of a company's business is necessarily left to the discretion of the directors. However, the ultimate control of the actions of the Board of Directors is vested in the members or shareholders of the company, and from time to time they must meet to ratify, or express their disapproval of, the director past conduct, and to consider their futures plans.
The members express their will at general meetings by passing resolutions.
Directors of the company also take decisions in Board meetings.
The various meetings of a company may be classified as follows:
I. Meetings of shareholders;
These meetings may be:
a) General meetings; which include -
i) Statutory meeting,
ii) Annual general meetings,
iii) Extraordinary meetings.
b) Class meetings of shareholders of different classes of shares where a company has more than one class of shares.
II. Meetings of creditors and debenture-holders:
a) during the lifetime of the company,
b) at the time of winding up of the company;
III. Meetings of directors
I GENERAL MEETINGS OF SHAREHOLDRES
1. STATUTORY MEETING (SEC.165)
Every company limited by shares and every company limited by guarantee and having a share capital shall within a period of not less than one month nor more than six months from the date at which the company is entitled to commence, business, hold a general meeting of the members of the company. This meeting is called the statutory meeting. This is the first meeting of the shareholders of a public company and is held only once in the lifetime of a company.
Statutory report:
The Board of directors shall, at least 21 days before the day on which the meeting is to be held, forward a report called the 'statutory report' to every member of the company.
Contents of the statutory report:
The statutory report of a company contains all the necessary information relating to the formational aspect of the company. It sets out the following information:
a) Total shares allotted.
b) Cash received.
c) Abstract of receipts and payments.
d) Directors and auditors.
e) Contracts.
f) Underwriting contract.
g) Arrears of calls.
h) Commission and brokerage.
Procedure at the meeting:
At the commencement of the statutory meeting, the Board shall produce a list showing the names, addresses and occupations of the members of the company and number of shares held by them respectively.
The members present at the meeting shall be at liberty to discuss any matter relating to the formation of the company.
The meeting may adjourn from time to time. At any adjourned meeting, any resolution, whether before or after the former meeting, may be passed.
Object of the meeting and report:
The object of the statutory meeting and forwarding of statutory report of members is-
2. ANNUAL GENERAL MEETING (SEC.166 AND 167)
Company to hold annual general meeting every year (Sec.166): Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notice calling it. A company may hold its first annual general meeting within a period of 18 months from the date of its incorporation. The Registrar may, for any special reason, extend the time for holding any annual general meeting by a period not exceeding 3 months.
Time and place of meeting:
Every annual general meeting shall be called during business hours on a day that is not a public holiday. It shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate.
21 days notice (Sec.171):
A general meeting of a company may be called b y giving not less than 21 days notice in writing. It may be called with a shorter notice if it is agreed to by all the members entitled to vote at the meeting.
Consequences of failure to hold annual general meeting:
If a company fails to hold an annual general meeting:- any member can apply under sec.167, to the Tribunal or Central Government for calling the meeting the company and every officer who is in default shall be punishable with fine.
Importance of annual general meeting:
It is only at the annual general meeting of a company that the shareholders can exercise any control over the affairs of the company. They can confront the directors, their elected representatives, at least once and a year. They also get an opportunity to discuss the affairs and review the working of the company.
1. EXTRAORDINARY GENERAL MEETING (SEC.169)
A statutory meeting and annual general meetings of a company are called ordinary meetings. Any meeting other than these meetings is called an extraordinary general meeting. It is called for transacting some urgent or special business which cannot be postponed till the next annual general meeting.
It may be convened-
1. By the Board of directors on its own or on the requisition of the members.
2. By the requisitionists themselves on the failure of the Board of directors to call the meeting.
II. CLASS MEETINGS
Under the companies Act, class meetings of various kinds of shareholders and creditors are required to be held under different circumstances. Under Sec. 106, class meetings of the holders of different classes of shares are to hold if the rights attaching to these shares are to be varied.
Requisites of a valid meeting:
A meeting can validly transact any business if the following requirements are satisfied:
A company secretary means "a person who is a member of the Institute of Company Secretaries of India" [Sec.2 (1) (c) of the Company Secretaries Act 1980].
According to Sec.2 (45) of the Companies Act as amended in 1988, 'secretary means a company secretary with the meaning of Sec. Sec.2 (1) (c) of the Company Secretaries Act 1980, and includes any individual possessing the prescribed qualifications appointed to perform the duties which may be performed by a secretary under this Act and any other ministerial or administrative duties.
Secretary in whole-time practice: 'Secretary in whole-time practice means a secretary who shall be deemed to be in practice and who is not in full-time employment.
Status of company secretary:
"A secretary is a mere servant; his position is that he is to do what he is told, and no person can assume that the has any authority to neither represent anything at all; nor can anyone assume that statements made by him are necessarily to be accepted as trustworthy without further inquiry".
Appointment:
A company secretary is generally appointed by the directors at their meeting.
He may also be appointed by the Articles in which case his appointment shall be confirmed by a resolution of the directors passed in their first meeting after his appointment.
A copy of the resolution appointing a person as secretary shall be forwarded to the Registrar of Companies.
Qualifications:
The qualifications of a person to be eligible for appointment as secretary are as follows:
1) Every company having a paid-up share capital of not less than Rs.50 lakhs shall have a whole-time secretary.
2) No person shall be appointed as a whole-time secretary unless he is a member of the institute of company secretaries of India.
3) A company having a paid-up share capital of less than Rs.50 lakhs may appoint any individual as its whole-time secretary to perform the duties of secretary under the Companies Act, 1956.
But no individual shall be eligible to be so appointed unless he possesses one or more of the following qualifications, namely;
a) Membership of the Institute of Company Secretaries of India.
b) Pass in the intermediate examination conducted by the institute of company secretaries of India.
c) Post-graduate degree in commerce or corporate secretary ship granted by any University in India.
d) Degree in law granted by any university.
e) Membership of Institute of Chartered Accountants of India.
f) Post-graduate degree or diploma in management sciences, granted by any University.
Certain companies to have secretaries (Sec.383-A):
Every company having paid-up share capital of Rs.50 lakhs or more shall have a whole-time secretary. Where the Board of directors of any such company comprises only 2 directors, neither of them shall be the secretary.
Penalty:
If a company fails to comply with the provisions of Sec. 383-A,
The company and every officer of the company, who is in default, shall be punishable with fine which may extend to Rs. 500 for every day during which the default continues.
MEANING OF DIVIDEND
One of the main objects of commercial enterprises is to earn profits which are distributed among shareholders by way of 'dividend'. It means that the dividend can only be paid out of profits.
Dividend to be declared at the annual general meeting:
Dividend can be declared by a company by a resolution passed at the annual general meeting by the shareholders. The board of directors determines what part of profit is available for distribution as dividend. After providing for past losses, depreciation and reserves, as required under the Companies Act and Articles, the company may not be left with sufficient profits available for distribution.
RULES REGARDING DIVIDEND:
1. Resolution at the annual general meeting:
The dividend is declared by a company by a resolution passed at the annual general meeting. The Board of directors determines the rate of dividend to be declared and recommends it to the meeting of shareholders.
2. Payment of dividend in proportion to paid up capital (Sec.93):
A company may, if authorized by its Articles, pay dividends in proportion to the amount paid up on each share. Where unequal amounts have been paid on some shares, the dividend may be unequal as among different shareholders.
3. Dividend to be paid only out of profits (Sec.205):
Declaration or payment of dividend. The dividend can be declared or paid by a company for any financial year only;
a) out of profits of the company for that year arrived at after providing for depreciation in the manner laid down in the Act,
b) out of the profits of the company for any previous financial year;
4. Unpaid dividend to be transferred to special dividend account (Sec.205-A):
(i) Unpaid dividend account.
(ii) Interest at 12 per cent on amount not transferred.
(iii) Transfer to investor education and protection fund.
(iv) Statement of the nature of sums and the persons entitled to them to be furnished.
(v) Receipt.
(vi) Dividend in the event of inadequacy or absence of profits.
5. Payment of unpaid or unclaimed dividend (Sec. 205-B):
Any person claiming to be entitled to any money transferred to the Investor Education and Protection Fund established under Sec. 205-C may apply to the authority or the Committee appointed under the Fund, for the refund of money due to him.
6. Establishment of Investor Education and Protection Fund:
The Central Government shall establish a fund to be called the Investor Education and Protection Fund.
7. Dividend to be paid to the registered shareholder (Sec.206):
The dividend shall be paid only
(a) To the registered shareholder or to his order or to his bankers,
(b) In case a share warrant has been issued, to the bearer of such share warrant or to his bankers;
8. Right to dividend, rights shares and bonus shares to be held in abeyances pending registration of transfer of shares (Sec.206-A).
9. Penalty for defaulting directors [Sec. 207 as substituted by the Companies (Amendment) Act, 2000]
Dividend warrant:
A dividend warrant is an instrument containing an order on a company's banker directing it to pay the stated amount to or to the order of the shareholder named therein who is entitled to claim dividend. It is in two parts - one part is a notice of the dividend to the shareholder as well as certificate of deduction of income-tax, and the other part is the dividend warrant. It certifies that the dividend relates to shares which were his own property.
UNIT - III
ISSUE OF SHARES - TYPES OF SHARES - DEBENTURES - PROCEDURE FOR ALLOTMENT OF SHARES AND DEBENTURES - SHARE CAPITAL - RIGHTS AND PRIVILEGS OF SHAREHOLDERS - PREVENTION OF OPPRESSION AND MISMANAGEMENT - DIFFERENT MODES OF WINDING UP OF COMPANIES.
The most usual form of borrowing by a company is by the issue of debentures. According to Sec. 2 (12), 'debenture' includes debenture stock, bounds and any other securities of a company, where constituting a charge on the assets of the company.
'Debenture' means a document which either creates a debt or acknowledges it.
In Edmonds vs. Blaina Co. Chitty J. described the meaning of the term debenture as follows; "the term itself imports a debt - an acknowledgement of a debt - and obligation or covenant to pay. This obligation or covenant is in most cases accompanied by some charge or security.
Characteristic features of a debenture:
The characteristic features of a debenture are as follows;
1. It is issued by a company and is usually in the form of a certificate which is an acknowledgement of indebtedness.
2. It is issued under the company's seal.
3. It is one of a series issued to a number of lenders.
4. It usually specifies a particular period or date as the date of repayment.
5. It generally creates a charge on the undertaking of the company part of its property.
6. A debenture-holder does not have any right to vote in the company meeting.
Class of Debentures;
Debentures may be classified according to the following characteristics, namely;
a) Bearer debentures:
These debentures, also known as unregistered debentures, are payable to its bearer.
b) Registered debentures:
These are debentures which are payable to the registered holders. A holder is one whose name appears both on the debenture certificate and in the company's register of debentures.
1. Secured debentures:
Debentures which create some charge on the property of the company are known as secured debentures.
2. Unsecured or naked debentures:
Debentures which do not create any charge on the assets of the company are known as unsecured or naked debentures.
3. Classification according to permanence:
a) Redeemable debentures:
Debentures are usually issued on the condition that they shall be redeemed after a certain period. Such debentures are known as redeemable debentures.
c) Irredeemable or perpetual debentures:
When debentures are irredeemable, they are called perpetual debentures. A debenture will be treated as irredeemable where either there is no period fixed for repayment of the principal amount of the company.
4. Classification according to convertibility.
a) Convertible debentures:
These debentures give an option to the holders to convert them into preference or equity shares at stated rates of exchange, after a certain period.
b) Non-convertible debentures:
These debentures do not give any option to their holders to convert them into preference or equity shares.
5. Classification according to priority:
a) First debentures:
These are the debentures which are to be repaid in priority to other debentures which may be subsequently issued.
b) Second debentures:
These are the debentures which are to be paid after the first debentures have been redeemed.
Debentures with voting rights not to be issued (Sec. 117):
A company cannot issue any debentures carrying voting rights at any meeting of the company, whether generally or in respect of particular classes of business. This has been done in view of the secured position of the debenture holders and in order to keep them off from influencing the policy of the general body of the shareholders.
The shareholders of a company are the persons who collectively constitute the company as a corporate entity. The terms member and shareholder and holder of a share are used interchangeably.
Distraction between a shareholder and a member:
1. A registered shareholder is a member but a registered member may not be a shareholder because the company may not have a share capital.
2. A person who owns a bearer share warrant is a shareholder but he is not a member as his name is struck off the register of members. This means that person can be a holder of shares without being a member.
3. A legal representative of a deceased member is not a member until he applies for registration. He is, hover, a shareholder even though his name does not appear in the register of members.
RIGHTS AND LIABILITIES OF MEMBERS OR SHAREHOLDERS:
Rights of shareholders:
The rights of the members of a company may be grouped under the following three heads:
These are the rights which are conferred on the members by the Companies Act. These rights cannot be taken away or modified by any provision in the memorandum or the articles.
a) Right to obtain copies of the Memorandum and the Articles on request and on payment of the prescribed fees.
b) Right of priority to have shares offered in case of increase of capital.
c) Right to transfer shares.
d) Right to vote on resolutions at meetings of the company.
e) Right to apply to the Tribunal to have any variation of his rights set aside by the Tribunal.
f) Right to have a share certificate in respect of his shares delivered to him.
g) Right to inspect the register of members, register of debenture-holders and copies of annual returns.
h) Right to receive a copy of the statutory report.
i) Right to apply to the Central Government for calling an annual general meeting when the company fails to call such a meeting.
j) Right to receive notice of meeting, attend and vote at meetings.
k) Right to appoint proxy and inspect proxy register.
l) Right to demand a poll or join in demand for a poll.
m) Right to apply to the Tribunal for calling an extraordinary meeting of the company where it is impracticable to call such a meeting.
n) Right to require the company to circulate resolutions.
o) Right to receive dividend when declared.
p) Right to receive copies of annual accounts of the company with the auditor's report.
q) Right to participate in appointment of directors and auditors in the annual general meeting.
r) Right to make an application to the NCLT for ordering an investigation into the affairs of the company.
s) Right to present a petition to the NCLT for relief in cases of oppression and mismanagement.
t) Right to petition to the NCLT for the winding up of the company.
u) Right to share in surplus on winding up.
These are the rights given to the shareholders by the Memorandum and Articles of Association.
These are the rights given to the members by the general law, e.g., in case of any misstatement or concealment of a material fact in a prospectus, a person who has applied for shares on the faith of such prospectus and has been allotted shares can avoid the contract and claim damages under the general law.
Liability of shareholders:
The liability of the members or shareholders of a company depends on the nature of the company.
Company with unlimited liability:
Each member is liable in full for all the debts contracted by the company during the period he was a member.
Company limited by shares:
Each member is liable to pay the full nominal value of the shares held by him. If he has already paid a part of the amount on the shares, his liability is limited to the unpaid amount on the shares in respect of which he is a shareholder.
The liability of a registered shareholder to pay for the shares standing in his name arises from the operation of Sec. 36 which provides that all moneys payable by any member to the company under the Memorandum or the Articles are a debt due from him to the company.
Where a shareholder dies, his estate is liable in respect of his partly paid shares, and when these shares are registered in the name of his legal representatives, they become liable on those shares.
INTORDUCTION
The general rule is that the decisions of the majority shareholders in a company bind the minority. The oppression of minority or mismanagement of a company by majority therefore, calls for some remedial action.
In such a case, the minority shareholders may apply to -
a) the NCLT for the winding up of the company on the ground that it is just and equitable to do so;
b) the NCLT for appropriate relief;
c) the Central Government for appropriate relief;
Sec. 397 to 409 empowers the NCLT and the Central Government to prevent oppression and mismanagement.
PREVENTION OF OPPRESSION
Meaning of 'oppression'
Oppression means not keeping to the accepted standard of honesty and fairness and a lock of regard of other shareholder interest. It has been stated that the complaining shareholders must be under a burden which is unjust or harsh or tyrannical. The harsh treatment, for instance, of a member who is a director or other officer or employee by the Board of directors or the oppression of a person as a director and not a member, is outside the purview of Sec.397.
Some cases of oppression:
In cases like the following, the NCLT will grant appropriate relief under Sec.397;
1. Where a majority shareholder persistently flouts the decisions of the Board of directors and makes it impossible for the company to function.
2. Where the majority shareholders try to force new and more risky objects upon an unwilling minority.
3. Where the members of a company are deprived of their right to vote, to elect directors and to receive dividends.
4. Where there is an unreasonable and consistent refusal to accept a transfer or transmission of shares, thereby not permitting some shareholders to have voting rights in the company.
5. Where the affairs of a company are being conducted by the directors doing nothing to defend its interests when they ought to do something.
6. Where the directors issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority.
Cases when remedy is not available under Sec.397:
There is no oppression in the following cases and relief under Sec.397 will not be granted;
PREVENTION OF MISMANAGEMENT
SEC.398 provides for relief against mismanagement:
A requisite number of members of a company may apply to the NCLT for appropriate relief on the ground of Mismanagement of the company.
Relief by the NCLT:
The NCLT may give relief if it is of opinion-
a) that the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interests of the company,
b) that by reason of a material change in the management or control of the company, the affairs of the company are likely to be conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interests of the company,
The change in management or control of the company may be due to an alteration in its Board of directors or manager or in the ownership of the company's shares.
The expression "the affairs of the company are being conducted in a manner prejudicial to the interests of the company" in Sec. 398 will also take within its ambit the non-conduct of the affairs of the company which non-conduct results in prejudice being caused to the country.
Winding up proceedings and proceedings under Sec. 397 and 398:
Sec. 397 and 398 are intended to avoid winding up of a company, if possible and keep it going while at the same time relieving the minority shareholders from acts of oppression and mismanagement preventing its affairs from being conducted in a manner prejudicial to public interest.
By the introduction of Sec. 397 and 398, a shareholder aggrieved by oppression and mismanagement has two alternative remedies. Before that, he had only one remedy, namely to apply for the winding up under just and equitable clause of Sec. 433(f).
Now the second choice open is an application under Sec. 397 and 398 for an appropriate order to bring to an end the mismanagement of a company or oppression of minority.
POWERS OF NATIONAL COMPANY LAW TRIBUNAL (NCLT):
Under Sec 397 and 398 the NCLT has all the necessary powers to end oppression as well as to prevent mismanagement.
Sec.402 further lays down that an order under Sec. 397 and 398 may provide for -
a) The regulation of the conduct of the company's affairs in future.
b) The purchase of the shares of any members of the company by other members or by the company.
c) In the case of purchase of shares by the company as aforesaid, the consequent reduction of its share capital.
d) The termination, setting aside or modification of any agreement between the and its management.
e) The termination, setting aside or modification of any agreement between the company and any third persons provided due notice to the party concerned has been given and his consent obtained.
f) The setting aside of any fraudulent preference made within 3 months before the date of the application.
g) Any other matter for which, in the opinion of the Company Law Board, it just and equitable that the provision should be made.
POWERS OF CENTRAL GOVERNMENT (SEC. 408 AND 388-B TO 388-E)
1. Power to prevent oppression or mismanagement (Sec. 408)
Where there is oppression or mismanagement within the meaning of Sec. 397 and 398, a requisite minimum number of members may apply for relief. The minimum number of members who can apply for relief shall be 100 or members holding not less than one-tenth of the total voting power.
Appointment of directors by the Central Government:
The Central Government may appoint such number of persons as the NCLT may specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest to hold office as directors of the company to prevent oppression or mismanagement. The directors so appointed shall hold office for a period not exceeding 3 years on any one occasion. The appointments may be made by the Central Government, if the NCLT on a reference made to it by the Central Government or on an application of the requisite number of members of the company is satisfied that it is necessary to make the appointments in order to prevent oppression or mismanagement.
Other directions to the company:
a) to remove an auditor already appointed and to appoint another auditor in his place,
b) to alter the Articles of the company;
2. Power to remove managerial personnel (Sec. 388-B to 388-E)
Sec. 388-B to 388-E empower the Central government to remove managerial personnel from office on the recommendation of the NCLT.
MEANING OF WINDING UP:
Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realized assets and the surplus, if any, is then distributed among the members in proportion to their holdings in the company.
Prof. Gower's definition:
Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.
MODES OF WINDING UP (SEC. 425)
There are three modes of winding up of a company, namely;
a) members voluntary winding up,
b) creditors voluntary winding up,
I. WINDING UP BY THE NATIONAL COMPANY LAW TRIBUNAL: Sec. 433 to 483
Winding up of a company under the order of a NCLT is also known as compulsory winding up.
Grounds for compulsory winding up (Sec. 433)
A company may be wound up by the NCLT -
(a) if the company has, by special resolution, resolved that it be wound up by the NCLT;
(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
(d) if the number of members is reduced, in the case of a public company, below 7, and in the case of a private company, below 2;
(e) if the company is unable to pay its debts;
(f) if the NCLT is of opinion that it is just and equitable that the company should be wound up;
(g) If the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive years.
(h) If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign states, public order, decency or morality.
(i) If the NCLT is of the opinion that the company should be wound up under the circumstances specified in Sec. 424-G.
PETITION (SEC. 439)
An application to the Tribunal (NCLT) for the winding up of a company made by a petition. Under Sec. 439, a petition for the winding up of a company may be presented, subject to the provisions of this Section;
a) by the company;
b) by any creditor or creditors;
c) by any contributory or contributories;
d) by all or any of the prior parties whether together or separately;
e) by the Registrar;
f) by the Central Government in that behalf;
g) by the Central Government or a State Government in a case falling under Sec.433;
POWERS OF NCLT
Powers of NCLT on hearing petition (Sec. 443)
On hearing a winding up petition, the NCLT may -
a) dismiss it, with or without costs;
b) adjourn the hearing conditionally or unconditionally;
c) make any interim or that it thinks fit;
d) make an order for winding up the company with or without costs or any other order as it thinks fit;
PROCEDURE OF WINDING UP BY THE NCLT
Official Liquidator (Sec.448):
For the purpose of winding up of companies by the NCLT, there shall be an Official Liquidator who-
(a) may be appointed from a panel of professional firms of chartered accountants, advocates, company secretaries cost and works accountants or firms having a combination of these professionals, which the Central Government shall constitute for the NCLT;
(b) may be a body corporate consisting of such professionals as may approved by the Central Government;
(c) may be a whole-time or a part-time officer appointed by the Central Government from time to time;
Duties of Liquidator:
1) Proceedings in winding up [Sec. 451(1) and (3)].
The liquidator shall conduct the proceedings in winding up the company and perform duties imposed by the NCLT.
2) Report [Sec. 455(1)]:
a) The Official Liquidator shall as soon as practicable after receipt of the statement of affairs of the company and not later than 6 months from the date of the order of winding up, submit a preliminary report to the NCLT;
b) Additional reports: The official liquidator may, if he thinks fit, make further reports stating the manner in which the company was promoted or formed.
3) Custody of company's property [Sec. 456]:
Where a winding up order has been made or where a provisional liquidator has been appointed, the liquidator shall take into his custody all the property, effects and actionable claims to which the company is entitled.
4) Exercise and control of liquidator's powers [Sec.460]:
The liquidator shall, in the administration of the assets of the company and the distribution thereof among creditor, have regard to any directions which may be given by resolution of the creditors or contributories at any general meeting or by the committee of inspection.
5) Proper books [Sec.461];
The liquidator shall keep proper books for making entries or recording minutes of the proceedings at meetings and such other matters as may be prescribed.
6) Audit of accounts [Se. 462]:
The liquidator shall, at such times as may be prescribed but at least twice each year during his tenure of office, present to the NCLT an account of his receipts and payments as liquidator.
7) Maybe appointment of committee of inspection [Sec. 464]:
The NCLT at the time of making an order for the winding up of a company or at any time thereafter, direct that there ought to be appointed a committee of inspection to act with the liquidator.
8) Pending liquidation [Sec. 551]:
The liquidator shall, within 2 months of the expiry of each year form the commencement of winding up, file a statement duly audited by a qualified auditor of the company, with respect to the proceedings in, and position of the liquidation.
Powers of liquidator:
The liquidator shall -
a) appoint security guards to protect the property of the company,
b) to appoint valuer, chartered surveyors, or chartered accountant to assess the value of the company's assets within 15 days after taking into his custody the property,
c) to give an advertisement inviting bids for sale of the assets of the company within 15 days from the date of receiving the valuation report,
d) to institute or defend suits and other legal proceedings, civil or criminal in the name and on behalf of the company,
e) to carry on the business of the company so far as may be necessary for the beneficial winding up of the company,
f) to do all acts and to execute documents and deeds on behalf of the company under its seal;
g) to inspect the records and returns of the company or the files of the Registrar without payment of any fee,
h) to sell whole of the undertaking of the company as a going concern,
i) to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets,
Liabilities of liquidator:
A liquidator of a company is liable for negligence -
(1) if he distributes its assets without making due provision for liabilities or contingent claims of which he has notice, e.g., where the company having assigned a lease is under a contingent liability for the rent, or where he knows of possible claims by workmen for injuries not covered by insurance.
(2) If he applies the company's assets in paying a doubtful claim without taking proper legal advice or direction from the Court.
(3) If there is breach of any of his statutory duties. In such a case he is liable in damages to a creditor or a contributory for injury to him.
2. VOLUNTARY WINDING UP (SECTIONS 484 TO 520)
Voluntary winding up means winding up by the members or creditors of company without interference by the NCLT. The object of a voluntary winding up is that the company, i.e., the members as well as the creditors, are left free to settle their affairs without going to the NCLT.
Circumstances in which a company may be wound up voluntarily (Sec. 484). A company may be wound up voluntarily -
1. By passing an ordinary resolution.
2. By passing a special resolution.
A voluntary winding up shall be deemed to commence at the time when the resolution for its voluntary winding up is passed.
Advertisement of resolution [Sec.485]:
Within 14 days of the passing of the resolution for voluntary winding up of the company, the company shall give notice of the resolution by advertisement in the Official Gazette, and also in some newspaper circulating in the district of the registered office of the company.
CONSEQUENCES OF VOLUNTARY WINDING UP:
a) Effect on status of company.
b) Board's powers to cease on appointment of a liquidator.
c) Notice of discharge of the officers and employees of the company.
d) Stay of actions.
e) Distribution of property.
f) Notification of liquidation.
TYPES OF VOLUNTARY WINDING UP
1. Members voluntary winding up
2. Creditors voluntary winding up
In a voluntary winding up of a company if a declaration of its solvency is made in accordance with the provisions of Sec. 488, it is a members voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts in full within 3 years from the commencement of the winding up.
Provisions applicable to a members voluntary winding up
Sec.490 to 498 shall apply in relation to a member's voluntary winding up. The provisions of these Sections are as follows:
The Company in general meeting shall appoint one or more liquidators for the purpose of winding up its affairs and distributing its assets. It shall also fix the remuneration, if any, to be paid to the liquidator or liquidators.
On the appointment of a liquidator, all the powers of the Board of directors, the managing or whole-time directors, and manager, shall cease except when the company in general meeting or the liquidator may sanction them to continue.
If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in general meeting may fill the vacancy.
The Company shall give notice to the Registrar of the appointment of liquidators.
A voluntary winding up of a company in which a declaration of its solvency in not made is referred to as a creditor's voluntary winding up.
Provisions applicable to creditors voluntary winding up:
Sec. 500 to 509 shall apply in relation to a creditor's voluntary winding up. The provisions of these Sections are as follows:
The company shall call a meeting of the creditors of the company on the day on which there is to be held the general meeting of the company at which the resolution for voluntary winding up is to proposed, or on the next day. It shall send the notices of meeting of the creditors by post simultaneously with the sending of the notices of meeting of the company. It shall also cause notice of the meeting of the creditors to be advertised once at least in the Official Gazette and once at least in 2 newspapers circulating in the district of the registered office of the company.
Notice of any resolution passed at the creditors meeting shall be given by the company to the Registrar within 10 days of the passing thereof.
The creditors and the members at their respective meetings may nominate a liquidator. If they nominate different person, the creditors' nominee shall be the liquidator. The application shall be made to the NCLT within 7 days after the date on which the nomination was made by the creditors.
The creditors at their meeting may, if they think fit, appoint a committee of inspection consisting of not more than 5 persons. If the creditors and members do not agree on a common list, the NCLT may constitute a committee of inspection.
The committee of inspection, or if there is no such committee, the creditors, may fix the remuneration of the liquidator. Where the remuneration is not so fixed, it shall be determined by the NCLT. The remuneration shall not be increased in any circumstances.
On the appointment of a liquidator, all the powers of the Board of directors shall cease. But the committee of inspection, or if there is no such committee, the creditors, in general meeting, may sanction the continuance of the Board.
If a vacancy occurs by death, resignation or otherwise, in the office of a liquidator, the creditors in general meeting may fill the vacancy.
The provisions of Sec.494 shall apply in the case of a creditor's voluntary winding up.
The liquidator shall call a general meeting of the company and a meeting of the creditors every year, within 3 months from the close of every year.
As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up showing how the winding up has been conducted and how the property of the company has been disposed.
MEMBERS AND CREDITORS VOLUNTARY WINDING UP COMPARED:
1. Declaration of solvency:
In case of a member's voluntary winding up, there is declaration of solvency. In case of creditors voluntary winding up there is no such declaration.
2. Control of winding up:
In a member's voluntary winding up, the members' control the winding up of the company and the creditors do not participate directly as the company makes a declaration of solvency. In a creditor's voluntary winding up, the creditors control the winding up of the company as the company is deemed to be insolvent.
3. Meetings:
In a member's voluntary winding up, there is no meeting of creditors. In a creditor's voluntary winding up, whenever there is a meeting of contributories, there is a corresponding meeting of creditors.
4. Appointment of liquidator:
In a member's voluntary winding up, the liquidator is appointed by the company and his remuneration is fixed by the company. In a creditor's voluntary winding up, he is appointed by the creditors and his remuneration is fixed by the committee of inspection or, if there is no such committee by the creditors.
5. Committee of inspection:
There is no committee of inspection in a member's voluntary winding up; in a creditor voluntary winding up the creditors may appoint a committee of inspection.
UNIT - IV
SEBI ACT, 1992; SECURITIES CONTRACTS (REGULATION) ACT, 1956 AND RULES.
SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 [SEBI]
An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of and to regulate, the securities market and for matters connected there with or incidental thereto.
Chapter I deal with Preliminary of this Act. Section 1 lays down this act may be called the Securities and Exchange Board of India Act, 1992.
Definitions: Section 2
(a) Board: means the Securities and Exchange Board of India established under Section 3;
(b) "Existing Securities and Exchange Board" means the Securities and Exchange Board of India constituted under the resolution of the Government of India in the Department of Economic Affairs;
ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA:
Chapter II deal with Establishment of the Securities and Exchange Board of India.
Establishment and incorporation of Board:
Section 3 lays down with effect from such date as the Central Government may, by notification, appoint there shall be establishment for the purposes of this Act, a Board by the name of the Securities and Exchange Board of India.
Management of the Board:
Section 4 lays down the Board shall consist of the following members, namely -
a) a Chairman;
b) two members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law;
c) one member from amongst the officials of the Reserve Bank of India;
d) two other members; to be appointed by the Central Government;
Term of office and conditions of service of Chairman and members of the Board:
Section 5 says that the term of office and other conditions of service of the Chairman and two members. The Central Government shall have the right to terminate the services of the Chairman or a member appointment under this section. By giving him notice of not less than three months in writing or three months salary and allowances in lieu thereof, and the Chairman or a member, as the case may be, shall also have the right to relinquish his office, at any time before the expiry of the period not less than three months in writing.
Removal of member from office: Section 6
The Central Government shall remove a member from office if he -
a) is, or at any time has been adjudicated as insolvent;
b) is of unsound mind and stands so declared by a competent court;
c) has been convicted of an offence which, in opinion of the Central Government involves a moral turpitude;
d) has in the opinion of the Central Government, so abused his position as to render his continuation in office detrimental to the public interest;
Meetings:
1. The Board shall meet at such times and places, and shall observe such rules of procedure in regard to the transaction of business at its meetings as may be provided by regulations.
2. The Chairman or, if for any reason, he is unable to attend a meeting of the Board, any other member chosen by the members present from amongst themselves at the meeting shall preside at the meeting.
3. all questions which come up before any meeting of the Board shall be decided by a majority votes of the members present and voting, and in the event of an equality of votes, the Chairman , the person presiding meetings.
Vacancies, etc., not to invalidate proceedings of Board: Section 8
a) any vacancy in or any defect in the constitution of the Board;
b) any defect in the appointment of a person acting as a member of the Board;
c) any irregularity in the procedure of the Board not affecting the merits of the case;
Officers and employees of the Board: Section 9
The Board may appoint such other officers and employees as it considers necessary for the efficient discharge of its functions under this Act.
TRANSFER OF ASSETS, LIABILITIES ETC., OF THE EXISTING SECURITIES AND EXCHANGE BOARD TO THE BOARD:
Section 10 lays down transfer of assets, liabilities, etc., of existing Securities and Exchange Board to the Board.
On and from the date of establishment of the Board -
a) any reference to the existing Securities and Exchange Board in any law other than this Act or in any contract shall be deemed as a reference to the Board;
b) all properties and assets, movable and immovable of the existing Securities and Exchange Board, shall best in the Board;
c) all rights and liabilities of the existing Securities and Exchange Board shall be transferred to the Board;
d) without prejudice to the provisions of all debts, obligation and liabilities incurred, all contracts entered into and all matters and things engaged to be done by the Securities and Exchange Board immediately before that date, with the purpose of the said existing Board immediately Board shall be deemed to have been incurred, Board;
e) all sums of money due to the existing Securities and Exchange Board immediately before that date shall be deemed to be due to the Board;
f) all suits and other legal proceedings instituted or which could have instituted by Securities and Exchange Board immediately before that date may be continued the Board;
g) every employee holding any office under the existing Securities and Exchange Board immediately before that date shall hold his office in the Board by the same tenure and upon the same terms and conditions of service as respects remuneration, leave, provident fund, retirement and other terminal benefits as he would have held such office if the Board had not been established and shall continue to do so as an employee of the Board;
POWERS AND FUNCTIONS OF THE BOARD
FUNCTIONS OF BOARD: SECTION 11
a) the duty of the Board to protect the interests of investors in securities and to promote the development and regulate the securities market;
b) regulating the business in stock exchanges and any other securities markets;
c) registering and regulating the working of stock-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters,
d) registering and regulating the working of collective investment schemes;
e) promoting and regulating self-regulatory organizations;
f) prohibiting fraudulent and unfair trade practices relating to securities markets;
g) prohibiting insider trading in securities;
h) performing such other function as be prescribed;
i) conducting research for the above purposes;
POWERS OF BOARD: SECTION 11B
Power to issue directions:
Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary -
a) in the interest of investors, or orderly development of securities market;
b) to prevent the affairs of any intermediary or other person referred to in section 12 being conducted in manner detrimental to the interest of investors or securities market;
c) to secure the proper management of any such intermediary or person;
REGISTRATION CERTIFICATE
Registration of stock-brokers, sub-brokers, share transfer agents etc.,: Section 12
Section 12 provided that a person buying or selling securities or otherwise dealing with the securities market as a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manger, investment adviser and such other intermediary who may be associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment. If he has made an application for such registration within the said period of three months, till the disposal of such application.
FINANCE, ACCOUNTS AND AUDIT
Grants by the Central Government: Section 13 provided that the Central Government may, after due appropriation made by parliament by law in this behalf make to the Board grants of such sums of money as that Government may think fit for being utilized for the purposes of this Act.
Fund: Section 14 provided that there shall be constituted a fund to be called securities and exchange Board of Indian General Fund and there shall be credited thereto - all grants, fees and charges received by the Board under this Act.
Accounts and audit: Section 15 provided that the Board shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed by the Central Government in consultation with the Comptroller and Auditor-General of India.
The accounts of the Board shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and any expenditure incurred in connection with such audit shall be payable by the Board to the Comptroller and Auditor-General of India.
The accounts of the Board as certified by the Comptroller and Auditor-General of India or any other person appointed by him in this behalf together with the audit report thereon shall be forwarded annually to the Central Government and that Government shall cause the same to be laid before each House of Parliament.
PENALTIES AND ADJUDICATION
Penalty for failure to furnish information, return, etc.,
Section 15A provided that the person, who is required under this Act or any rules or regulations made there under:
a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousand rupees for each such failure;
b) to file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefore in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues;
c) to maintain books of account or records, fails to maintain the same he shall be liable to a penalty not exceeding ten thousand rupees for every day during which the failure continues;
SECURITIES CONTRACTS (REGULATION) ACT, 1956
An Act to prevent undesirable transactions in securities by regulation the business of dealing therein, by providing for certain other matters connected therewith.
This Act may be called the Securities Contracts (Regulation) Act, 1956.
Definitions:
"Contract" means a contract for or relating to the purchase or sale of securities.
"Government security" means a security created and issued, whether before or after the commencement of this Act, by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in section 2(2) of the Public Debt Act, 1944.
RECOGNISED STOCK EXCHANGES
Application for recognition of stock exchanges: Sec.3
Any stock exchange, which is desirous of being recognized for the purposes of this Act, may make an application in the prescribed manner to the Central Government.
The stock exchange for the regulation and control of contracts and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange and in particular to -
a) the governing body of such stock exchange, its constitution and powers of management and the manner in which its business it to be transacted;
b) the powers and duties of the office bearers of the stock exchange;
c) the admission into the stock exchange of various classes of members, the qualifications for membership and the exclusion, suspension, and re-admission of members there form;
d) the procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership; and nomination and appointment of authorized representatives and clerks;
Grant of recognition to stock exchanges: Sec. 4
If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any as it may require -
a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors;
b) that the stock exchange is willing to comply with any other conditions which the Central Government, after consultation with the governing body of the stock exchange and having regard to the area served by the stock exchange and its standing and the nature of the securities;
c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange;
It may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribed.
Withdrawal of recognition: Sec. 5
Section 5 provided that no such withdrawal shall affect the validity of any contract entered into or made before the date of the notification, and the Central Government may after consultation with the stock exchange, make such provisions as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date.
Power of Central Government to call for periodical returns or direct inquiries to be made: Section 6:
1. Every recognized stock exchange shall furnish to the Securities and Exchange Board of India such periodical returns relating to its affairs as may be prescribed.
2. every recognized stock exchange and every member thereof shall maintain and preserve for such periods not exceeding five years such books of account, and other documents as the Central Government, after consultation with the stock exchange concerned, may prescribe in the interest of the trade or in the public interest, and such books of account and other documents shall be subject to inspection at all reasonable times by the Securities and Exchange Board of India.
3. where an inquiry in relation to the affairs of a recognized stock exchange or the affairs of any of its member sin relation to the stock exchange has undertaken under this section-
a) Every director, manager, secretary or other officer of such stock exchange;
b) Every member of such stock exchange;
c) if the member of the stock exchange is a firm, every partner, manager secretary or other officer of the firm; shall be bound to produce before the authority making the inquiry all such books of account, and other documents in his custody.
Annual reports to be furnished to Central Government by stock exchanges: Section 7
Every recognized stock exchange shall furnish the Central Government with a copy of the annual report, and such annual report shall contain such particulars as may be prescribed.
Power of recognized stock exchange to make rules restricting voting rights, etc., Sec.7A
A recognized stock exchange may make rules or amend any rules made be it to provide for all of the following matters, namely:
a) The restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting;
b) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only;
c) the restriction on the right of member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange;
d) Such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified in this section.
Power of Central Government to direct rules to be made or to make rules; Sec.8
Power of recognized stock exchanges to make bye-laws; Sec. 9
Any recognized stock exchange may, subject to the previous approval of the Securities and Exchange Board of India, make bye-laws for the regulation and control of contracts and without prejudice to the generality of the foregoing power, such bye-laws may provide for:
a) the opening and closing of markets and the regulation of the hours of trade;
b) a clearing house for the periodical settlement of contracts and differences there under, the delivery of an payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house;
c) the regulation or prohibition of blank transfers;
d) the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house;
e) the determination and declaration of market rates, including the opening closing highest and lowest rates for securities;
f) the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing;
g) the regulation of dealings by members for their own account;
h) the separation of the functions of jobbers and brokers;
i) the making, comparing, settling and closing of bargains;
j) the fixing of a scale of brokerage and other charges;
k) the regulation of the course of business between parties to contracts in any capacity;
l) the levy and recovery of fees, fines and penalties;
m) the method and procedure for the settlement of claims or disputes, including settlement by arbitration;
Power of Securities and Exchange Board of India to make or amend bye-laws of recognized stock exchanges: Sec. 10
Section 10 provided that if the Securities and Exchange Board of India is satisfied in any case that in the interest of the trade or in the public interest any bye-laws should be made, amended or revised immediately, it may, by order in writing specifying the reasons therefore dispense with the condition of previous publication.
Power of Central Government to supersede governing body of a recognized stock exchange: Sec. 11
Section 11 provided that any other powers vested in the Central Government under this Act, where the Central Government is of opinion that governing body of any recognized stock exchange should be superseded, then notwithstanding any thing contained in any other law for the time being in force, in the Central Government may serve on the governing body a written notice that the Central Government is considering the suppression of the governing body for the reasons specified in the notice and after giving an opportunity to the governing body to be heard in the matter.
Power to suspend business of recognized stock exchanges: Sec. 12
Section 12 provided that where the period of suspension is to be extended beyond the first period, no notification extending the period of suspension shall be issued unless the governing body of the recognized stock exchange has been given an opportunity of being heard in the matter.
CONTRACTS AND OPTIONS IN SECURITIES
Contracts in notified areas illegal in certain circumstances: Sec.13
If the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any State, that it is necessary so to do, it may, by notification in the Official Gazette, declared this section to apply to such State, and thereupon every contract in such State. Which is entered into after the date of the notification otherwise than between members of a recognized stock exchange in such State or such member shall be illegal?
Contracts in notified areas to be void in certain circumstances: Sec.14
Members may not act as principals in certain circumstance: Sec.15
Section.15 provided that where the member has secured the consent or authority of such person otherwise than in writing he shall secure written confirmation by such person or such consent or authority within three days from the date of the contract.
Procedure and powers of Securities Appellate Tribunal: Sec. 22 B
The Securities Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure 1908, while trying a suit, in respect of the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it exparte;
(g) setting aside any order of dismissal of any application for default or any order passed by it ex parte;
(h) any other matter which may be prescribed;
Right to legal representation: Sec. 22C
The appellant may either appear in person or authorize one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal.
Appeal to High Court: Sec. 22F.
Section 22F provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period allow it to be filed within a further period not exceeding sixty days.
Penalties: Sec. 23
Any person who-
Without reasonable excuse fails to comply with any requisition made under section 6(4);
(a) owns or keeps a place other than that of a recognized stock exchange which is used for the purpose of entering into any contracts in contravention of any of the provisions of this Act;
(b) mangers, controls in keeping any place other than that of a recognized stock exchange which is used for the purpose of entering into any contracts in contravention of any of the provisions of this Act;
(c) not being a member of a recognized stock exchange or his agent authorized as such under the rules of dealer in securities licensed under section 17 willfully represents to any person to believe that contracts can be entered into this Act;
(d) joins, gathers at any place other than the place of business specified in the bye-laws of a recognized stock exchange any person for making offers any contracts in contravention of any of the provisions of this Act;
Shall, on conviction, be punishable with imprisonment for a term which may extend to one year, or with fine or with both.
UNIT - V
FEMA ACT, 1999; COMPETITION ACT, 2002;
THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 - FEMA 1999:
Industrialization of the country depends on the extent of investments made in the economy for starting many projects. Resources in the form of money and material are very essential for development. Capital for investment may be forthcoming within the country or it may also from foreign countries. Further, industrialists and big businessmen would have earned lot of foreign exchange for further investments.
During the Second World War period, the then Government passed several ordinances regulating the foreign exchanges transaction. In 1947, a full-fledged Foreign Exchange Regulation Act (FERA) was passed by the Government of India. FERA 1947 was enacted initially for a period of 10 years. FERA was made permanent in 1957. In the year 1973, the Act was modified and the Foreign Exchange Regulation Act, 1973 was passed.
FERA 1973 was enacted to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency for the conservation of foreign exchange resources of the country and the proper utilitarian thereof in the interests of the economic development of the country. The provisions of 1973 Act were strengthened and made far more stringent in view of the then prevailing economic scenario. With global economy opening up and in the light of liberalization since 1991, the provisions of 1973 Acer relaxed in 1993. However, Indian economy needed to keep pace with global liberalization. Provisions of FERA 1973 though relaxed in 199e were still found repressive and a blockade to the new economic and free exchange polices to which Government was committed. A new liberalized Foreign Exchange Management Act, 1999(FEMA) was therefore enacted.
BACKGROUND:
FEMA was enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
AIMS OF FEMA AND OBJECTIVES:
The Act aims "to consolidate and amend the law relating to foreign exchange with objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
· The stated objective of the new Act is to facilitate external trade and payment.
· It seeks to promote the orderly development and maintenance of the foreign exchange market in India.
· On the capital account, the forex outflow is allowed only for transactions that are permitted.
· Current account transactions can be restricted by the Centre in consultation with the RBI.
This Act extends to the whole of India and shall also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India.
Definitions:
"Authored person" means an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized under sub-section (1) of Sec. 10 to deal in foreign exchange securities;
"Currency" includes all currency notes, postal notes, postal orders, money orders cheques, drafts, travelers' cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.
"Currency notes" means and includes cash in the form of coins and bank notes;
"Foreign currency" means any currency other than Indian currency;
"Foreign exchange" means foreign currency and includes -
(a) deposits, credits and balances payable in any foreign currency,
(b) drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,
(c) drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn by bank, institutions or persons outside India, but payable in Indian currency;
REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE
Chapter II of the Act deals with regulation and management of foreign exchange. Section 3 states that except as otherwise provided in this Act, no person shall in any manner deal in or transfer any foreign exchange of foreign security to any person not being an authorized person.
Section 4 states that except as otherwise provided in this Act, no person resident in India shall acquire, hold, own possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.
CURRENT ACCOUNT AND CAPITAL ACCOUNT TRANSACTIONS
Sections 5 and 6 deal with current account and capital account transactions.
According to section 5, any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current account transaction. However, the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account traction as may be prescribed. According to Section 6, any person may sell or draw foreign exchange to or from a authorized person for a capital account transaction subject to provisions of Sub-section 2. Section 6(2), states that Reserve Bank may, in consultation with Central Government, specify:
1. Any class or classes of capital account transactions which are permissible;
2. The limit up to which foreign exchange shall be admissible for such transactions;
Section 6 (3) state the Reserve Bank may, by regulation prohibit, restrict or regulate the follows:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside of India;
(c) transfer or issue of any security or foreign security by a branch, office or agency in India of a person resident outside India;
(d) any borrowing or lending of foreign exchange in whatever form or by whatever name called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surely in respect of any debt, obligation or other liability incurred;
EXPORT OF GOODS AND SERVICES:
Section 7 (1) of the Act lays down that every exporter of goods shall -
a) furnish to the Reserve Bank to such other exchange to or from an authorized person for a capital account transactions which are permissible;
b) The limit up to which foreign exchange shall be admissible for such transactions. However, the Reserve Bank shall not impose any restriction on the drawl of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
Section 7(2) lays down that the Reserve Bank may direct any exporter to comply with such requirements as it deems fit for the purpose of ensuring that the export value of goods is receive without any delay.
Section 7(3) lays down that every exporter of services shall furnish to the Reserve Bank, in a specified manner, details regarding the true and correct material particulars in relation to payment for such services.
REALISATION AND REPATRIATION OF FOREIGN EXCHANGE
Section 8 lays down that save as otherwise provided in the Act, where any where any amount of foreign exchange is due or has accrued to any person resident in India such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.
Section 9 provides the following exemptions from realization and repatriation of foreign exchange:
a) Possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify;
b) foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify;
c) foreign exchange acquired or receive before the 8th July 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of permission granted by the Reserve Bank;
d) foreign exchange held by a person resident in India up to such limit as the reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause © including any income arising there from;
e) foreign exchange acquired form employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify;
f) such other receipts in foreign exchange as the Reserve Bank may specify;
AUTHORISED PERSON
Chapter III of the Act relates to the authorization of a person by the Reserve Bank to deal in foreign exchange, Reserve Bank's powers to issue directions to authorized person and the power of Reserve Bank to inspect authorized person.
Section 10 of the Act says that Reserve Bank may authorize any person to deal in foreign exchange or in foreign securities, as an authorized dealer, money changer or off-shore banking unit or in any other manner as it deems fit.
The authorization shall be in writing and subject to the condition laid down therein. However, the Reserve Bank may revoke the authorization -
a) if it is in public interest to do so,
b) if the authorized person has failed to comply with condition subject to which the authorization was granted or has contravened any of the provisions of the Ac;.
Section 11 empowers the Reserve Bank to give directions to the authorized person in regard to making of payment or the doing or desisting from doing any act relating to foreign exchange or foreign security to ensure compliance with the provisions of the act.
Section 12 empowers the Reserve Bank to inspect the business of any authorized person for the purpose of -
a) verifying the correctness of any statement, information or particulars furnished to the Reserve Bank;
b) obtaining any information or particulars which such authorized person has failed to furnish on being called upon to do so,
c) securing compliance with the provisions of the Act or of any rules, regulations, directions or orders made there under;
CONTRAVENTION AND PENALTIES
Chapter IV deals with the issue of contravention and penalties.
Section 13 says that if any person contravenes any provisions of this Act, he shall, upon adjudication, be liable to penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to Rs. 5,000/- for every day after the first day during which the contravention continues.
Section 14 says that if the person concerned fails to make full payment of the penalty imposed on him within a period of 90 days, he shall be liable to civil imprisonment.
According to Sec. 15(1), any contravention under Sec. 13 may, on an application made by the person committing such contravention, be compounded by the Director of Enforcement or such other officers as may be prescribed by the Central Government.
Section 15(2) says that where a contravention has been compounded under Sec.15(1), no proceeding or further proceeding, as the case may be, shall be initiated or continued as the case may be, against the person committing such contravention under that section.
ADJUDICATION AND APPEAL
Chapter V deals with the issue of adjudication and appeal.
Section 16 states that Central Government may appoint Adjudicating Authorities for holding an inquiry in the manner prescribed after giving the accused person a reasonable opportunity of being heard for the purpose of imposing any penalty. The Adjudicating Authority shall have the same powers of a civil court which are conferred on the Appellate Tribunal.
Section 17 provides for the appointment of one or more Special Directors (Appeals) under this Act. The Appellate Tribunal shall consist of a chairperson and such number of Members as the Central Government may deem fit.
Section 21 states that a person shall not be qualified for appointment as the chairperson or a Member unless he is qualified to be a Judge of a District Court.
A person shall not be qualified for appointment as a Special Director (Appeal) unless;
A) He has been a member of the Indian Legal Service and has held a post in grade I of that service;
B) He has been a member of the Indian Legal Service and has held a post equivalent to a Joint Secretary to the Government of India;
Section 28 (2), which deals with the powers of the Appellate Tribunal and the Special Director states that they shall have, for the purposes of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit, in respect of the following matters, namely;
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) subject to the provisions of Sec. 123 and 124 of the Indian Evidence Act, 1872, requisitioning any public record or document from any office;
(e) issuing commissions for the examination of witnesses or documents;
(f) reviewing its decisions;
(g) dismissing a representation of default or deciding it ex parte;
(h) setting aside any order of dismissal of any representation for default or any order passed by it ex parte;
(i) any other matter which may be prescribed by the Central Government;
Section 34 of the Acts states that no civil court shall have jurisdiction to entertain any suit or proceedings in respect of any matter which an Adjudicating Authority or the Appellate Tribunal or the Special Director is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by this Act.
Section 35 lays down that any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within Sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising out of such order.
DIRECTORATE OF ENFORCEMENT
Chapter VI deals with the establishment of the Directorate of Enforcement and its powers, etc.
Section 36 (1), states that the Central Government shall establish a Directorate of Enforcement with a Director and such other officers or class of officers as it thinks fit, who shall be called Officers of Enforcement, for the purpose of this Act.
Section 37 (1) lays down that the Director, shall take up for investigation the contravention referred to in section. Section 37(3), the Director of Enforcement and other officers of Enforcement shall exercise the like powers which are conferred on Income-tax authorities under the Income-tax Act, 1961, and shall exercise such powers, subject to such limitations laid down under that Act.
Section 38 empowers the Central Government to authorize any officer of customs or any central excise officer or any police officer or any other officer of the Central Government or a state Government to exercise such of the powers and discharge such of the duties of the Director of Enforcement or any other officer of enforcement under this Act as may be stated in the order.
THE COMPETITION ACT, 2002
INTRODUCTION:
Despite many efforts made by the Government towards unshackling of the Indian economy, competition in the true sense still eludes India. Unlike advance countries where competition has reached a certain level of maturation, India presents a sordid picture of either unequal competition in some sectors or total lack of competition in other sectors. It is true that economists have us believe that free competition is a myth and is not present anywhere. However, one cannot deny the importance of even modicum of competition in enthroning consumer interests and reducing economic costs to the nation.
COMMITTEE ON COMPETITION LAW AND POLICY
The committee on Competition Law and Policy, 2000 headed by Mr.S.V.S.Raghavan, has shown commendable interest placing acceptable competition legislation in the statute books. With the gradual but certain ascendance of the market economy in all economic spheres and with globalization a reality, the need to frame an effective and coherent law on competition that would drive policy has become obvious. For the average Indian mindset, conditioned as it is by five decades of planned economic growth, competition has until recently mattered only to the extent of say checking private monopolies.
RECOMMENDATIONS OF THE COMMITTEE
Since the essence and the spirit of competition need to be preserved while harmonizing the competition policy with the Government policy, the committee has made far-reaching recommendations, which it terms pre-requisites for achieving the desired results. The Committee also favored a progressive reduction and ultimate elimination of reservation of products for the small scale industrial and handloom sector that would in any case lose its rationale in an era of free imports.
The Competition Act 2000 provides keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India.
DEFINITIONS (SECTION 2)
In this Act, unless the context otherwise requires -
ACQUISITION means, directly or indirectly acquiring shares, voting rights or control over management of any enterprise;
AGREEMENT includes any arrangement or understanding or in writing or action is intended to be enforceable by legal proceedings;
PROHIBITION OF CERTAIN AGREEMENTS
ANTI-COMPETITIVE AGREEMENTS (SECTION 3)
Competition means striking against each other for settling something desired or doing something desired or doing something in the best manner possible a trial of ability. It is a contest between two rivals, or the answering all requirements; having sufficient capacity, ability or authority; possessing the requisite physical, mental natural or legal qualifications.
Combination in restraint of trade is an effort of two or more parties, acting independently, to secure the business of a third party by the offer of the most favorable terms; also the relations between different buyers or different sellers which result from this effort. It is the struggle between rivals for the same trade at the same time. The term implies the idea of endeavoring by two or more to obtain the same object.
Agreement between two or more persons, in the form of a contract, trust, pool, holding company, or other form of association, for the purpose of unduly restricting competition, monopolizing trade and commerce in certain commodity, controlling its production, distribution, and price, or otherwise interfering with freedom of trade without statutory authority.
Sec.3 of the Competition Act, 2002, provides for prohibition of entering into anti-competitive agreements. It shall not be lawful for any enterprise or association of enterprises or person or association of persons to enter into an agreement in respect of production, supply, storage, distribution, acquisition or control of goods effect on competition within India. All such agreements entered into in contravention of the aforesaid prohibition shall be void.
PROHIBITION OF ABUSE OF DOMINANT POSITION (SECTION 4)
Sec.4 prohibits abuse of dominant position by any enterprise. Such abuse of dominant position, inter alia, includes imposition, either directly or indirectly of unfair or discriminatory purchase or selling prices including predatory prices of goods or service, limiting production of service indulging in practices resulting in denial of market access, making conclusion of contracts subject to acceptance by other parties of supplementary obligations and using dominant position in one market to enter into the market.
COMBINATION (SECTION 5)
Sec. 5 of the Act deals with combination of enterprises and persons. The acquisition of one or more enterprises by one or more persons or acquiring of control or merger or amalgamation of enterprises under certain circumstances specified in the said clause shall be construed as combination.
REGULATION OF COMBINATIONS (SECTION 6)
Under Section 6, no person or enterprise shall enter into a combination which is likely to cause or causes an appreciable adverse effect on competition within the relevant market in India. It further provides exemption from the provisions of this clause to certain institutions.
COMPETITION COMMISSION OF INDIA [SECTION 7 TO 17]
ESTABLISHMENT OF COMMISSION
The Act provides for the establishment of the Competition Commission India. The Commission shall be a body corporate by the aforesaid name having perpetual succession and a common seal with power to acquire, hold and dispose of property. The place of head office of the Commission shall be decided by the Central Government. However, the Commission can establish offices at other places in India.
COMPOSITION OF COMMISSION
The Commission shall consist of the Chairperson and not less than two and not more than ten other Members to be appointed by the Central Government. The Central Government shall appoint the Chairperson and a Member during the first year of the establishment of the Commission. A person who is or has been or is qualified to be a Judge of a High Court or is having special knowledge of, and professional experience in, not less than 15 years in International trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administration or in any other matter which in the opinion of the Central Government, be useful to the Commission shall be eligible for appointment as the Chairperson or as a Member.
Selection of Chairperson and other Members
The Chairperson and other Members shall be selected in the manner as may be prescribed.
TERM OF OFFICE OF CHAIRPERSON AND OTHER MEMBERS
The Chairperson and every other Member shall hold office as such for a term of five years from the date on which he enters upon his office and shall be eligible for reappointment;
No Chairperson shall hold office after he attains the age of seventy years and no other member shall hold officer after he attains the age of 65 years. This section also provides for discharge of functions of the Chairperson by the senior most Member in case the Chairperson is unable to discharge his functions.
RESIGNATION, REMOVAL AND SUSPENSION OF CHAIRPERSON AND OTHER MEMBERS
RESIGNATION:
The Chairperson or any other Member may, by notice in writing under his hand addressed to the Central Government, resign his office;
The Chairperson or a Member shall, unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his officer or until the expiry of his term of office whichever is the earliest.
REMOVAL:
The Central Government may, by order, remove the Chairperson or any other Member from his office if such Chairperson or Member, as the case may be -
e) he is at any time adjudged as an insolvent;
f) he has engaged at any time, during his term of office, in any paid employment;
g) has been convicted of an offence which, in the opinion of the Central Government involves moral turpitude;
h) has acquired such financial or other interest as is likely to affect prejudicially his function as Members;
i) has so abused his position as- to render his continuance in office prejudicial to the public interest;
j) has become physically or mentally incapable of acting as a Member;
No Member shall be removed from his office on the ground specified unless the Supreme Court, on a reference being made to it in this behalf by the Central Government, has on inquiry, held by it in accordance with such procedure as may be prescribed in this behalf by the Supreme Court, reported that the member ought on such ground or grounds to be removed.
Restriction on employment of Chairperson and other Members in certain cases:
The Chairperson and other Members shall not, for a period of one year from the date on which they cease to hold office, accept any employment in, or connected with the management or administration of, any enterprise which has been a party to a proceeding before the Commission under this Act.
Financial and administrative powers of Member Administration:
The Central Government shall designate any Member as Member Administration who shall exercise such financial administrative powers as may be vested in him under rules made by the Central Government. The Member Administration shall have authority to delegate such of his financial and administrative powers as he may think fit to any other officer of the commission subject to the condition, that while exercising such delegated powers continue to act under the direction superintendence and control of the Member Administration.
The Salary, and the other terms and conditions of service of the Chairperson and other Members including traveling expenses shall not be varied to his disadvantage after appointment.
Vacancy, etc., not to invalidate proceedings of Commission:
No act or proceeding of the Commission shall be invalid merely by reason of -
A) Any vacancy in, or any defect in the constitution of the commission;
B) Any defect in the appointment of a person acting as a Chairperson or as a Member;
C) any irregularity in the procedure of the Commission not affecting the merits of the case;
Registrar and officers and other employees of Commission:
The Commission may appoint a Registrar and such officers and other employees, as it considers necessary for the efficient performance of its functions under this Act. The salaries and allowances payable to and other terms and conditions of service of the Registrar and officers and employees shall be such as may be prescribed.
DUTIES, POWERS AND FUNCTIONS OF COMMISSION (SECTION 18 TO 40)
DUTIES OF COMMISSION:
Subject to the provisions of this Act, it shall be the duty of the Commission to eliminate practices having adverse effect on competition, promote ad sustain competition, protect the interests of consumers, and ensure freedom of trade carried on by other participants, in markets in India;
The Commission may, for the purpose of discharging its duties or performing its functions under this Act, enter into any memorandum or arrangement, with the prior approval of the Central Government, with any agency of any foreign country.
Inquiry into certain agreements and dominant position of enterprise:
The Commission may inquire into any alleged contravention of the provisions either on its own notion or on -
a) receipt of a complaint, accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association;
b) A reference made to it by the Central Government or a State Government or a statutory authority;
The Commission shall, while determining whether an agreement has an appreciable adverse effect on competition, have due regard to all or any of the following factors, namely:
(a) certain of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits of consumers;
(e) improvements in production or distribution of goods or provision of services;
(f) promotion of technical, scientific and economic development by means, of production or distribution of goods or provision of services;
The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not have due regard to all or any of the following factors, namely:
a) market share of the enterprise;
b) size and resources of the enterprise;
c) size and importance of the competitors;
d) economic power of the enterprise including commercial advantages over competitors;
e) vertical integration of the enterprises or sale or service network of such enterprises;
f) dependence of consumers on the enterprise;
g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
h) countervailing buying power;
i) market structure and size of market;
j) social obligation and social costs;
k) any other factor which the Commission may consider relevant for the inquiry;
l) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
For determining whether a market constitutes a "relevant market" for the purposes of this Act, the Commission shall have due regard to the "relevant geographic market" have due regard to an or any of the following factors, namely:
I. regulatory trade barriers;
II. local specification requirements;
III. national procurement polices;
IV. adequate distribution facilities;
V. transport costs;
VI. language;
VII. consumer preferences;
VIII. need for secure or regular supplies or rapid after-services;
The Commission shall, while determining the "relevant product market" has due regard to all or any of the following factors, namely:
a) physical characteristics or end-use of goods;
b) price of goods or services;
c) consumer preference;
d) exclusion of in-house production;
e) existence of specialized production;
f) classification of specialized producers;
Inquiry into Combination by Commission:
The Commission may, upon its own knowledge or information relating to acquisition referred to or acquiring of control referred to or merger or amalgamation referred to inquire into whether such a combination has caused or is likely to cause an appreciable adverse effect on competition in India.
The Commission shall not initiate any inquiry after the expiry of one year from the date on which such combination has taken effect.
The Commission shall, on receipt of a notice or upon receipt of a reference, inquire whether a combination referred to in that notice or reference has caused or is likely to cause an appreciable adverse effect on competition in India.
For the purposes of determining whether a combination would have the effect or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission shall have due regard to all or any of the following factors, namely:
(a) actual and potential level of competition through imports in the market;
(b) extent of barriers to entry to the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) extent of effective competition likely to sustain in a market;
(f) extent to which substitutes are available in the market;
(g) likelihood that the combination would result in the parties to the combination being able to significantly and sustain ably increase prices or profit margins;
(h) market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;
(i) nature and extent of vertical integration in the market;
(j) possibility of a failing business;
Reference by Statutory Authority:
If in the course of a proceeding before any statutory authority, entrusted with the responsibility of regulating any goods or service or market there for, a party has raised an issued that the decision taken by the statutory authority would be contrary to the provision of the Act, then the statutory authority shall be bound to make a reference to the Commission.
Benches of Commission:
The jurisdiction, powers and authority of the Commission may be exercised by Benches thereof. The Benches shall be constituted by the Chairperson and each Bench shall consist of not less than two Members. Every Bench shall consist of at least one Judicial Member.
The Bench over which the Chairperson presides shall be the Principal Bench and the other Benches shall be known as the Additional Benches. There shall be constituted by the Chairperson one or more Benches to be called the Mergers Bench.
Distribution of business amongst Commission Benches (Sec.23):
Where any Benches are constituted, the Chairperson may, from time to time, by order, make provisions as to the distribution of the business of the Commission amongst the Benches and specify the matters, which may be dealt with by each Bench.
If any question arises as to whether any matter falls within the purview of the business allocated to a Bench, the decision of the Chairperson thereon shall be final.
The Chairperson may transfer a Member from one Bench to another Bench; or authorize the Members of one Bench to discharge also the functions of the Members of other Bench.
Procedure for deciding a case where Members of Bench differ in opinion:
If the Members of a Bench differ in opinion on any point, they shall state the point or points on which they differ, and make a reference to the Chairperson who shall either near the points himself or refer the case for hearing on such points by one or more of the other Member and such points shall be decided according the opinion of the majority of the Members who have heard the case, including those who first heard it.
Jurisdiction of Bench:
An inquiry shall be initiated or a complaint be instituted or a reference be made under this Act before a Bench within the local limits of whose jurisdiction -
a) the respondent, or each of the respondents, where there are more than one, at the time of the initiation of inquiry of the complaint , as the case may be actually and voluntarily resides;
b) any of the respondents, where there are more than one at the time of the initiation of the inquiry of complaint as the case may be actually and voluntarily resides or personally works for gain provided that in such case either the leave of the Bench is give;
c) the cause of action, wholly or in part, arises;
Procedure for inquiry on complaints:
On receipt of a complaint or a reference from the Central Government or a State Government or a statutory authority or on its own knowledge or information, under Section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the Director General to cause an investigation to be made into the matter. Where on receipt of a complaint the Commission is of the opinion that there exists no prima facie case, it shall dismiss the complaint and may pass such orders as it deems fit, including imposition of costs, if necessary.
Orders by Commission after inquiry into agreements or abuse of dominant position:
Where after inquiry the commission finds that any agreement or action of an enterprise in a dominant position, is in contravention, as the case may be, it may pass all or any of the following orders, namely:
a) direct any enterprise;
b) impose such penalty;
c) award compensation to parties in accordance with the provisions contained in Sec.34;
d) direct that the agreements shall stand modified to the extent and in the manner as may be specified in the order by the Commission;
e) direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs, if any;
f) recommend, to the Central Government for the division of an enterprise enjoying dominant position;
g) pass such other order as it may deem fit;
Division of enterprise enjoying dominant position:
The Central Government, on recommendation may, notwithstanding anything contained in any other law for the time being in force, order in writing, and direct division of an enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant position.
In particular and without prejudice to the generality of the foregoing powers, may order referred may provide for all or any of the following matters, namely:
(a) the transfer or vesting of property, rights, liabilities or obligations;
(b) the adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise;
(c) the creation, allotment, surrender or cancellation of any shares, stocks or securities;
(d) the payment of compensation to any person who suffered any loss due to dominant position of such enterprise;
(e) any other matter which may be necessary to give effect to the division of the enterprise;
Procedure for investigation of combinations:
Where the Commission is of the opinion that a combination is likely to caused an appreciable adverse effect on competition within the relevant market in India, is shall issue to notice to show cause to the parties to combination calling upon them to respond within thirty days of the receipt of the notice, as to why investigation in respect of such combination should not be conducted.
The Commission may invite any person or member of the public, affected by the said combination, to file his written objections, if any, before the Commission within fifteen working days from the date on which the details of the combination were published.
After receipt of all information and within a period of forty-five working days form the expiry of the period specified as above, the Commission shall proceed to deal with the case in accordance with the provisions contained in this Act.
Orders of Commission on certain combinations:
Where the Commission is of the opinion that any combination does not or have an appreciable adverse effect on competition, it shall, by order approve that combination including the combination in respect of which a notice has been given.
Where the Commission has directed that the combination shall not take effect or the combination is deemed to have an appreciable adverse effect on competition, then without to any penalty which may be imposed or any prosecution which may be initiated under this Act, the commission may order that -
a) the acquisition;
b) the acquiring of control;
c) the merger or amalgamation shall not be given effect to;
Duties of Director General to investigate contravention:
The Director General shall, so direct by the Commission, assist the commission in investigate contravention of the provisions of this Act or any rules or regulations made there under this Act.
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