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1 Presented By CA Swatantra Singh, B.Com, FCA, MBA ID: ID: New.

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Presentation on theme: "1 Presented By CA Swatantra Singh, B.Com, FCA, MBA ID: ID: New."— Presentation transcript:

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2 1 Presented By CA Swatantra Singh, B.Com, FCA, MBA ID: ID: New Delhi, , New Delhi, ,

3 Company Law

4 What is a company? A Company is a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability. A Company is a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability. They can be incorporated under the Companies Act (it may be any type of company) They can be incorporated under the Companies Act (it may be any type of company) Corporations enacted under special enactments ( Even those which are incorporated outside India) Corporations enacted under special enactments ( Even those which are incorporated outside India) Corporate sole Corporate sole Any other body corporate notified by the central government Any other body corporate notified by the central government

5 Features of a company A company is considered as a separate legal entity from its members, which can conduct business with all powers to contract. A company is considered as a separate legal entity from its members, which can conduct business with all powers to contract. Independent corporate entity (Saloman V. Saloman) It is independent of its members and shareholders Independent corporate entity (Saloman V. Saloman) It is independent of its members and shareholders

6 Other features Limited Liability ( either by share or guarantee ) Limited Liability ( either by share or guarantee ) It can own property, separate from its members. The property is vested with the company, as it is a body corporate. It can own property, separate from its members. The property is vested with the company, as it is a body corporate. The income of the members are different from the income of the company ( Income received by the members as dividends cannot be same as that of the company) The income of the members are different from the income of the company ( Income received by the members as dividends cannot be same as that of the company) cont…. cont….

7 Features continued.. Perpetual succession: Death of the members is not the death of the company until it is wound up Perpetual succession: Death of the members is not the death of the company until it is wound up As it is a legal entity or a juristic person or artificial person it can sue and be sued As it is a legal entity or a juristic person or artificial person it can sue and be sued The company enjoys rights and liabilities which are not as that of the members of the company The company enjoys rights and liabilities which are not as that of the members of the company

8 Lifting of Corporate Veil As the company is a separate legal entity, is has been provided with a veil, compared to that of individuals who are managing the company. As the company is a separate legal entity, is has been provided with a veil, compared to that of individuals who are managing the company. But if the court feels that such veil has to been used for any wrongful purpose, the court lifts the corporate veil and makes the individual liable for such acts which they should not have done or doing in the name of the company But if the court feels that such veil has to been used for any wrongful purpose, the court lifts the corporate veil and makes the individual liable for such acts which they should not have done or doing in the name of the company

9 Circumstances to lift the corporate veil… The corporate veil can be lifted either under the Statutory provisions or Statutory provisions or Judicial interpretations Judicial interpretations The statutory provisions are Provided under the Companies Act, 1956 The other circumstances are decided through Judicial interpretations, which are based on facts of each case as per the decisions of the court

10 Statutory circumstances for lifting the corporate veil Reduction in membership- Less than seven in public company and less than two if it is a private company Reduction in membership- Less than seven in public company and less than two if it is a private company Failure to refund application money- After the issue of shares to the pubic, the company has to pay back the initial payment to the unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to do so, the corporate veil can be lifted. Failure to refund application money- After the issue of shares to the pubic, the company has to pay back the initial payment to the unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to do so, the corporate veil can be lifted. Mis-description of companies name- While signing a contract if the company’s name is not properly described, then the corporate veil can be lifted. Mis-description of companies name- While signing a contract if the company’s name is not properly described, then the corporate veil can be lifted.

11 continued Misrepresentation in the prospectus- (Derry Vs Peek) In case of misrepresentation, the promoters, directors and every other person responsible in this matter can be held liable. Misrepresentation in the prospectus- (Derry Vs Peek) In case of misrepresentation, the promoters, directors and every other person responsible in this matter can be held liable. Fraudulent Conduct- In case the company is carried on with an intent to defraud the creditors, then the court may lift the corporate veil. Fraudulent Conduct- In case the company is carried on with an intent to defraud the creditors, then the court may lift the corporate veil. Holding and subsidiary companies- A subsidiary has a distinct legal entity from the holding company other than in a few circumstances, so if otherwise shown, the court may under the Act, lift the corporate veil of the subsidiary company. Holding and subsidiary companies- A subsidiary has a distinct legal entity from the holding company other than in a few circumstances, so if otherwise shown, the court may under the Act, lift the corporate veil of the subsidiary company.

12 Circumstances to lift the corporate veil through judicial interpretations When the court feels that there are no statutory provisions which can pierce the corporate veil, and the identity of the company is not the one which has to exist, and the court has to interfere in order to avoid the activities that are done in the name of the company by persons managing them, it has been empowered to do so…… When the court feels that there are no statutory provisions which can pierce the corporate veil, and the identity of the company is not the one which has to exist, and the court has to interfere in order to avoid the activities that are done in the name of the company by persons managing them, it has been empowered to do so…… The circumstances are….. The circumstances are…..

13 Judicial interpretations by the court are as follows: Protection of Revenue- When ever a company uses its name for the purpose of tax evasion or to circumvent tax obligations Protection of Revenue- When ever a company uses its name for the purpose of tax evasion or to circumvent tax obligations Prevention of fraud or Improper conduct- The incorporation has been used for fraudulent purpose, like defrauding the creditors, defeating the purpose of law etc.. Prevention of fraud or Improper conduct- The incorporation has been used for fraudulent purpose, like defrauding the creditors, defeating the purpose of law etc.. Determination of the character of the company- Enemy company or all the members being the citizens of the enemy country. (Daimler Co. Ltd V. Continental Tyre & Rubber Co. Ltd) Determination of the character of the company- Enemy company or all the members being the citizens of the enemy country. (Daimler Co. Ltd V. Continental Tyre & Rubber Co. Ltd)

14 Other circumstances Where a company is used to avoid welfare legislation- If a company is formed in order to avoid the benefits to the workers like bonus, or other statutory benefits.. Where a company is used to avoid welfare legislation- If a company is formed in order to avoid the benefits to the workers like bonus, or other statutory benefits.. For determining the technical competence of the company- To look into the competency of the company or the shareholders or promoters For determining the technical competence of the company- To look into the competency of the company or the shareholders or promoters (New Horizon’s Ltd and Another V. Union of India (New Horizon’s Ltd and Another V. Union of India (1994) (1994)

15 Types of Companies Limited Company ( Limited by share or by guarantee) Limited Company ( Limited by share or by guarantee) Unlimited company Unlimited company Government Company Government Company Foreign Company Foreign Company Private Company Private Company Public Company Public Company

16 Limited Company Limited by Shares- In such companies, the liability is only the amount which remains unpaid on the shares. Limited by Shares- In such companies, the liability is only the amount which remains unpaid on the shares. Limited by Guarantee not having share capital- In this type of companies the memorandum of Association limits the members’ liability. It will be based on the undertaking that has been given in MOA for their contribution in case of a winding up. Limited by Guarantee not having share capital- In this type of companies the memorandum of Association limits the members’ liability. It will be based on the undertaking that has been given in MOA for their contribution in case of a winding up. Limited by guarantee having share capital- In such cases, the liability would be based on the MOA towards the guaranteed amount and the remaining would be from the unpaid sums of the shares held by the person concerned. Limited by guarantee having share capital- In such cases, the liability would be based on the MOA towards the guaranteed amount and the remaining would be from the unpaid sums of the shares held by the person concerned.

17 Unlimited Company There is no limit on the liability of the members. The liability in such cases would extend to the whole amount of the company’s debts and liabilities. There is no limit on the liability of the members. The liability in such cases would extend to the whole amount of the company’s debts and liabilities. Here the members cannot be directly sued by the creditors. Here the members cannot be directly sued by the creditors. When the company is wound up, the official liquidator will call upon the members to discharge the liability. When the company is wound up, the official liquidator will call upon the members to discharge the liability. The details of the number of members with which the company is registered and the amount of share capital has to be stated in the Articles of Association (AOA). The details of the number of members with which the company is registered and the amount of share capital has to be stated in the Articles of Association (AOA).

18 Government Company When 51% of the paid up share capital is held by the government. When 51% of the paid up share capital is held by the government. The share can be held by the central government or state government. Partly by central and partly by two or more governments. The share can be held by the central government or state government. Partly by central and partly by two or more governments. As the legal status of the company does not change by being a government company, there are no special privileges given to them. As the legal status of the company does not change by being a government company, there are no special privileges given to them.

19 Foreign Company A company incorporated outside India, but having a place of business in India. A company incorporated outside India, but having a place of business in India. If it does not have a place of business in India but only has agents in India it cannot be considered to be foreign company. If it does not have a place of business in India but only has agents in India it cannot be considered to be foreign company.

20 Private Company A company which has a minimum of two persons. They have to subscribe to the MOA and AOA A company which has a minimum of two persons. They have to subscribe to the MOA and AOA It should be have a minimum paid up capital of 1 lakh or more as prescribed by the article. It should be have a minimum paid up capital of 1 lakh or more as prescribed by the article. The maximum number of members to be fifty ( it does not include members who are employed in the company, persons who were formerly employed) The maximum number of members to be fifty ( it does not include members who are employed in the company, persons who were formerly employed) The rights to transfer the shares are restricted in the Private companies The rights to transfer the shares are restricted in the Private companies continued…. continued….

21 Prohibits any invitation to the public to subscribe and therefore it cannot issue a prospectus inviting the public to subscribe for any shares in, or debentures of the company Prohibits any invitation to the public to subscribe and therefore it cannot issue a prospectus inviting the public to subscribe for any shares in, or debentures of the company It prohibits acceptance of deposits from persons other than its members, directors or their relatives. It prohibits acceptance of deposits from persons other than its members, directors or their relatives. If two or more are holding one or more shares in a company jointly, they shall for the purpose of this definition, be treated as a single member. If two or more are holding one or more shares in a company jointly, they shall for the purpose of this definition, be treated as a single member. As there is no public accountability like a public company, there is no rigorous surveillance. As there is no public accountability like a public company, there is no rigorous surveillance.

22 Exemption and Privileges of a Private company It can have a minimum of two members. It can have a minimum of two members. It can commence business immediately after obtaining certificate of incorporation. It can commence business immediately after obtaining certificate of incorporation. It need not issue prospectus or statement in lieu of prospectus. It need not issue prospectus or statement in lieu of prospectus. It can have a minimum of 2 directors. It can have a minimum of 2 directors. It need not hold statutory meeting or file statutory report with the ROC. It need not hold statutory meeting or file statutory report with the ROC.

23 Public Company A Public company means a company- A Public company means a company- > Which is not a private company > Which is not a private company > Which has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be prescribed > Which has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be prescribed > Which is a private company and is a not a subsidiary of a company, which is private company. > Which is a private company and is a not a subsidiary of a company, which is private company. >It includes- any company which is a public company with a paid up capital of less than 5 lakh, then it has to enhance its paid up capital as per the statutory requirement >It includes- any company which is a public company with a paid up capital of less than 5 lakh, then it has to enhance its paid up capital as per the statutory requirement

24 Conversion of Company The Act provides for conversion of public company into a private company and vice versa The Act provides for conversion of public company into a private company and vice versa A private company is converted into a public company either by default or by choice in compliance with the statutory requirements. A private company is converted into a public company either by default or by choice in compliance with the statutory requirements. Once the action for conversion takes place then, a petition can be filed with the central government with the necessary documents for its decision on the matter of conversion Once the action for conversion takes place then, a petition can be filed with the central government with the necessary documents for its decision on the matter of conversion

25 Registration and Incorporation Association of persons or partnership or more than 20 members ( 10 in case of banking) can register to form a company under the Companies Act, 1956 Association of persons or partnership or more than 20 members ( 10 in case of banking) can register to form a company under the Companies Act, 1956 If they do not register they can be considered to be illegal association. The contract entered into by this illegal association is void and cannot be validated. Its illegality will not affect its tax liability or its chargeability If they do not register they can be considered to be illegal association. The contract entered into by this illegal association is void and cannot be validated. Its illegality will not affect its tax liability or its chargeability The certification of incorporation is the conclusive evidence, that all the requirements for the registration have been complied with the The certification of incorporation is the conclusive evidence, that all the requirements for the registration have been complied with the

26 Incorporation of a Company The persons who conceive an idea of a company decide and do the necessary work for formation of a company are called the promoters of the Company. The persons who conceive an idea of a company decide and do the necessary work for formation of a company are called the promoters of the Company. The Promoters are the persons who decide on the formation of the company. The Promoters are the persons who decide on the formation of the company. The promoters of a company stand undoubtedly in a fiduciary position though they are not the agent or a trustee of a company. They are the ones “who create and mould the company”. The promoters of a company stand undoubtedly in a fiduciary position though they are not the agent or a trustee of a company. They are the ones “who create and mould the company”. They may have to enter into pre-incorporation contracts, which can be validated after the incorporation of the company for obtaining certificate of incorporation. They may have to enter into pre-incorporation contracts, which can be validated after the incorporation of the company for obtaining certificate of incorporation.

27 Promoters They can be remunerated for their services, but they have to enter into a contract before the incorporation of the company through a pre incorporation of the company They can be remunerated for their services, but they have to enter into a contract before the incorporation of the company through a pre incorporation of the company They will usually act as nominees or as the first directors of the company They will usually act as nominees or as the first directors of the company They enter into contracts after the incorporation and before the commencement of business. They enter into contracts after the incorporation and before the commencement of business. But they need not compulsorily participate in the formation of the company. But they need not compulsorily participate in the formation of the company.

28 Sometimes, a few persons may only act as professionals who help the promoters on behalf of the company.. like the solicitor, chartered accountant etc.. and get paid for their services. Sometimes, a few persons may only act as professionals who help the promoters on behalf of the company.. like the solicitor, chartered accountant etc.. and get paid for their services. The promoters in most of the cases decide as to …What is the type of a company to be formed? The promoters in most of the cases decide as to …What is the type of a company to be formed? In India promoters generally secure the management of the company that is formed and have a controlling interest in the company’s management In India promoters generally secure the management of the company that is formed and have a controlling interest in the company’s management

29 Legal Position of the Promoters They cannot make profit at the expense of the company, which they have promoted without the knowledge and consent of the company. In case they do so, they may be compelled to account for it. They cannot make profit at the expense of the company, which they have promoted without the knowledge and consent of the company. In case they do so, they may be compelled to account for it. They cannot sell their property to the company at a profit unless all the material facts are disclosed at the independent board of directors or the shareholders of the company. They cannot sell their property to the company at a profit unless all the material facts are disclosed at the independent board of directors or the shareholders of the company. If they do so, the company may repudiate the contract of sale or confirm the sale after recovering the profit made by the promoter. If they do so, the company may repudiate the contract of sale or confirm the sale after recovering the profit made by the promoter.

30 Promoters have the following liabilities under the Companies Act, 1956 They can be liable for non compliance of the provisions of the Act They can be liable for non compliance of the provisions of the Act Severe penalty may be imposed Severe penalty may be imposed The court may suspend the promoter from taking part in the management of the company The court may suspend the promoter from taking part in the management of the company Liable for any untrue statement in the prospectus to the person who has subscribed for any shares or debentures on the faith of the prospectus Liable for any untrue statement in the prospectus to the person who has subscribed for any shares or debentures on the faith of the prospectus The liabilities are …. The liabilities are …. a) to set aside the allotment of shares, a) to set aside the allotment of shares, b) sued for damages, b) sued for damages, c) sued for compensation c) sued for compensation d) criminal proceedings d) criminal proceedings

31 The requirements are as follows Application for availability of name Application for availability of name Preparation of MOA and AOA Preparation of MOA and AOA Selection and finalization of MOA and AOA- Its printing, stamping and signing Selection and finalization of MOA and AOA- Its printing, stamping and signing Preparation of other necessary documents Preparation of other necessary documents Filling of the required documents for Registration to obtain certificate of incorporation and Certificate of commencement of business Filling of the required documents for Registration to obtain certificate of incorporation and Certificate of commencement of business

32 Memorandum of Association It is the charter of the company It is the charter of the company It contains the fundamental conditions upon which the company can be incorporated It contains the fundamental conditions upon which the company can be incorporated It contains the objects of the company’s formation It contains the objects of the company’s formation The company has to act within objects specified in the MOA The company has to act within objects specified in the MOA It defines as well as confines the powers of the company It defines as well as confines the powers of the company Any thing done beyond the objects specified in the MOA will be ultra vires. Their transactions will be null and void Any thing done beyond the objects specified in the MOA will be ultra vires. Their transactions will be null and void The outsider have to transact looking into the MOA The outsider have to transact looking into the MOA

33 Conditions of the MOA It should be printed It should be printed Divided into paragraph and numbers consecutively Divided into paragraph and numbers consecutively Signed by at least seven persons or two in case of public and private company respectively. Signed by at least seven persons or two in case of public and private company respectively. The signature should be in the presence of a witness, who will have to attest the signature The signature should be in the presence of a witness, who will have to attest the signature Members have to take shares and write the number of shares taken with full address Members have to take shares and write the number of shares taken with full address

34 The MOA of the Limited Company The name of the company with ‘limited’ as the last word The name of the company with ‘limited’ as the last word The name of the state where the registered office of the company is to be situated The name of the state where the registered office of the company is to be situated The objects of the company stating the ‘Main objects’ and the ‘other objects’ The objects of the company stating the ‘Main objects’ and the ‘other objects’ The declaration about the liability of the members is limited ( limited by shares or guarantee) The declaration about the liability of the members is limited ( limited by shares or guarantee) The amount of the authorized share capital, divided into shares of fixed amounts. The amount of the authorized share capital, divided into shares of fixed amounts.

35 The Compulsory Clauses in MOA The Name Clause – it decides on the name of the company based on the capital involved The Name Clause – it decides on the name of the company based on the capital involved The Registered Office Clause- where it has registered its head office and other branch office ( The registered office can be changed with the permission of the ROC) The Registered Office Clause- where it has registered its head office and other branch office ( The registered office can be changed with the permission of the ROC) The Object Clause- Main object, ancillary object and the other objects of the company are clearly specified ( Ashbury Railway Carriage Co V. Riche). The applicable doctrine here is the “ Doctrine of Ultra Vires” beyond the powers of the company (opposed to Intra Vires) The Object Clause- Main object, ancillary object and the other objects of the company are clearly specified ( Ashbury Railway Carriage Co V. Riche). The applicable doctrine here is the “ Doctrine of Ultra Vires” beyond the powers of the company (opposed to Intra Vires)

36 The Liability Clause- What is the liability of its members.. limited by shares or guarantee or unlimited, there can be alteration in the liability clause The Liability Clause- What is the liability of its members.. limited by shares or guarantee or unlimited, there can be alteration in the liability clause The Capital Clause - The amount of the nominal capital of the company, number of shares in which it is to be divided… alteration of the capital clause etc The Capital Clause - The amount of the nominal capital of the company, number of shares in which it is to be divided… alteration of the capital clause etc The Association or Subscription clause- Where the subscribers to the MOA declare that they respectively agree to take the number of the shares in the capital. It has to have the following: The Association or Subscription clause- Where the subscribers to the MOA declare that they respectively agree to take the number of the shares in the capital. It has to have the following: a) They have to sign in the presence of two witnesses, who attest the signatures, a) They have to sign in the presence of two witnesses, who attest the signatures, b) The subscriber to take at least one share. b) The subscriber to take at least one share. c) After the name the subscriber has to write the number of shares taken c) After the name the subscriber has to write the number of shares taken

37 “Doctrine of Ultra Vires” The powers exercisable by the company are to be confined to the objects specified in the MOA. The powers exercisable by the company are to be confined to the objects specified in the MOA. So it is better to define and include the provisions regarding the acquiring of business, sharing of profits, promoting company and other financial, gifts, political party funds etc. So it is better to define and include the provisions regarding the acquiring of business, sharing of profits, promoting company and other financial, gifts, political party funds etc. If the company acts beyond the powers or the objects of the company that is specified in the MOA, the acts are considered to be of ultra vires. Even if it is ratified by the all the members, the action is considered to be ineffective. If the company acts beyond the powers or the objects of the company that is specified in the MOA, the acts are considered to be of ultra vires. Even if it is ratified by the all the members, the action is considered to be ineffective. Even the charitable contributions have to be based on the object clause. ( A Lakshmanaswami Mudaliar V. LIC of India) Even the charitable contributions have to be based on the object clause. ( A Lakshmanaswami Mudaliar V. LIC of India)

38 The consequences of the ultra vires transactions are as follows: a) Injunction b) Directors’ personal liability. c) If a property has been purchased and it is an ultra vires act, the company can have a right over that property. d) The doctrine to be used exclusively for the companies’ interest. e) But the others cannot use this doctrine as a tool to attack the company

39 Articles of Association It is the companies bye- laws or rules to govern the management of the company for its internal affairs and the conduct of its business. It is the companies bye- laws or rules to govern the management of the company for its internal affairs and the conduct of its business. AOA defines the powers of its officers and also establishes a contract between the company and the members and between the members inter se AOA defines the powers of its officers and also establishes a contract between the company and the members and between the members inter se It can be originally framed and altered by the company under previous or existing provisions of law. It can be originally framed and altered by the company under previous or existing provisions of law.

40 AOA AOA plays a subsidiary part to the MOA AOA plays a subsidiary part to the MOA Any thing done beyond the AOA will be considered to be irregular and may be ratified by the shareholders. Any thing done beyond the AOA will be considered to be irregular and may be ratified by the shareholders. The content of the AOA may differ from company to company as the Act has not specified any specific provisions The content of the AOA may differ from company to company as the Act has not specified any specific provisions Flexibility is allowed to the persons who form the company to adopt the AOA within the requirements of the company law Flexibility is allowed to the persons who form the company to adopt the AOA within the requirements of the company law The AOA will have to be conversant with the MOA, as they are contemporaneous documents to be read together. The AOA will have to be conversant with the MOA, as they are contemporaneous documents to be read together. Any ambiguity and uncertainty in one of them may be removed by reference to the other. Any ambiguity and uncertainty in one of them may be removed by reference to the other.

41 Contents of the AOA may be as follows: Share capital Share capital Lien on shares Lien on shares Calls on shares Calls on shares Transfer and transmission of shares Transfer and transmission of shares Forfeiture of the shares Forfeiture of the shares Surrender of the shares Surrender of the shares General meetings General meetings Alteration of the capital Alteration of the capital Directors etc.. Directors etc.. Dividends and reserves Dividends and reserves Account and audit Account and audit Borrowing powers Borrowing powers Winding up Winding up Adoption of the preliminary contracts etc…. Adoption of the preliminary contracts etc….

42 DRAFTING OF ARTICLES & MEMORANDUM OF ASSOCIATION

43 MEANING &LEGAL EFFECT INTERNAL REGULATIONS OF THE CO.& CHARTER OF INCORPORATION INTERNAL REGULATIONS OF THE CO.& CHARTER OF INCORPORATION BINDS THE COMPANY VIS-A-VIS MEMBERS BINDS THE COMPANY VIS-A-VIS MEMBERS BINDS MEMBERS VIS-A-VIS COMPANY BINDS MEMBERS VIS-A-VIS COMPANY BINDS MEMBERS INTER SE. BINDS MEMBERS INTER SE.

44 Shareholders/Joint venture Agreements AGREEMENT AMONGST SHAREHOLDERS AGREEMENT AMONGST SHAREHOLDERS PRIVATE DOCUMENT PRIVATE DOCUMENT CONTACTUAL FREEDOM CONTACTUAL FREEDOM NO AUTOMATIC APPLICABLITY NO AUTOMATIC APPLICABLITY

45 MEMORANDUM-BASIC STRUCTURE NAME CLAUSE NAME CLAUSE OBJECT CLAUSE OBJECT CLAUSE REGISTERED OFFICE CLAUSE REGISTERED OFFICE CLAUSE CAPITAL CLAUSE CAPITAL CLAUSE LIABLITY CLAUSE LIABLITY CLAUSE SUBSCRIPTION CLAUSE SUBSCRIPTION CLAUSE

46 ARTICLES -SCHEDULE-1 TABLE A-FOR A COMPANY LIMITED BY SHARES TABLE A-FOR A COMPANY LIMITED BY SHARES TABLE C-COMPANYLIMITED BY GUARANTEE & NOT HAVING A SHARE CAPITAL TABLE C-COMPANYLIMITED BY GUARANTEE & NOT HAVING A SHARE CAPITAL TABLE D-COMPANY LIMITED BY GUARANTEE & HAVING A SHARE CAPITAL TABLE D-COMPANY LIMITED BY GUARANTEE & HAVING A SHARE CAPITAL TABLE E- UNLIMITED COMPANY. TABLE E- UNLIMITED COMPANY.

47 TABLE A INTERPRETATION INTERPRETATION SHARE CAPITAL SHARE CAPITAL GENERAL MEETINGS GENERAL MEETINGS BOARD MEETINGS BOARD MEETINGS MANAGER/SECRETARY MANAGER/SECRETARY SEAL SEAL DIVIDEND/RESERVES DIVIDEND/RESERVES

48 TABLE A-CONTD. ACCOUNTS ACCOUNTS CAPITALISATION OF PROFITS CAPITALISATION OF PROFITS WINDING UP WINDING UP INDEMNITY INDEMNITY

49 IMPORTANT CLAUSES SHAREHOLDING RATIO SHAREHOLDING RATIO BOARD OF DIRECTORS BOARD OF DIRECTORS SHAREHOLDERS MEETINGS SHAREHOLDERS MEETINGS SHARE TRANSFER RESTRICTIONS SHARE TRANSFER RESTRICTIONS DEADLOCK RESOLUTION DEADLOCK RESOLUTION ARBITRATION ARBITRATION

50 BOARD CONTROL STRENGTH OF THE BOARD STRENGTH OF THE BOARD QUORUM QUORUM RIGHT TO NOMINATE DIRECTORS RIGHT TO NOMINATE DIRECTORS CHAIRMAN CHAIRMAN CASTING VOTE CASTING VOTE RESERVE MATTERS RESERVE MATTERS

51 SHAREHOLDERS MEETING QUORUM QUORUM RESERVE MATTERS RESERVE MATTERS CHAIRMAN CHAIRMAN

52 SHARE TRANSFER RESTRICTIONS RESTRICTIONS PRE EMPTIVE RIGHTS PRE EMPTIVE RIGHTS VALUATION VALUATION

53 DEADLOCK RESOLUTION DEFINE DEADLOCK DEFINE DEADLOCK RESOLUTION MECHANISM RESOLUTION MECHANISM CONSEQUENCES OF NON RESOLUTION CONSEQUENCES OF NON RESOLUTION

54 ARBITRATION EVENT OF DISPUTE/DIFFERENCE EVENT OF DISPUTE/DIFFERENCE WHO TO BE THE ARBITRATOR WHO TO BE THE ARBITRATOR LAW APPLICABLE LAW APPLICABLE VENUE & LANGUAGE VENUE & LANGUAGE COSTS COSTS RIGHT TO CLAIM INTERIM RELIEF RIGHT TO CLAIM INTERIM RELIEF

55 CERTAIN IMPORTANT PROVISIONS GUARANTEES GUARANTEES BORROWINGS BORROWINGS DIVIDENDS DIVIDENDS AUDIT AUDIT TRADE NAMES/MARKS TRADE NAMES/MARKS KEY APPOINTMENTS KEY APPOINTMENTS

56 Doctrine of Constructive notice and Indoor Management Persons dealing with the company have to satisfy themselves. But need not know the internal irregularity. Royal British Bank V. Turquand (Turquand Rule) Directors issuing a bond. Persons dealing with the company have to satisfy themselves. But need not know the internal irregularity. Royal British Bank V. Turquand (Turquand Rule) Directors issuing a bond. The doctrine of Constructive notice can be invoked by the company to operate against the persons dealing with the company. The doctrine of Constructive notice can be invoked by the company to operate against the persons dealing with the company. The outsider cannot embark, but only can acquaint upon the MOA and AOA. (Official Liquidator, Manasube &Co Pvt Lid V. Commissioner of Police) The outsider cannot embark, but only can acquaint upon the MOA and AOA. (Official Liquidator, Manasube &Co Pvt Lid V. Commissioner of Police)

57 Exceptions to the Doctrine of Where the outsider cannot claim the relief on the grounds of “Indoor management” Knowledge of irregularity Knowledge of irregularity No knowledge of articles No knowledge of articles Negligence Negligence Forgery Forgery Non- Existent authority of the company Non- Existent authority of the company

58 Raising of Capital From Public The companies can raise money by offering securities for sale to the public. The companies can raise money by offering securities for sale to the public. They can invite the public to buy shares, which is known as public issue. They can invite the public to buy shares, which is known as public issue. For this purpose the company may issue a prospectus, which may include a notice circular, advertisement or other documents which are issued to invite public deposits. For this purpose the company may issue a prospectus, which may include a notice circular, advertisement or other documents which are issued to invite public deposits.

59 Prospectus It is an invitation issued to the public to purchase or subscribe shares or debentures of the company. It is an invitation issued to the public to purchase or subscribe shares or debentures of the company. Every prospectus must be dated. The date of publication and the date of issue must be specifically stated in the prospectus. Every prospectus must be dated. The date of publication and the date of issue must be specifically stated in the prospectus. The golden rule of the prospectus is that every detail has to be given in strict and scrupulous accuracy. The material facts given in the prospectus are presumed to be true.( New Brunswick and Canada Railway. Land & Co. Vs. Muggerridge). The golden rule of the prospectus is that every detail has to be given in strict and scrupulous accuracy. The material facts given in the prospectus are presumed to be true.( New Brunswick and Canada Railway. Land & Co. Vs. Muggerridge).

60 Various forms in which the prospectus can be issued. Shelf Prospectus: Prospectus is normally issued by financial institution or bank for one or more issues of the securities or class of securities mentioned in the prospectus. Shelf Prospectus: Prospectus is normally issued by financial institution or bank for one or more issues of the securities or class of securities mentioned in the prospectus. There can be deemed prospectus also if it is issued by the issue house There can be deemed prospectus also if it is issued by the issue house ‘Information Memorandum’: It means a process, which is undertaken prior to the filing of prospectus. ‘Information Memorandum’: It means a process, which is undertaken prior to the filing of prospectus. Even an Advertisement, that the shares are available is considered to be prospectus Even an Advertisement, that the shares are available is considered to be prospectus

61 Contents of the prospectus General information General information Capital structure Capital structure Terms of present issue Terms of present issue Management and projects Management and projects Management and perception of risk factor Management and perception of risk factor It is compulsory to register the prospectus with the Registrar It is compulsory to register the prospectus with the Registrar

62 Civil Liability for Misstatements In case of any untrue statement in the prospectus The liability will be on the director of the company, whose name was written during the time of issue The liability will be on the director of the company, whose name was written during the time of issue The persons who have authorized their names to be theirs in the prospectus to be named as directors The persons who have authorized their names to be theirs in the prospectus to be named as directors Promoter Promoter Every person including the person who is an expert and has authorized his name to be issued with the prospectus Every person including the person who is an expert and has authorized his name to be issued with the prospectus

63 Remedies for misstatements in the prospectus Relying on the prospectus if any person buys shares, the person may Relying on the prospectus if any person buys shares, the person may Rescind the contract ( only when there is misrepresentation relating to the material facts. Rescind the contract ( only when there is misrepresentation relating to the material facts. The rescission has to be done within a reasonable time The rescission has to be done within a reasonable time Claim damages- it can be claimed from the directors, promoters or other persons who has authorized their name to be written during the issue of the prospectus Claim damages- it can be claimed from the directors, promoters or other persons who has authorized their name to be written during the issue of the prospectus

64 Share Capital Share: Share is defined as “an interest having a money value and made up of diverse rights specified under the articles of association”. Share: Share is defined as “an interest having a money value and made up of diverse rights specified under the articles of association”. Share capital: Share capital means the capital raised by the company by issue of shares. Share capital: Share capital means the capital raised by the company by issue of shares. A share is a share in the share capital of the company including the stock. A share is a share in the share capital of the company including the stock. Share gives a right to participate in the profits of the company, or a share in the assets when the company is going to be wound up. Share gives a right to participate in the profits of the company, or a share in the assets when the company is going to be wound up.

65 Other features of a share A share is not a negotiable instrument, but it is a movable property. A share is not a negotiable instrument, but it is a movable property. It is also considered to be goods under the Sale of Goods Act, It is also considered to be goods under the Sale of Goods Act, The company has to issue the share certificate. The company has to issue the share certificate. It is subject to stamp duty. It is subject to stamp duty. The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members by the Board of Directors in accordance with the Articles of Association. The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members by the Board of Directors in accordance with the Articles of Association. The call may be for full amount or part of it. The call may be for full amount or part of it.

66 Share Certificate and Share Warrant Share Certificate: The Share Certificate is a document issued by the company and is prima facie evidence to show that the person named therein is the holder ( title) of the specified number of shares stated therein. Share Certificate: The Share Certificate is a document issued by the company and is prima facie evidence to show that the person named therein is the holder ( title) of the specified number of shares stated therein. Share certificate is issued by the company to the ( share holder) allottee of shares. Share certificate is issued by the company to the ( share holder) allottee of shares. The company has to issue within 3 months from the date of allotment. In case of default the allottee may approach the central government The company has to issue within 3 months from the date of allotment. In case of default the allottee may approach the central government Share Warrant: The share warrant is a bearer document issued by the company under its common seal. As share warrant is a negotiable instrument, it is transferred by endorsement and by mere delivery like any other negotiable instrument. Share Warrant: The share warrant is a bearer document issued by the company under its common seal. As share warrant is a negotiable instrument, it is transferred by endorsement and by mere delivery like any other negotiable instrument.

67 Kinds of shares >Preference shares- It can be further classified as Participating preferential shares. Participating preferential shares. Cumulative preferential shares Cumulative preferential shares Non Cumulative preferential shares Non Cumulative preferential shares >Redeemable Shares and >Irredeemable Shares >Equity or ordinary shares >Shares at premium >Shares at discount >Bonus shares >Right shares

68 Transfer and Transmission of shares AOA provides for the procedure of transfer of shares. It is a voluntary action of the shareholder. AOA provides for the procedure of transfer of shares. It is a voluntary action of the shareholder. It can be made even by a blank transfer –In such cases the transferor only signs the transfer form without making any other entries. It can be made even by a blank transfer –In such cases the transferor only signs the transfer form without making any other entries. In case it is a forged transfer, the transferor’s signature is forged on the share transfer instrument. In case it is a forged transfer, the transferor’s signature is forged on the share transfer instrument. Transmission of shares is by operation of law, e.g. by death, insolvency of the shareholder etc. Transmission of shares is by operation of law, e.g. by death, insolvency of the shareholder etc.

69 Buy-Back of Securities The company may purchase its securities back and it is popularly known as buy back of shares The company may purchase its securities back and it is popularly known as buy back of shares To do so, the company has to be authorized under the AOA. To do so, the company has to be authorized under the AOA. The company has to comply with the provisions of the Company law to buy back its securities. The company has to comply with the provisions of the Company law to buy back its securities. The listed company has to seek permission from the SEBI (SERA 1998). Specifically for the private company etc, the Buy Back Securities Rules1999 will be applicable. The listed company has to seek permission from the SEBI (SERA 1998). Specifically for the private company etc, the Buy Back Securities Rules1999 will be applicable.

70 Dividends The sharing of profits in the going concerns and the distribution of the assets after the winding up can be called as dividends The sharing of profits in the going concerns and the distribution of the assets after the winding up can be called as dividends It will be distributed among the shares holders It will be distributed among the shares holders The dividends can be declared and paid out of: The dividends can be declared and paid out of: Current profits Current profits Reserves Reserves Monies provided by the government and the depreciation as provided by the companies. Monies provided by the government and the depreciation as provided by the companies. It can be paid after presenting the balance sheet and profit and loss account in the AGM It can be paid after presenting the balance sheet and profit and loss account in the AGM

71 Dividend Other than the equity shareholders, even the preferential shareholders can get the dividends. Rather they are the first ones to get the dividends. Other than the equity shareholders, even the preferential shareholders can get the dividends. Rather they are the first ones to get the dividends. Dividends are to be only in cash, if otherwise specified in the AOA. Dividends are to be only in cash, if otherwise specified in the AOA. In exceptional cases, even the central government may permit the payment of interest to shareholders, even though there is no profit. In exceptional cases, even the central government may permit the payment of interest to shareholders, even though there is no profit.

72 Directors The Legal Status of the director The director occupies the position of a: As a Trustee- In relation to the company As Agents- When they act o n behalf of the company As Managing Partner-As they are entrusted with the responsibility of the company Qualification Shares In case there is requirement as per the AOA for the director is bound to buy qualification shares If acts are done by the director prior to he or she being disqualified, the acts are considered to be valid.

73 Disqualifications As per the company law, the following persons are disqualified from been appointed as a director: Unsound mind Unsound mind An undischarged insolvent An undischarged insolvent A person who is convicted by the court A person who is convicted by the court Who has applied for being adjudged insolvent Who has applied for being adjudged insolvent Not paid for the call on shares Not paid for the call on shares Persons who are already directors in maximum number of companies as per the provisions of the Act or Persons who are already directors in maximum number of companies as per the provisions of the Act or Any other person who has been disqualified by the court for any other reason Any other person who has been disqualified by the court for any other reason

74 Appointment of Directors   The appointment can sometimes be by based on the proportional representation like minority shareholders.   There can be alternate directors, additional directors, casual directors.   The third parties can appoint the directors   Other than the shareholders and the first directors,the central government and NCLT may also appoint directors.

75 Duties and Liabilities of the Directors Fiduciary Duties To act honestly and with good faith Not to use confidential information of the company for their own purpose Duty of Care and to act reasonably while acting for the company Statutory Duties Not to contract with company, where he/she or his relative has an interest in the contract where he/she has a interest, they need to inform the board or seek prior approval while entering into contract, otherwise the contract is voidable Duty to attend and convene meetings Duty not to delegate

76 The directors liabilities The liability of the directors can be either civil or criminal. The liability of the directors can be either civil or criminal. If provided in the MOA, the liability may be unlimited, for a limited company, otherwise it may be altered. If provided in the MOA, the liability may be unlimited, for a limited company, otherwise it may be altered. Liability may be for breach of fiduciary duties Liability may be for breach of fiduciary duties The directors are personally liable for the following: The directors are personally liable for the following: a) Ultra vires acts a) Ultra vires acts b) malafide acts b) malafide acts c) negligent acts c) negligent acts d) liability for the acts of third parties d) liability for the acts of third parties

77 Criminal Liability Liability of the director for any untrue statement in the prospectus Liability of the director for any untrue statement in the prospectus Inviting any deposits in contravention of the law Inviting any deposits in contravention of the law Liability for false advertisement Liability for false advertisement Failure to repay the application money, which was excess Failure to repay the application money, which was excess Concealing the names of the creditors Concealing the names of the creditors Failure to lay the balance sheet. Failure to lay the balance sheet. Failure to provide information to the auditor etc Failure to provide information to the auditor etc

78 Company Meetings A meeting may be convened by the director, requisitionist, or the NCLT A meeting may be convened by the director, requisitionist, or the NCLT Notice to be given by the secretary after the time and place have been fixed by the directors Notice to be given by the secretary after the time and place have been fixed by the directors Even the shareholders can call a meeting as an extraordinary general meeting (EGM) Even the shareholders can call a meeting as an extraordinary general meeting (EGM) The NCLT can call an Annual General Meeting (AGM) The NCLT can call an Annual General Meeting (AGM)

79 Classification of Meetings Shareholders meetings Shareholders meetings a) Statutory meetings ( which happens only once in the lifetime of the company) a) Statutory meetings ( which happens only once in the lifetime of the company) b) EGM- Convened to transact some special or important decision to be taken b) EGM- Convened to transact some special or important decision to be taken c) Class meetings- This is the meeting of the shareholders- which is convened by the class of shareholders based on the kind of shares they hold. c) Class meetings- This is the meeting of the shareholders- which is convened by the class of shareholders based on the kind of shares they hold. continued….. continued…..

80 Other meetings AGM-it can be conducted based on the provisions given in the Articles or by passing a resolution in one AGM for the subsequent AGM’s AGM-it can be conducted based on the provisions given in the Articles or by passing a resolution in one AGM for the subsequent AGM’s Board Meetings- This is conducted for the smooth running of the company and for collectively taking the decisions. The meetings may be conducted to call on shares, issue debentures, borrow money, to make loans, To invest the funds etc Board Meetings- This is conducted for the smooth running of the company and for collectively taking the decisions. The meetings may be conducted to call on shares, issue debentures, borrow money, to make loans, To invest the funds etc

81 How to conduct meeting? Written notice to be given Written notice to be given Notice to be issued under the authority of the company Notice to be issued under the authority of the company In case of failure to give a notice, the persons concerned may be punished with fine and the proceedings of the meeting will be rendered invalid. In case of failure to give a notice, the persons concerned may be punished with fine and the proceedings of the meeting will be rendered invalid.

82 Resolution A motion when passed is called a resolution. A motion when passed is called a resolution. The resolution in the General body meetings can be an ordinary resolution The resolution in the General body meetings can be an ordinary resolution ( Simple majority) and special resolution. ( Simple majority) and special resolution. Special resolution- ( notice of 21 days to be given) the notice has to specify the purpose. The number of votes to be cast in favour of the resolution is to be three times the number vote cast against. Special resolution- ( notice of 21 days to be given) the notice has to specify the purpose. The number of votes to be cast in favour of the resolution is to be three times the number vote cast against.

83 Quorum and proxy The minimum members to be present must be according to the provisions of the law. The minimum members to be present must be according to the provisions of the law. Public company ( minimum Five) and private company (minimum of 2) Public company ( minimum Five) and private company (minimum of 2) The quorum must be those members who are eligible to vote in respect of the agenda of the meeting. The quorum must be those members who are eligible to vote in respect of the agenda of the meeting. If the quorum is not present within half an hour from the appointed time, either the meeting stands dissolved or may be adjourned in the same day next week or any other as may be determined by the directors If the quorum is not present within half an hour from the appointed time, either the meeting stands dissolved or may be adjourned in the same day next week or any other as may be determined by the directors A person in case of being incapable to attend a meeting and who is eligible to vote may appoint a proxy in writing to attend the meeting of the member and vote on his or her behalf. The proxy can only vote and cannot participate in the discussions. A person in case of being incapable to attend a meeting and who is eligible to vote may appoint a proxy in writing to attend the meeting of the member and vote on his or her behalf. The proxy can only vote and cannot participate in the discussions.

84 Compromise, Reconstruction and Arrangement Reconstruction includes reorganization, arrangement and amalgamation. Reconstruction includes reorganization, arrangement and amalgamation. Arrangement includes all forms of reconstructing. Arrangement includes all forms of reconstructing. It has been broadly defined as all forms of capital reorganizations either by consolidation of shares or division of shares or both It has been broadly defined as all forms of capital reorganizations either by consolidation of shares or division of shares or both Reorganization and arrangement are done when there is only one company is involved Reorganization and arrangement are done when there is only one company is involved continued …. continued ….

85 Reconstruction can be effectively done through a compromise or arrangement. Reconstruction can be effectively done through a compromise or arrangement. To do so the meeting or the members or the separate class of the shareholders has to be conducted or in case of winding up the meeting to be called by the liquidator To do so the meeting or the members or the separate class of the shareholders has to be conducted or in case of winding up the meeting to be called by the liquidator Even a banking company (sick bank) may be reconstructed or amalgamated by the central government on the basis of the Reserve Bank’s application for a fixed period of time. Even a banking company (sick bank) may be reconstructed or amalgamated by the central government on the basis of the Reserve Bank’s application for a fixed period of time. The reconstruction or amalgamation can be done with any other banking institution. The reconstruction or amalgamation can be done with any other banking institution.

86 Scheme to be approved Any kind of scheme to be accepted, it has to get approval from the members or the members may reject the scheme. Any kind of scheme to be accepted, it has to get approval from the members or the members may reject the scheme. After the scheme is approved by voting, the court has to sanction the scheme or reject, if it is against the public interest or if it feels that the scheme is not beneficial. After the scheme is approved by voting, the court has to sanction the scheme or reject, if it is against the public interest or if it feels that the scheme is not beneficial. The legal provisions vary based the mode of scheme adopted by the company. The legal provisions vary based the mode of scheme adopted by the company.

87 Modes of Reconstruction or Amalgamation By sale of undertaking- it can be the whole or part of sale ( the court will decide) By sale of undertaking- it can be the whole or part of sale ( the court will decide) By sale of shares ( Maximum number of companies adopt this scheme- In such schemes the shares are sold and registered in the name of the purchasing company or on its behalf. The shareholders selling the shares are compensated either by cash or with the shares of the acquiring company. By sale of shares ( Maximum number of companies adopt this scheme- In such schemes the shares are sold and registered in the name of the purchasing company or on its behalf. The shareholders selling the shares are compensated either by cash or with the shares of the acquiring company. Amalgamation can take place even for the sake of Public interest by the central government. In such cases, it will be notified in the official gazette. Amalgamation can take place even for the sake of Public interest by the central government. In such cases, it will be notified in the official gazette.

88 Mergers, Acquisitions and Take over of companies Merger connotes union of two or more commercial interests, corporations, undertakings, bodies or any other entities. Merger connotes union of two or more commercial interests, corporations, undertakings, bodies or any other entities. Fusion of two or more corporations by the transfer of all property to a single corporation. It is used as a synonym for amalgamation. Even the Act makes no distinction between merger and amalgamation. Fusion of two or more corporations by the transfer of all property to a single corporation. It is used as a synonym for amalgamation. Even the Act makes no distinction between merger and amalgamation.

89 The changing of legal entity after mergers and acquisitions In a merger- one of the company loses its corporate existence and the survivor company acquires the assets as well as the liabilities of the merger company. In a merger- one of the company loses its corporate existence and the survivor company acquires the assets as well as the liabilities of the merger company. In acquisition, it is acquiring the ownership in the property is the purchase of a controlling interest in the share capital of another existing company. It is an act of acquiring asset and management of the company. In acquisition, it is acquiring the ownership in the property is the purchase of a controlling interest in the share capital of another existing company. It is an act of acquiring asset and management of the company.

90 Winding up It is the process whereby the life of the company is ended and its property is administered for the benefit of its creditors and members. It is the process whereby the life of the company is ended and its property is administered for the benefit of its creditors and members. During this process a liquidator is appointed to take control of the company. The liquidator will be responsible for the assets, debts and final distribution of the surplus to the members. During this process a liquidator is appointed to take control of the company. The liquidator will be responsible for the assets, debts and final distribution of the surplus to the members. It is the process for discharge of liabilities and returning the surplus to those who are entitled for it. It is the process for discharge of liabilities and returning the surplus to those who are entitled for it. But even a company which is making profit can be wound up is the special feature of winding up, which is different from that of the process of insolvency. But even a company which is making profit can be wound up is the special feature of winding up, which is different from that of the process of insolvency.

91 How can be company be wound up? By passing a special resolution By passing a special resolution If there is a default in holding the statutory meeting If there is a default in holding the statutory meeting Failure to commence the business Failure to commence the business If there is reduction in the membership of the minimum number of members as per the statutory requirement If there is reduction in the membership of the minimum number of members as per the statutory requirement If it not able to pay its debts If it not able to pay its debts

92 Modes of winding up Compulsory winding up under the supervision of the court Compulsory winding up under the supervision of the court (Reasons as stated in the previous slide) (Reasons as stated in the previous slide) Compulsory winding up may happen for just and equitable reasons also. Compulsory winding up may happen for just and equitable reasons also. The just and equitable grounds can be like loss of substratum, where there is dead lock in the management, etc The just and equitable grounds can be like loss of substratum, where there is dead lock in the management, etc Voluntary winding up ( Members voluntary winding up and creditors voluntary winding up) Voluntary winding up ( Members voluntary winding up and creditors voluntary winding up) Voluntary winding up subject to the supervision of the court. Voluntary winding up subject to the supervision of the court.

93 Winding up procedure A petition for winding up has to be filed by the concerned person to the prescribed authority A petition for winding up has to be filed by the concerned person to the prescribed authority Liquidator to be appointed to safeguard the property of the company Liquidator to be appointed to safeguard the property of the company Then the court will hear the matter and pass necessary orders. It can dismiss the petition or pass an order of winding up Then the court will hear the matter and pass necessary orders. It can dismiss the petition or pass an order of winding up

94 Dissolution of the company When the company ceases to exist as a corporate entity for all practical purposes it is said to have been dissolved. When the company ceases to exist as a corporate entity for all practical purposes it is said to have been dissolved. Dissolution has to be declared by the court. Dissolution has to be declared by the court. It will not be extinct and will be kept under suspension for 2 Years. It will not be extinct and will be kept under suspension for 2 Years. The order has to be forwarded by the liquidator to the Registrar of the Companies within 30 days from the date of the order of dissolution. The order has to be forwarded by the liquidator to the Registrar of the Companies within 30 days from the date of the order of dissolution.

95 Statutory Role & Responsibility of Independent Directors and Familiarity with Legal Aspects associated with discharging their Duties

96 The genesis of SOX: A Corporate Tsunami Corporate America was rocked by scandal after scandal in a very short span of time. Enron KMart Tyco WorldCom Global Crossing

97 Andersen collapsed…

98 An Angered Response … Loss of confidence in regulators Loss of confidence in regulators Political nexus Political nexus Investor confidence takes a dip Investor confidence takes a dip 401(k) retirement savings wiped out 401(k) retirement savings wiped out Sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley, the Act was passed to re-emphasize the importance of ethical standards in the preparation of financial information reported to investors, restore investor confidence and strengthen corporate governance.

99 Types of Directors Nominee- Director whose function is passive in nature. Nominee director are subject to directors responsibilities. Nominee director appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors. Nominee- Director whose function is passive in nature. Nominee director are subject to directors responsibilities. Nominee director appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors. Whole Time- is executive director who is in whole time employment of the company. Whole Time- is executive director who is in whole time employment of the company. Independent- is a non executive director who has no material pecuniary relationship or transactions with the company. Independent- is a non executive director who has no material pecuniary relationship or transactions with the company.

100 Responsibility of Directors Meaning thereof Meaning thereof Statutory Responsibility Statutory Responsibility Fiduciary Responsibility Fiduciary Responsibility Statutory Role and Responsibility Statutory Role and Responsibility  Need for familiarisation with legal aspects  Relationship with duty discharge obligations

101 Key Issues Responsibility Responsibility Duty Duty Statutory Statutory

102 What is “Duty” Generally speaking, duty is what we expect of others Generally speaking, duty is what we expect of others Duty is a task we look forward to with distaste, perform with reluctance, and brag about afterwards Duty is a task we look forward to with distaste, perform with reluctance, and brag about afterwards The trouble with the world is that so many people who stand up for their rights fall down miserably on their duties The trouble with the world is that so many people who stand up for their rights fall down miserably on their duties The best way to get rid of your duties is to discharge them The best way to get rid of your duties is to discharge them “Next to doing the right thing, the most important thing is to let people know you are doing the right thing” – John D. Rockfeller “Next to doing the right thing, the most important thing is to let people know you are doing the right thing” – John D. Rockfeller “It is not enough to be ready to go where duty calls. A man should stand around where he can hear the call” – Robert Louis Stevenson “It is not enough to be ready to go where duty calls. A man should stand around where he can hear the call” – Robert Louis Stevenson

103 Responsibility Responsibility walks hand in hand with capacity and power Responsibility walks hand in hand with capacity and power Responsibility also is directly linked to one’s duties Responsibility also is directly linked to one’s duties It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities You cannot evade the responsibilities of tomorrow by evading it today - Abraham Lincoln

104 Responsibility The price of greatness is responsibility - Sir Winston Churchill

105 Drivers of Change Democratisation of ownership Democratisation of ownership Liberalisation Liberalisation Globalisation of markets Globalisation of markets Technology Technology Corporate Governance Corporate Governance ESOPs ESOPs Other influences – lenders, regulators, tax authorities Other influences – lenders, regulators, tax authorities

106 The environment in which we work in Changing Economic Times Changing Economic Times Pressures to Perform - Wall Street expectations - Shareholder and Board of Director expectations Pressures to Perform - Wall Street expectations - Shareholder and Board of Director expectations Complexity and sophistication of Business Structures and Transactions - Numerous risks and challenges of reporting transactions in an easily understood manner Complexity and sophistication of Business Structures and Transactions - Numerous risks and challenges of reporting transactions in an easily understood manner Complex and Voluminous Standards Complex and Voluminous Standards

107 The Role of a Director A Director is part of a collective body of Directors called the Board responsible for the superintendence, control and direction of the affairs of the Company

108 The Role of a Director Is an individual Director as a member of the Company Board equally responsible as the Company Board ? No, unless he, the individual director, is charged with a specific responsibility

109 The Role of a Director Is the Company Board responsible for management of the Company or for the supervisory oversight of the Company ? This depends on whether the Company has a CEO to manage the affairs of the Company on a day-to-day basis.

110 Director’s duties Act in the best interests of the company Act in the best interests of the company Safeguard the interests of the stakeholders Safeguard the interests of the stakeholders Attend Board Meetings and participate in decisions Attend Board Meetings and participate in decisions Exercise due care and skill Exercise due care and skill Avoid conflict situations Avoid conflict situations Not seek personal gains Not seek personal gains Maintain confidentiality Maintain confidentiality Fiduciary duty Fiduciary duty Seek opinion of experts when necessary Seek opinion of experts when necessary Discharge duties required in specific committees of the Board Discharge duties required in specific committees of the Board

111 Directors’ duties ● Directors are subject to various duties, both common law and statutory. At a very fundamental level, these duties are directed at four well-defined objectives : ● to compel directors to act in accordance with the strict terms of their mandate; ● to compel them to exercise care and skill in carrying out their various functions;

112 Directors’ duties ● to compel them to use their wide discretionary powers in good faith and proper purpose ● and finally, to compel them to act loyally in advancing the interest of their company.” Sarah Worthington, Corporate Governance - Remedying and Ratifying Directors’ Breaches

113 Directors’ Duties What is a director’s duty of skill ? What is a director’s duty of skill ? Directors are not required to bring any special qualifications into their office. Directors are not required to bring any special qualifications into their office. Major Law Reform required in this area

114 Directors’ Duties What is the duty of care required for a Director ? What is the duty of care required for a Director ? The Supreme Court of India has held in Official Liquidator v P.A. Tendolkar (1973) 43 Comp Cases 382 as follows: The Supreme Court of India has held in Official Liquidator v P.A. Tendolkar (1973) 43 Comp Cases 382 as follows: A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of the Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to every one who examines the affairs of the Company even superficially A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of the Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to every one who examines the affairs of the Company even superficially

115 Directors’ Duties What is the non-executive director’s duty of skill and care ? What is the non-executive director’s duty of skill and care ? The English Court after reviewing many cases in Dorchester Finance Co. Ltd v Stebbing, 1989 BCLC498 (Ch D) held as follows: The English Court after reviewing many cases in Dorchester Finance Co. Ltd v Stebbing, 1989 BCLC498 (Ch D) held as follows: A Director is to exhibit in the performance of his duties such degree of skill as may be reasonably expected from a person of his knowledge and experience A Director is to exhibit in the performance of his duties such degree of skill as may be reasonably expected from a person of his knowledge and experience A Director is to exhibit in the performance of his duties such care as an ordinary man might be expected to take on his own behalf A Director is to exhibit in the performance of his duties such care as an ordinary man might be expected to take on his own behalf A Director must act in good faith and in the best interests of the Company A Director must act in good faith and in the best interests of the Company These standards of duty of care and skill apply equally to non- executive Directors These standards of duty of care and skill apply equally to non- executive Directors

116 Directors’ Duties Acting in good faith a valid defense for the Directors Acting in good faith a valid defense for the Directors In Re The Walt Disney Company, the US Court in its decision decided in August 2005 upheld the rule of acting in good faith by saying that the concept of intentional dereliction of duty, a conscious disregard for one’s responsibilities, is an appropriate (although not the only), standard for determining whether fiduciaries have acted in good faith In Re The Walt Disney Company, the US Court in its decision decided in August 2005 upheld the rule of acting in good faith by saying that the concept of intentional dereliction of duty, a conscious disregard for one’s responsibilities, is an appropriate (although not the only), standard for determining whether fiduciaries have acted in good faith

117 Directors’ Responsibilities Present directors Present directors Past directors Past directors Members of Audit Committee Members of Audit Committee Explicit and implicit Explicit and implicit Responsibility for subsidiaries Responsibility for subsidiaries

118 Statutory Responsibilities Section 274 of the Companies Act list out disqualifications of directors. Director should conduct himself in such a way that he does not incur such disqualification Section 274 of the Companies Act list out disqualifications of directors. Director should conduct himself in such a way that he does not incur such disqualification Director should maintain absolute secrecy of confidential information Director should maintain absolute secrecy of confidential information Director should not derive undue personal advantage or benefit by virtue of his position Director should not derive undue personal advantage or benefit by virtue of his position Director should ensure that company at all times complies with statutes, rules and regulations in letter and spirit Director should ensure that company at all times complies with statutes, rules and regulations in letter and spirit Director with other Directors of the Board is responsible that report and recommendation of Audit Committee and Shareholders’ / Investors’ Grievance Committee receive due consideration Director with other Directors of the Board is responsible that report and recommendation of Audit Committee and Shareholders’ / Investors’ Grievance Committee receive due consideration Director is accountable for the company practicing the highest standard of corporate governance with a underlying view of increasing the shareholders’ value Director is accountable for the company practicing the highest standard of corporate governance with a underlying view of increasing the shareholders’ value

119 Fiduciary Duty of Directors Director should not enter into engagements in which he can have a personal interest conflicting with the interest of the company. Director should not enter into engagements in which he can have a personal interest conflicting with the interest of the company. Director must display the utmost good faith towards the company in their dealings with it or on its behalf. Director must display the utmost good faith towards the company in their dealings with it or on its behalf.

120 Directors’ Responsibilities Arthur Levitt’s views Arthur Levitt’s views Blue Ribbon Committee Blue Ribbon Committee Section 292A and Audit Committees Section 292A and Audit Committees Section 217 (2AA) Section 217 (2AA) Clause 49 of Listing Agreement Clause 49 of Listing Agreement

121 Recommendation of Blue Ribbon Committee Member of the Audit Committee to be independent of the company (not employees) Member of the Audit Committee to be independent of the company (not employees) The Audit committee to be composed exclusively of non executive directors The Audit committee to be composed exclusively of non executive directors The Audit Committee to consist of at least three member with specialist expertise in the field of finance and accounting The Audit Committee to consist of at least three member with specialist expertise in the field of finance and accounting The Audit committee to have a written charter The Audit committee to have a written charter The charter to be published at least every three years in a proxy statement The charter to be published at least every three years in a proxy statement

122 Recommendation of Blue Ribbon Committee The external auditors to be accountable to the Board of Directors and particularly to the audit committee. The external auditors to be accountable to the Board of Directors and particularly to the audit committee. The external auditors to report annually on their independence from the company. The external auditors to report annually on their independence from the company. The audit committee to discuss the quality of accounting principles with the external auditors. The audit committee to discuss the quality of accounting principles with the external auditors. The audit committee to produce a report on its activities. The audit committee to produce a report on its activities. Quarterly financial statements (form 10-Q) to undergo a critical review by the external auditors Quarterly financial statements (form 10-Q) to undergo a critical review by the external auditors

123 Section 217(2AA) Report by Board of Directors includes Directors responsibility Statement indicating therein Report by Board of Directors includes Directors responsibility Statement indicating therein In preparation of annual accounts, applicable accounting standard has been followed along with explanations to material departures. In preparation of annual accounts, applicable accounting standard has been followed along with explanations to material departures. That accounting policies has been selected and applied consistently and made judgment and estimates that are reasonable and prudent. That accounting policies has been selected and applied consistently and made judgment and estimates that are reasonable and prudent. Proper and sufficient care for the maintenance of accounting records in accordance with the act for safeguarding the assets of company and for detecting and preventing fraud Proper and sufficient care for the maintenance of accounting records in accordance with the act for safeguarding the assets of company and for detecting and preventing fraud Prepared annual accounts on a going concern basis Prepared annual accounts on a going concern basis

124 Section 274 clause (g) ● such person is already a director of a public company ( A) has not the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April 1999; or (B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such default continues for one year or more: Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director failed to file annual accounts and annual return or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend

125 Section 292A Audit committee shall consist of at least three directors other than managing director or whole time director. Audit committee shall consist of at least three directors other than managing director or whole time director. Audit Committee shall have discussion with auditors about internal control systems, the scope of audit and review half yearly and annual financial statements. Audit Committee shall have discussion with auditors about internal control systems, the scope of audit and review half yearly and annual financial statements. Audit committee has authority to investigate into any matter. Audit committee has authority to investigate into any matter. The recommendations of the Audit committee is binding on the Board The recommendations of the Audit committee is binding on the Board The chairman of the Audit Committee shall attend the annual general meeting to provide clarification on matters relating to audit The chairman of the Audit Committee shall attend the annual general meeting to provide clarification on matters relating to audit

126 Clause 49 of Listing Agreement The non executive director on the board should not be less than fifty percent of the Board of Directors or in the case of non executive chairman at least should comprise of independent directors The non executive director on the board should not be less than fifty percent of the Board of Directors or in the case of non executive chairman at least should comprise of independent directors The board meeting is to be held at least four times in a year. The board meeting is to be held at least four times in a year. The difference between two Board meeting should not exceed four months The difference between two Board meeting should not exceed four months The Annual Report of a company should comprise a separate section in Corporate Governance. Non compliance of any mandatory requirement which is a part of listing agreement to be specifically highlighted with a reason for such non compliance. The Annual Report of a company should comprise a separate section in Corporate Governance. Non compliance of any mandatory requirement which is a part of listing agreement to be specifically highlighted with a reason for such non compliance. The compliance of conditions of corporate governance is to be certified by auditors and the same is to be annexed with directors report and also sent to the Stock Exchange with return The compliance of conditions of corporate governance is to be certified by auditors and the same is to be annexed with directors report and also sent to the Stock Exchange with return

127 Clause 49 Kumarmangalam Birla committee on corporate governance – SEBI – 1999 Kumarmangalam Birla committee on corporate governance – SEBI – 1999 Narayana Murthy committee on corporate governace Narayana Murthy committee on corporate governace

128 Definition Excludes any relatives of promoters, senior management Excludes any relatives of promoters, senior management Cooling-off Period - for any member of any advisory firm (not just statutory auditors, but also lawyers, consultants and internal auditors) Cooling-off Period - for any member of any advisory firm (not just statutory auditors, but also lawyers, consultants and internal auditors)

129 Increased responsibilities Enhances the responsibilities of the board Enhances the responsibilities of the board Company’s compliance with all applicable laws to be disclosed Company’s compliance with all applicable laws to be disclosed Enhanced oversight over its subsidiaries Enhanced oversight over its subsidiaries  Board members also have to review all significant transactions entered into by any subsidiary  Review minutes of all the subsidiaries’ board meetings  Sign-off on compliance with the company’s code of conduct

130 Improving quality of disclosure Disclosure of directors’ shareholding in the company Disclosure of directors’ shareholding in the company Disclosure of compensation paid to non-executive directors Disclosure of compensation paid to non-executive directors Disclosure of all related-party transactions Disclosure of all related-party transactions Use of funds raised through public issues (in case of any use of funds for purposes other than that originally stated in the offer prospectus), Use of funds raised through public issues (in case of any use of funds for purposes other than that originally stated in the offer prospectus), An audited statement on the deviation to be included in the annual report, An audited statement on the deviation to be included in the annual report, Any changes in accounting policies and practices. Any changes in accounting policies and practices.

131 Liability For company debts For company debts Ultra-vires acts Ultra-vires acts Criminal liability under Negotiable Instruments Act Criminal liability under Negotiable Instruments Act Damages for breach of contract Damages for breach of contract Director’s responsibility statements Director’s responsibility statements Liability of directors under other laws (labour, food adulteration, essential commodities, etc.) Liability of directors under other laws (labour, food adulteration, essential commodities, etc.)

132 Some Company Law Provisions Non compliance of various provisions of the Act Non compliance of various provisions of the Act Avoidance of provisions relieving liability of officers – void Avoidance of provisions relieving liability of officers – void Unlimited liability (Section 323) – permissible Unlimited liability (Section 323) – permissible Statutory Protection to Directors (Section 633) Statutory Protection to Directors (Section 633) Directors’ Responsibility Statement Directors’ Responsibility Statement

133 CEO / CFO responsibilities The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that: (a) They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief : (i) these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; (ii) these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

134 Management certification Management has to certify the key financial assertions like completeness, validity, valuation etc. underlying in the preparation of the financial statements. Management has to certify the key financial assertions like completeness, validity, valuation etc. underlying in the preparation of the financial statements. Opinion of the statutory auditors is not the only criterion on which the financial statements will be evaluated. Opinion of the statutory auditors is not the only criterion on which the financial statements will be evaluated. Responsibility on the management to ensure compliance with applicable standards, laws etc. and to ensure that the financial statements give true and fair view of the affairs of the Company. Responsibility on the management to ensure compliance with applicable standards, laws etc. and to ensure that the financial statements give true and fair view of the affairs of the Company.

135 Management certification They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

136 Guidance for Independent Directors-The Taste and Smell Tests Reputation of company Reputation of company Capability to meet the requirements and expectations Capability to meet the requirements and expectations Demonstrate independence Demonstrate independence Whether the company has adequate controls and whether they can be relied upon Whether the company has adequate controls and whether they can be relied upon Ability to resist pressure Ability to resist pressure

137 Guidance for Independent Directors-The Taste and Smell Tests Knowledge on current developments Knowledge on current developments Aware and abide by corporate code of conduct Aware and abide by corporate code of conduct Seek expert help Seek expert help Prepare in advance for board meetings Prepare in advance for board meetings Maintain confidentiality Maintain confidentiality

138 Way Ahead Independent directors here to stay Independent directors here to stay Board and audit committee procedures will need to be revamped Board and audit committee procedures will need to be revamped Need to be more proactive at watching over compliance Need to be more proactive at watching over compliance Identify and manage risks Identify and manage risks Have processes to test and evaluate controls Have processes to test and evaluate controls

139 PUBLIC DEPOSIT 58A-PUBLIC DEPOSIT NOT TO BE INVITED WITHOUT ISSUING AN ADVERTISEMENT

140 Provision: 1[58A. Deposits#02 not to be invited without issuing an advertisement] (1) The Central Government may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members. (2) No company shall invite, or allow any other person to invite or cause to be invited on its behalf, any deposit unless- (a)such deposit is invited or is caused to be invited in accordance with the rules made under sub-section (1), #03[* * *] (b)an advertisement, including therein a statement showing the financial position of the company, has been issued by the company in such form and in such manner as may be prescribed #05[, and] #06[(c)the company is not in default in the repayment of any deposit or part thereof and any interest thereupon in accordance with the terms and conditions of such deposit.]

141 Provision: b) No deposit referred to in clause(a) shall be renewed by the company after the expiry of the term thereof unless the deposit is such that it could have been accepted if the rules made under sub- section (1) were in force at the time when the deposit was initially accepted by the company. (3)(a) Every deposit accepted by a company at any time before the commencement of the Companies (Amendment) Act, 1974 (14 of 1974) in accordance with the directions made by the Reserve Bank of India under Chapter IIIB of the Reserve Bank of India Act, 1934 (2 of 1934), shall, unless renewed in accordance with clause (b), be repaid in accordance with the #07[terms and conditions of such deposit] 08[(3A) Every deposit accepted by a company after the commencement of the Companies (Amendment) Act, 1988, shall, unless renewed in accordance with the rules made under sub- section (1), be repaid in accordance with the terms and conditions of such deposit.]

142 Provision: Where any deposit is accepted by a company after the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), in contravention of the rules made under sub- section (1), repayment of such deposit shall be made by the company within thirty days from the date of acceptance of such deposit or within such further time, not exceeding thirty days, as the Central Government may, on sufficient cause being shown by the company, allow. 5. Where a company omits or fails to make repayment of a deposit in accordance with the provisions of clause (c) of sub-section (3), or in the case of a deposit referred to in sub-section (4), within the time specified in that sub-section,- (a)the company shall be punishable with fine which shall not be less than twice the amount in relation to which the repayment of the deposit has not been made, and out of the fine, if realised, an amount equal to the amount in relation to which the repayment of deposit has not been made, shall be paid by the Court, trying the offence, to the person to whom repayment of the deposit was to be made, and on such payment, the liability of the company to make repayment of the deposit shall, to the extent of the amount paid by the Court, stand discharged;

143 Provision: b)Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine. #09(6) Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit in excess of the limits prescribed under sub-section (1) or in contravention of the manner of condition prescribed under that sub-section or in contravention of the provisions of sub-section (2), as the case may be: 7)(a) Nothing contained in this section shall apply to,- (i)a banking company, or (ii)such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf. (b) Except the provisions relating to advertisement contained in clause (b) of sub-section (2),#12 nothing in this section shall apply to such classes of financial companies as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

144 Provision: [(8) The Central Government may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason, by order, issued either prospectively or retrospectively from a date not earlier than the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), grant extension of time to a company or class of companies to comply with, or exempt any company or class of companies from, all or any of the provisions of this section#14 either generally or for any specified period subject to such conditions as may be specified in the order: Provided that no order under this sub-section shall be issued in relation to a class of companies except after consultation with the Reserve Bank of India.] [(9) Where a company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the #16[Tribunal] may, if it is satisfied, either on its own motion or on the application of the depositor,#17 that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the company to make repayment of such deposit#18 or part thereof forthwith or within such time and subject to such conditions as may be specified in the order: Provided that the #19[Tribunal] may, before making any order under this sub-section, give a reasonable opportunity of being heard to the company and the other persons interested in the matter.

145 Provision: 10) Whoever fails to comply with any order made by the #20[Tribunal] under sub-section (9) shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of #21[not less than rupees five hundred] for every day during which such non- compliance continues.] (11) A depositor may, at any time, make a nomination#23 and the provisions of sections 109A and 109B shall, as far as may be, apply to the nomination made under this sub-section.] Explanation.-For the purposes of this section, "deposit" means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

146 Provision: # 01Inserted by Act 41 of 1974, section 7, w.e.f #02See Companies (Acceptance of Deposits) Rules, #03The word "and" omitted by the Companies (Amendment) Act, 1996, w.e.f #04See The Non-Banking Financial Companies and Miscellaneous Non- Banking Companies (Advertisement) Rules, #05Inserted by the Companies (Amendment) Act, 1996, w.e.f #06Ibid. #07Substituted by the Companies (Amendment) Act, 1988, section 9, w.e.f for the words "terms of such deposit". #08Inserted by the Companies (Amendment) Act, 1988, section 9, w.e.f #09Powers delegated to Chief Officer, Deputy Chief Officer and Assistant Chief Officers attached to the Department of Non-Banking Companies, RBI vide Notification No. GSR 473(E), dated

147 Provision: #10Substituted for "one lakh rupees" by the Companies (Amendment) Act, 2000, w.e.f #11Substituted for "five thousand rupees" by the Companies (Amendment) Act, 2000, w.e.f #12See The Non-Banking Financial Companies and Miscellaneous Non- Banking Companies (Advertisement) Rules, #13Inserted by Act 46 of 1977, section 3, w.e.f #14See Companies (Application for Extension of time or Exemption under sub- section (8) of section 58A) Rules, #15Inserted by the Companies (Amendment) Act, 1988, section 9, w.e.f #16Substituted for "Company Law Board" by the Companies (Second Amendment) Act, #17Application to be made in Form 4 of the Company Law Board Regulations, #18Fees prescribed is Rs. 50. On notification of the commencement of the amendment, power will be transferred to the National Company Law Tribunal.

148 Provision: #19Substituted for "Company Law Board" by the Companies (Second Amendment) Act, #20Ibid. #21Substituted for "not less than rupees fifty" by the Companies (Amendment) Act, 2000, w.e.f #22Inserted by the Companies (Amendment) Act, 1999, w.r.e.f #23See Form 2B, Companies (Central Government's) General Rules & Forms, 1999, w.e.f

149 Procedure for Inviting and Accepting Public Deposits under Section 58A In view of the provisions of the companies act, 1956 and the companies (Acceptance of Deposits ) Rules, 1975, a company, which proposes to invite and accept deposit from public should comply with the procedural requirements: 1.Authority in Memorandum to borrow funds: Check if the Memorandum of Association of the company contains provision empowering the company to borrow the funds. Trading companies have implied power of borrowing. If the Memorandum of Association does not give such power to the company, then the Memorandum is required to be altered by incorporating an appropriating object clause therein, for which the general meeting (GM) of the company shall have to be convened and held for passing the special resolution in accordance with the provision of section 17 of the companies Act,1956, before attempting to invite and accept deposit from public.

150 Cont… 2.Powers of the board: Section 291 of the Companies Act, 1956 provides that subject to the provisions of the Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. However the Board shall not exercise any power or do any act or things, which is directed or required, whether by the companies Act, or any other Act or by the Memorandum or Article of the company or otherwise, to be exercised or done by the company in general meeting. Section 292 confers on the Board of Directors of a company power to borrow moneys Otherwise than on Debenture but such powers must exercised by means of resolutions passed at meetings of the Board. According to Section 293(1)(d) of the Act, in order to enable the Board of directors of a company to borrow funds in excess of the paid up share capital and free reserves of the company, consent of the company in general meeting has to be obtained. In view of the provisions of sections 291, 292, 293, the company must ensure that, before passing Board resolution for inviting and accepting public deposit under section 292 of the Act, the amount of the proposed deposit together with the amount of existing borrowings, does not exceed the company’s paid up share capital and free reserves and if it does, it must convene the general meeting of the shareholders of the company to pass a resolution under section 293(1)(d) of the Act, fixing the limit on the total amount of borrowing.

151 Cont….. 3.Holding of Board meeting: Board meeting required to convene to approve the scheme of acceptance of deposits, Amount of deposit, terms and conditions of acceptance, repayment approve the text of advertisement. 4. Filing of advertisement with the ROC: A copy of the advertisement duly signed by the majority of directors of the company and same required to be filed to the Registrar of Companies for approval of Registration.. 5.Publication of advertisement: company must publish the advertisement in a leading English newspaper and one in a vernacular( homely language) circulating in the state in which the Registered office of the company is situated. 6.Issue of Application Forms: An application inviting deposit being attached with the text of advertisement distributed to the public through brokers and intermediaries, the same which must have been prepared strictly in accordance with the provision of rule 5 of the companies ( Acceptance of Deposits ) Rules, Statement in lieu of Advertisement : If a company intends to accept deposit without inviting, it can do so by filing the Statement in lieu of Advertisement With ROC, duly signed by the Directors and containing all the particulars required in the Advertisement

152 Cont….. 8.Acceptance of deposit during validity of advertisement: A company can accept deposit / renew during the validity of the advertisement i.e for a period of six months from the date of closure of financial years in which it is issued or until the date on which balance sheet of the company laid before the company in AGM whichever is earlier. 9.Issue of deposit Receipt to each Depositor: The company must issue a Receipt of Deposit(signed by the Authorized officer) to all the depositors within 8 weeks from the date of receipt of money or cheques from the depositors. Receipt should contain all the details like names and address of the depositors, date of deposit, Amount received and the interest payable thereon.

153 SPECIMEN DEPOSIT RECEIPT (NOT TRANSFERABLE) NAME OF THE COMPANY Regd Office: _____________________________ Fixed Deposit Receipt No________________ for Rs_______________________ Repayable on ______________________ Received from _____________________________________________________ Name and Address(es) of depositors(s)] ____________________________________________________________________ ____ the sum of rupees ________________ on __________________ as a deposit for _________________ years from the ______________ day of _________________ 20_ _ bearing interest at _________________ percent per annum payable half yearly on __________ and _________________ each year. Date: For ABC Company Ltd Company secretary Authorised Signatory NOTE: This receipt is subject to the terms and conditions of the fixed deposit scheme of the company.

154 REVERSE OF THE RECEIPT Received from ….. co Ltd ______________________________________ this _________________ day of ____________________ 20_ _ Princcipal Rs_________________________________________________ Interest Rs___________________________________________________ Total Rs ____________________________________________________ Signature(S) of Depositor(S) ____________________________________ Revenue Stamp Name and Address

155 Cont….. 10.Entry in the Register(s) of Deposit: Details of the depositors are entered in the Register: Name and Adress of the depositors Date and Amount of deposit Duration of the deposit and the date of maturity Rate of interest and date of payment Any other information. 1.Filing of Return of deposit: Return of deposit must be filed witgh the registrar on or before 30th june of each year, in the manner prescribed in the companies deposit Rules, 1975 and furnish the same as on 31st of March duly certified by the Auditors. 12. Copy to RBI copy of Return of Deposit also be filed with the RBI ( Reserve bank of India ) 13.Payment of Interest on Deposit and Repayment of Deposit: Repayment of deposit and interest thereon must be paid in accordance with the terms and condition on which deposit have been accepted.

156 Cont… Premature Repayment of deposit: company must make premature repayment of deposit, if and when a depositor approaches the company, strictly according to the provisions of rule 8(1) of the said rules which provides that barring the exception contained in the proviso to the sub rule, where the company makes repayment of a deposit after the expiry of six months from the date of such deposit but before the expiry of such deposit was accepted by the company, the rate of interest payable by the company on such deposit, shall be reduced by one percent from the rate which the company would have paid had the deposit been accepted for a period for which such deposit had run and the company shall not pay interest at any rate higher than the rate so desired. 15. Maintenance of liquid Assets: At least 15% of the Amount deposited maturing during the year ending shall be deposited or invest in any of the following: In a current or other deposit account with any scheduled bank, free from charge or lien. In a encumbered securities of the Central Government or the state Government In a encumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trust Act, 1882; In a encumbered bonds issued by the Housing Development Finance Corporation Limited. The amount so deposited shall not be utilized for any purpose other than the repayment of deposit maturing during the year, provided that the sum remaining deposited or invested as the case may be, shall not, at any time, fall ten percent of the amount deposits maturing that year.

157 Cont… Refund of Excess Deposit: Ceiling limit as required under rule 3(2) provides that any excess received by the company shall be refund within 30 days or such other extended time not exceeding 30 days as may be allowed by the central Government. 17.Brokerage payable: The Brokerage payable by the company shall not exceed the limit prescribed under Rule 3(1) (d) i.e no company shall pay brokerage exceeding one percent of the deposit for a period upto one year, one and half percent of the deposit for a period of more than one year but upto two years and two percent of deposit for a period exceeding two years collected by and through such broker and such payment shall be on one time basis. 18. Rate of Interest: Rate of interest offered by the company on Deposit does not exceed the maximum rate of interest prescribed by the Reserve Bank of India that the non Banking Financial Companies can pay on their public Deposit. Only after complying with the above provision and procedure a company can accept deposit under section 58A of the companies Act, 1956.

158 CERTIFICATIONOFE-FORMS UNDER COMPANIES ACT, 1956

159 CATEGORIZATION OF E - FORMS

160

161  FORM -23AC - FILLING BALANCE SHEET AND OTHER DOCUMENTS WITH REGISTRAR  FORM -23ACA - FILLING PROFIT AND LOSS AND OTHER DOCUMENTS WITH REGISTRAR  FORM -20B - FOR FILLING ANNUAL RETURN BY A COMPANY HAVING SHARE CAPITAL WITH THE REGISTRAR

162 CERTIFICATION

163 Form 23AC

164 Date of board meeting

165 Due date of AGM?

166 SRN of Form 23B?

167

168 Category in which share capital raised ? Auditors remark and explanati on of BOD

169 Various attachmen ts Resolution No. and date of BM

170 Form 23ACA

171

172

173 EPS ? Rent- Recd or Paid?

174 Attachments

175 Form 20B

176 Extension for F.Y. or A.G.M.

177 Issued Capital? Subscribe d Capital? Indebtnes s

178 Breakup of Equity Capital

179

180 Attachme nts

181  FORM -18Change of Registered Office  FORM -32 Appointment / Resignation of Director / Secretary  FORM -5Increase / Change in Share Capital  FORM – 2Return of Allotment

182  FORM - 23 Filing of Special Resolution / Agreement  Form – 17Satisfaction of Charge  FORM - 25C Appointment of Managing Director / Whole Time Director / Manager  FORM - 21Filing of Order of Court / CLB

183 Form 18

184 Provisions in respect of various type of changes Name and Address of Police Station

185 SRN of form 23, 1AD, 21

186 Form 32

187 Designation, Category, Chairman, ED, etc.

188 Manager or Secretary

189

190 Form 5

191 Various purposes Ordinary or Special

192 Bifurcation of additional capital And conditions Other purposes for change in capital

193 Revised Capital Structure

194 Change of AOA Payment of Stamp duty

195 Attachments

196 Form 2

197 Number of Allotment Details of terms, V.R., No. of Shares and Premium

198 Allotment for consideration other than cash

199 Allotment of Bonus Shares Post Allotment Capital Structure

200 Special Resolution u/s. 81(1A) Attachments

201 Form 23

202 Date of dispatch of Notice Different type of Resolutions

203 Change of objects

204 SRN of form 21 ? Attachments

205

206 Form 17

207 Date of Satisfaction of charge in full

208 NDC from charge holder

209 Form 25C

210 Date of B.R, Effective D.O.A. and Remuneration Structure

211

212 CERTIFICATION

213 Form 21

214 Ordered passed by

215 Details in case of Amalgamation order

216 SRN of relevant form and payment of penalty

217

218 PRACTICAL ASPECTS IN APPOINTMENT & REMOVAL OF AUDITORS

219 AUDITOR First Auditor Subsequent Auditor Special Auditor Branch Auditor Cost Auditor appointed by Central Govt. Auditor of Government Companies

220  Appointed by BOD within 1 month of registration of the company. `Sec 224(5)  If BOD fails to appoint,the company may appoint at a General Meeting.  Holds office until the conclusion of first AGM.  Members at any GM may remove such auditor and appoint another one in his place,of whose nomination special notice has been given. Proviso to section 224(5) Proviso to section 224(5)  Appointment of first auditors through the MOA &AOA - not a valid appointment. Appointment & Removal of First Auditor

221  Appointed at each AGM to hold office until the conclusion of next AGM. Sec 224(1)  Intimation to the auditor within 7 days.  Auditor to file form 23B to ROC within 30 days. Sec 224(1A)  Appointment of auditor is mandatory in the AGM for the ensuing year. ICAI v.J Saikia. Appointment of Subsequent Auditors

222  Tenure of Auditor is not for a particular year or financial year.  Tenure-From one AGM to another AGM.  If AGM not held- will continue up to the factual conclusion of the AGM. Tenure of Auditor

223  Obligatory on every company to appoint an Auditor i.e. STATUTORY AUDITOR  The Auditor, if Individual, should be a Chartered Accountant.  In case of Firm of Auditors,every Partner should be qualified for appointment as an Auditor in the Firm’s name.  Statutory auditor can not be internal auditor. DCA-Circular No.5/77[1/1/76-CL-V]dated DCA-Circular No.5/77[1/1/76-CL-V]dated Appointment of Auditor

224 Who can not be appointed as Auditor? Section 226(3)  A Body Corporate  An Officer or Employee of the Company  A Person who is a Partner,or in the employment,of an Officer or Employee of the Company.  A Person who is indebted to the Company for an amount exceeding Rs  A Person holding any security of that Company after a period of one year from the date of commencement of the Companies Amendment Act 2000.

225 Restrictions  Should not be in ‘FULL TIME EMPLOYMENT’  Auditor of max 20 Companies – only 10 can be Big Companies  Big Companies - paid up capital of or exceeding 25 lacs  In a Firm of Auditors, the limit of 20 Companies is per Partner.  As per Companies(Amendment)Act,2000, Private Companies will not be taken into account for counting the limit of 20 Companies.

226  Joint audit assignments - to be counted as one company.  Branch Audits – not included DCA-Circular No.21 of 75 dated DCA-Circular No.21 of 75 dated  Guarantee companies having no share capital – also excluded DCA-Letter No.8/12/(224)/74-CL-V dated DCA-Letter No.8/12/(224)/74-CL-V dated  Foreign companies audit - not included DCA-Circular No.21 of 75 dated DCA-Circular No.21 of 75 dated

227 Re-appointment of Retiring Auditors- Sec 224(2)  Normally, retiring Auditor is appointed for the next year.  He shall be re-appointed unless: he is not qualified for re-appointment. he is not qualified for re-appointment. he has given the Company notice of his unwillingness to be re-appointed. he has given the Company notice of his unwillingness to be re-appointed. a resolution has been passed at that meeting appointing somebody instead of him or expressly providing that he shall not be re-appointed. a resolution has been passed at that meeting appointing somebody instead of him or expressly providing that he shall not be re-appointed. notice has been given of an intended resolution to appoint some other person but the resolution can not be proceeded with. notice has been given of an intended resolution to appoint some other person but the resolution can not be proceeded with.

228  ‘A retiring Auditor shall re-appointed except in four types of cases referred in 224(2)’. But the passing of resolution is essential for the re- appointment of the retiring Auditor. Circular No.5/72,dated Circular No.5/72,dated

229 Removal of Auditor  Special notice required - Section 225(1)  Auditor can be removed before expiry of his term by Company in GM after previous approval of Central Govt (powers delegated to Regional Director). Section 224(5) Section 224(5)  Approval of Central Govt. not required for removal of First Auditor.  Prior approval of Central govt. require before actually removing an Auditor. Though resolution for removal can be passed before.

230 CODE OF ETHICS Cases & Issues of Unjustified Removal of Auditors: Independence of Auditors Independence of Auditors

231 Unjustified Removal of Auditors Section 224 – Appointment & Remuneration of Auditor Section 224 – Appointment & Remuneration of Auditor Section 224A – Auditor not to appointed except with the approval of the company by special resolution in certain cases. Section 224A – Auditor not to appointed except with the approval of the company by special resolution in certain cases. Section 225 – Provisions as to resolutions for appointing or removing auditors Section 225 – Provisions as to resolutions for appointing or removing auditors Clause (8)&(9) Part I of Schedule I of CA Act,1949 Clause (8)&(9) Part I of Schedule I of CA Act,1949

232 Relationship with Other Members in Practice Communication with outgoing Auditor in case of change of auditor Communication with outgoing Auditor in case of change of auditor Compliance with the requirement of section 224, 224A & 225 of the Companies Act, 1956 Compliance with the requirement of section 224, 224A & 225 of the Companies Act, 1956

233 Communication with outgoing Auditor in case of change of auditor Non-compliance of the Provisions of Section 224, 224A & 225 of the Companies act, 1956 Non-compliance of the Provisions of Section 224, 224A & 225 of the Companies act, 1956 Undercutting of Fees Undercutting of Fees Non-payment of undisputed audit fees Non-payment of undisputed audit fees Issuance of a qualified report Issuance of a qualified report

234 Compliance with the requirement of Sec. 224, 224A & 225 of the Companies Act To ensure that the outgoing is properly removed To ensure that the outgoing is properly removed That the guidelines prescribed by the Institute have been complied with That the guidelines prescribed by the Institute have been complied with To ensure that the incoming auditor is properly appointed. To ensure that the incoming auditor is properly appointed.

235 INDEPENDENCE Independence of Mind Independence of Mind Independence in Appearance Independence in Appearance

236 Independence Should be Exhibited in Objectivity Objectivity Integrity Integrity Professional Services Professional Services

237 Threats of Independence Self - Interest Threat Self - Interest Threat Advocacy Threat Advocacy Threat Familiarity Threat Familiarity Threat Intimidation Threat Intimidation Threat Self Review Threat Self Review Threat

238 Safeguards Safeguards Created by the Profession, Legislation or Regulation Safeguards Created by the Profession, Legislation or Regulation Safeguards within the Assurance Client Safeguards within the Assurance Client Safeguards within the Firm/s own Systems & Procedures Safeguards within the Firm/s own Systems & Procedures

239 Safeguards Created by the Profession, Legislation or Regulation Education, Training & Experience Education, Training & Experience Continuing Education Requirements Continuing Education Requirements Professional Standards & Disciplinary Processes. Professional Standards & Disciplinary Processes. External Review of Firms Quality Control System. External Review of Firms Quality Control System. Legislation Governing Independence Legislation Governing Independence

240 Safeguards within the Assurance Client Competent Employees to make Managerial Decisions. Competent Employees to make Managerial Decisions. Policies and Procedures for fair Financial Reporting. Policies and Procedures for fair Financial Reporting. Internal Procedures Internal Procedures Corporate Governance Structure Corporate Governance Structure

241 Safeguards within the Firms own Systems & Procedures Firm Leadership Firm Leadership Policies & Procedures for Quality Control Policies & Procedures for Quality Control Documented Independence regarding Identification of threats and Application of Safeguards. Documented Independence regarding Identification of threats and Application of Safeguards. Disciplinary Mechanism Disciplinary Mechanism

242 Objective & Structure Identifying Threats to Independence Identifying Threats to Independence Evaluating the Threats Evaluating the Threats Applying appropriate Safeguards to eliminate or reduce the threats. Applying appropriate Safeguards to eliminate or reduce the threats.

243 Public Interest Public Consists of Clients Clients Credit Granters Credit Granters Government Government Employers Employers Employees Investors Business Financial Community

244 Objectives Credibility Credibility Professionalism Professionalism Quality of Services Quality of Services Confidence Confidence

245 Fundamental Principles Integrity Integrity Objectivity Objectivity Professional Competence and Due Care Professional Competence and Due Care Confidentiality Confidentiality Professional Behavior Professional Behavior Technical Standards. Technical Standards.

246 Filling up of Casual Vacancy  BOD may fill any casual vacancy. Sec 224(6)(a)  Vacancy caused by resignation - filled by the company in GM.  Such Auditor holds office till conclusion of next AGM. Sec 224(6)(b) A casual vacancy is not a vacancy created by a deliberate omission on the part of the company to appoint an auditor at its AGM. ICAI Vs.J.Sakia A casual vacancy is not a vacancy created by a deliberate omission on the part of the company to appoint an auditor at its AGM. ICAI Vs.J.Sakia Where an auditor refuses to accept appointment or re-appointment – not resignation. Where an auditor refuses to accept appointment or re-appointment – not resignation.

247  If one of the two joint Auditors resigns before the completion of the tenure - Casual Vacancy  If there is a complete change in the constitution of the firm of Auditors i.e. all the earlier partners retire and new partners joins - Casual Vacancy.

248 Appointment of Auditor by Central Government  If no Auditor appointed at an AGM- Central Govt. may appoint. Sec 224(3)  Company to give notice to Central Govt within 7 days after AGM that no auditor has been appointed. Sec 224(4) Delay in giving such notice does not affect the Delay in giving such notice does not affect the jurisdiction of the Central Govt. jurisdiction of the Central Govt. Powers of Central Govt. - Delegated to Regional Director. Powers of Central Govt. - Delegated to Regional Director.

249 Appointment of Auditor by Special Resolution -Sec 224A  Where not less than 25% of subscribed share capital is held by -Public Financial Institution/ Govt.Company/ Central Govt./ State Govt. -any institution established under State/ Provincial Act in which State Govt.holds not less than 51% of subscribed which State Govt.holds not less than 51% of subscribed share capital. share capital. -Nationalised bank/ Insurance company. DCA has clarified that the above three clauses are not DCA has clarified that the above three clauses are not mutually exclusive. It would apply to all cases of shareholding in any combination. mutually exclusive. It would apply to all cases of shareholding in any combination. DCA-Circular No.14 of 2001 dated DCA-Circular No.14 of 2001 dated

250 Material date for 25% holding of subscribed share capital - date of AGM at which Special Resolution is to be passed and not the date of notice of meeting. Material date for 25% holding of subscribed share capital - date of AGM at which Special Resolution is to be passed and not the date of notice of meeting. DCA-Circular No.2/76[1/1/76-CL-V] dated DCA-Circular No.2/76[1/1/76-CL-V] dated Irrespective of the circumstances in which a nationalized bank is holding shares,if the name of the bank is entered in the register of members of the company,such holding of shares will have to be taken into account for the purposes of sec 224A. Irrespective of the circumstances in which a nationalized bank is holding shares,if the name of the bank is entered in the register of members of the company,such holding of shares will have to be taken into account for the purposes of sec 224A. DCA-Circular No.18/74 dated DCA-Circular No.18/74 dated

251 Auditor of Government Companies (Sec 619) Appointed or re-appointed by the C&AG Submits a copy of report to C&AG

252 Branch Auditor- Section 228  May be the Company’s Auditor or some other person qualified to be appointed as Auditor.  Where Branch Auditor is different from Company’s Auditor, he is appointed by the Company in GM or BOD are authorised to appoint him in consultation with Company’s Auditor.  Same powers as Company’s Auditor.  Forwards his report to the Central Govt.

253 COST AUDITOR (Sec 233B) Appointed by the BOD with previous Approval of Central Government Same powers & duties as that of Statutory Auditor Submits report to Central Govt. & the Company Statutory Auditor can not be appointed as Cost Auditor

254 Special Auditor (Sec 233A) Central Govt.may either Appoint C.A. or Company’s Auditor Same powers as Company’s Auditor Makes his report to Central Govt.

255 254 LIQUIDATION PROCEEDINGS SPECIFICALLY RELATAING TO NBFCs AND OTHER COMPANIES

256 Changes in Schedule VI

257 TITLE Liabilities and Assets were classified under the heading of SOURCE OF FUNDS & APPLICATION OF FUNDS The Liabilities and Assets to be classified under the heading of EQUITY AND LIBILITIES & ASSETS

258 New Disclosures in Share Capital A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period Shares in in the company held by each shareholder holding more than 5% share specifying the number of share held Shares in in the company held by each shareholder holding more than 5% share specifying the number of share held

259 New Disclosures in Share Capital Old DiscloserNew Discloser Authorised Capital: 1,00,000 Issued & subscribed Capital: 1,00,000 Share Application: 10,00,000 Pending for Allotment Share Application: 10,00,000 Pending for Allotment No RestrictionNow terms & conditions of share application money needs to be disclosed as if sufficient balance of Authorised capital is not available.

260 RESERVES & SURPLUS Old Schedule VIRevised Schedule VI P&L debit balance was shown under the head Miscellaneous expenditure & losses Debit balance of Profit and Loss Account to be shown as negative figure under the head Surplus. Therefore, reserve & surplus balance can be negative.

261 Separate disclosure of Current Liability Old DiscloserNew Discloser Earlier Current Liabilities and Provisions are shown by deducting from Current Assets under the Head of APPLICATION OF FUNDS Now it is to be shown separately as Non Current Liabilities and Current Liabilities under the Head EQUITY AND LIBILITIES

262 Criteria for classifying Current Liability It is expected to be settled in the company’s normal operating cycle. It is expected to be settled in the company’s normal operating cycle. It is held primarily for the purpose of being traded. It is held primarily for the purpose of being traded. It is due to be settled within twelve months after the reporting date; or It is due to be settled within twelve months after the reporting date; or The company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. The company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Other than that all should be classified as Non Current Liabilities

263 Borrowings Old Schedule VIRevised Schedule VI Short term & long term borrowings are grouped together under the head Loan funds sub-head Secured / Unsecured Long term borrowings to be shown under non-current liabilities and short term borrowings to be shown under current liabilities. Borrowings shall further be sub- classified as Secured and Unsecured. Period and amount of continuing default as on the balance sheet date in repayment of loans and interest to be separately specified

264 Deferred Tax Assets / Liabilities Old Schedule VIRevised Schedule VI Deferred Tax assets / liabilities were not specified. Deferred Tax assets / liabilities to be disclosed under non-current assets / liabilities as the case may be.

265 Sundry Creditors Old Schedule VIRevised Schedule VI Creditors were broken up in to micro & small suppliers and other creditors Classified under Long Term Liabilities as Trade Payables and under current Liabilities.

266 LONG TERM DEBT – CURRENT MATURITY Old Schedule VIRevised Schedule VI No specific mention for separate disclosure of Current maturities of long term debt Current maturities of long term debt to be disclosed under other current liabilities

267 Fixed Assets Old Schedule VI Revised Schedule VI There was no bifurcation required of tangible & intangible assets on the face of the Balance sheet. Fixed assets to be shown under non- current assets and it has to be bifurcated in to Tangible & intangible assets on the face of the Balance Sheet.

268 Investments Old Schedule VIRevised Schedule VI Both current & non-current investments to be disclosed under the head investments Current and non-current investments are to be discosed separately under current assets & non-current assets respectively

269 Criteria for classifying Current Assets It is expected to be realized in, or is intended for sale or consumption in the company’s normal operating cycle. It is expected to be realized in, or is intended for sale or consumption in the company’s normal operating cycle. It is held primarily for the purpose of being traded It is held primarily for the purpose of being traded It is Expected to be realized within 12 months after reporting date. It is Expected to be realized within 12 months after reporting date. It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability foe at least twelve months after the report date. It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability foe at least twelve months after the report date. Other than that all should be classified as Non Current Assets.

270 Deposits Old Schedule VIRevised Schedule VI Lease deposits are part of loans & advances Lease deposits to be disclosed as long term loans & advances under the head non-current assets

271 Cash & Bank Balances Old Schedule VIRevised Schedule VI Bank balance to be bifurcated in scheduled banks & others Bank balances in relation to earmarked balances, held as margin money against borrowings, deposits with more than 12 months maturity, each of these to be shown separately.

272 Loans & Advances Old Schedule VIRevised Schedule VI Loans & Advance are disclosed alongwith current assets Loans & Advances to be broken up in long term & short term and to be disclosed under non-current & current assets respectively And further bifurcation with capital advances security deposits etc.

273 PROFIT & LOSS – EXPENSES Old Schedule VIRevised Schedule VI Any item under which expense exceeds one per cent of the total revenue of the company or5,000 which ever is higher; was disclosed separately Any item of income / expense which exceeds one per cent of the revenue from operations or1,00,000, which ever is higher; to be disclosed separately

274 Finance Cost Old Schedule VIRevised Schedule VI Finance cost to be classified in fixed loans & other loans Finance cost shall be classified as interest expense, other borrowing costs & Gain / Loss on foreign currency transaction & translation

275 Rounding off of Figures appearing in financial statement Rounding off of Figures appearing in financial statement Old Schedule VIRevised Schedule VI Turnover of less than 100 Crores - R/off to the nearest Hundreds, thousands or decimal thereof Turnover of less than 100 Croress - R/off to the nearest Hundreds, thousands, lakhs or millions or decimal thereof Turnover of 100 Crores or more but less than500 Crores - R/off to the nearest Hundreds, thousands, lakhs or millions or decimal thereof Turnover of 100 Croress or more - R/off to the nearest lakhs, millions or crores, or decimal thereof Turnover of 500 Crs or more - R/off to the nearest Hundreds, thousands, lakhs, millions or crores, or decimal thereof

276 Purchases Old Schedule VIRevised Schedule VI The purchase made and the opening & closing stock, giving break up in respect of each class of goods traded in by the company and indicating the quantities thereof. Goods traded in by the company to be disclosed in broad heads in notes. Disclosure of quantitative details of goods is diluted

277 276 THE PHOLOSOPHICAL FOUNDATIONS OF CORPORATE INSOLVENCY LAW FROM THE ENGLISH LAW Corporate Insolvency law has four overriding objectives: Corporate Insolvency law has four overriding objectives: 1. to restore the debtor company to profitable trading where this is practicable; 2. to maximize the return to creditors as a whole where the company itself can not be saved; 3. to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a limited redistribution of rights; and 4. to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book and, where appropriate, deprived of the right to be involved in the management of the other companies. To facilitate achievement of these objectives the insolvency law provides a battery of legal and administrative instruments and institutional structures. To facilitate achievement of these objectives the insolvency law provides a battery of legal and administrative instruments and institutional structures.

278 VISION, OBJECT AND CONCLUSION OF THE LIQUIDATION VISION: To maximize the collective returns to creditors what US commentators say; To maximize the collective returns to creditors what US commentators say;OBJECT: For Just Distribution of the Net Assets on the principle of “pari passu” rule, of course, distribution on “pro rata” method - [ the pari passu rule has a long history in insolvency law. It is to be found in a statute of Henry VIII calling for the sale of a bankrupt’s assets ‘for the satisfaction and payment of (his) creditors: that is to say, to every of the said creditors, a portion Rate and Rate like, according to the quantity of their Debts’. Ref Case of the Bankrupts (1592) 2 Co Rep 25; 76 ER 441 applying the same principle in a later statute.] AND For Just Distribution of the Net Assets on the principle of “pari passu” rule, of course, distribution on “pro rata” method - [ the pari passu rule has a long history in insolvency law. It is to be found in a statute of Henry VIII calling for the sale of a bankrupt’s assets ‘for the satisfaction and payment of (his) creditors: that is to say, to every of the said creditors, a portion Rate and Rate like, according to the quantity of their Debts’. Ref Case of the Bankrupts (1592) 2 Co Rep 25; 76 ER 441 applying the same principle in a later statute.] AND CONCLUSION: CONCLUSION: To bring company in liquidation to a logical end : Termination of Company’s existence - dissolution To bring company in liquidation to a logical end : Termination of Company’s existence - dissolution 5/2/

279 5/2/ SCHME OF INSOLVENCY LAWS Two Kinds of Insolvency Laws: Two Kinds of Insolvency Laws: 1. Personal Insolvency, which deals with individuals and 1. Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908; (the process is through the appointment of 1908; (the process is through the appointment of “Receiver”) and “Receiver”) and  2. Corporate Insolvency – It results in winding up of the company under the Companies Act, if it is for revival of the company, the Sick Industrial Companies (Special Provisions) Act,1985 (SICA) deals with it. (the process of insolvency triggers through the appointment of “Liquidator”).

280 5/2/ MAIN REASONS FOR CORPORATE INSOLVENCY-I Company’s entire capital is eroded due to heavy losses:-  Lack of financial management; Inadequate capital investment;  Excess percentage of credit borrowing in disproportionate to actual capital investment; too much reliance on external marketing;  Unpreparedness with the changes in business scenario; In competencies in facing with global competition

281 MAIN REASONS FOR CORPORATE INSOLVENCY-II 5/2/ Company’s entire capital is eroded due to heavy losses:- Lack of business skills (risk management); Lack of experience or poor strategies in marketing and customer service; Lack of harmonious relations with stakeholders as well as among the management; Failure to prevent frauds; Diversification of funds; to cherish self driven goals at the cost of stakeholders interests; Circumstantial collapses ( Recession; Unfavorable court verdicts; Cancellation of Product Licenses; Disturbance in external relations); Anti trade polices;

282 MODES OF WINDING UP S Modes of winding up. ‑ (1) The winding up of a company may be either S Modes of winding up. ‑ (1) The winding up of a company may be either (a) by the Court; or (b) voluntary; or (c) subject to the supervision of the Court. (2) The provisions of this Act with respect to winding up apply, unless the contrary appears, to the winding up of a company in any of those modes. 5/2/

283 5/2/ CORPORATE INSOLVENCY WITH REFERNECE TO THE PROVISIONS OF COMPANIES ACT, 1956 The Act does not provide any precise definition for the word “Corporate Insolvency” Section 433 (e) of the Act only to some extent answer the “Insolvency”- The company unable to pay its debt- (i). Debt and (ii). Inability to pay: Cash Flow Test : Inability to Pay Test Cash Flow Test : Inability to Pay Test Balance Sheet Test: Liability of the Debtor exceeds his assets Balance Sheet Test: Liability of the Debtor exceeds his assets  Debt is admitted if there is no bona fide dispute;( Seciton 434 is deeming provision to decide inability to pay debts if it is due of Rs. 500 or more)  The court can hardly exercise any discretion where the company is so hopelessly insolvent that there is absolutely no chance of resurrection. A bona fide dispute implies existence of a substantial ground for the dispute raised. The companies were unable to pay debts. They could not substantiate their defence. Winding up was inevitable. Sicom Ltd. v. Shree Panduranga Poultries P. Ltd., (1999) 2 Comp LJ 218: (2001) 103 Com Cases 318 (AP).

284 S CIRCUMSTANCES IN WHICH COMPANY BE WOUND MAY UP BY COURT (a) if the company has, by special resolution, resolved that the company may be wound up by the court; (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 seven, and in the case of a private company, below two; (e) if the company is unable to pay its debts; (f) if the court is of opinion that it is just and equitable that the company should be wound up. 5/2/

285 5/2/ STATUTORY DECLARATION – INSOLVENT-I Company’s assets are not sufficient to pay its debts; Company’s assets are not sufficient to pay its debts; A company carrying on business with borrowed money and carrying forward its losses, in the balance ‑ sheet and a company whose assets are so locked ‑ up that they cannot be realised for payment of its debts, these are indications of commercial insolvency. Ramesh Premchand Shah v. Engineers Enterprises P. Ltd., (1977) 47 Com Cases 294 (Bom); Concord Finance P. Ltd v. Rawalpindi Theatres P. Ltd., (1970) 40 Com Cases 156 (Del). A company carrying on business with borrowed money and carrying forward its losses, in the balance ‑ sheet and a company whose assets are so locked ‑ up that they cannot be realised for payment of its debts, these are indications of commercial insolvency. Ramesh Premchand Shah v. Engineers Enterprises P. Ltd., (1977) 47 Com Cases 294 (Bom); Concord Finance P. Ltd v. Rawalpindi Theatres P. Ltd., (1970) 40 Com Cases 156 (Del). Company becomes defunct and it has not been carrying business operations for the last several years. Company becomes defunct and it has not been carrying business operations for the last several years.

286 5/2/ WINDING UP ORDER AND ITS CONSEQUENCES-II Section 454: Statement of Affairs to be made to OL; Section 454: Statement of Affairs to be made to OL; Section 456- Custody of the company’s property Section 456- Custody of the company’s property  Ownership of company’s property vests with the liquidator though the title stands in the name of the company. But the rights of the company has been divested on the date of winding up order itself.  The Liquidator can take the assistance of the District Magistrate and other revenue staff; (Since the object of winding up proceedings is to put all unsecured creditors on par and to pay them pari passu, an attachment effected by the revenue authority on the immovable properties of the company in respect of dues to the Employees' State Insurance Corporation, Wages Authority and Regional Provident Fund Commissioner, was ineffective and the liquidator could take the properties into his custody free from all attachments and realise their value according to winding up procedures. Ananta Mills Ltd. (In Liquidation) v. City Deputy Collector, Ahmedabad, (1972) 42 Com Cases 476 (Guj)).

287 5/2/ STATUTORY DECLARATION – INSOLVENT-III The shares of a company were accepted by the stock exchange for listing but subsequently the permission was cancelled. The application money became refundable. There was no prospect of the company doing any business and there was a complete deadlock among the directors. It was doubtful if the creditors were likely to be paid. It was held to be a case of commercial insolvency. Deccan Farms & Distilleries Ltd. v. Velabai Laxmidas Bhanji, (1979) 49 Com Cases 321 (Bom) (DB).

288 S Provisions as to applications for winding up (1) An application to the Court for the winding up of a company shall be by petition presented, subject to the provisions of this section, (2) -by the company; or -by any creditor or creditors, including any contingent or prospective creditor or creditors; or - by any contributory or contributories; or - by all or any of the parties specified in clauses (a), (b) and (c) whether together or separately; or -by the Registrar with the previous sanction of the Central Government to the presentation of the petition 5/2/

289 S Commencement of winding up by Court.- Voluntary Winding up- deemed to have commenced at the date of passing of special resolution; Voluntary Winding up- deemed to have commenced at the date of passing of special resolution; Compulsory winding up or winding up by the court – deemed to have commenced at the date of presentation of the petition for winding up. Compulsory winding up or winding up by the court – deemed to have commenced at the date of presentation of the petition for winding up. S Powers of Court on hearing petition.- (1) On hearing a winding-up petition, the Court may S Powers of Court on hearing petition.- (1) On hearing a winding-up petition, the Court may (a) dismiss it, with or without costs; or (a) dismiss it, with or without costs; or (b) adjourn the hearing conditionally or unconditionally; or (b) adjourn the hearing conditionally or unconditionally; or (c) make any interim order that it thinks fit; or (c) make any interim order that it thinks fit; or (d) make an order for winding-up the company with or without costs, or any other order that it thinks fit etc. (d) make an order for winding-up the company with or without costs, or any other order that it thinks fit etc. 5/2/

290 S Copy of winding up order to be filed with Registrar - On the making of a winding up order, it shall be the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order, within 2 [thirty days] from the date of the making of the order. (Sub Section (1)) - On the making of a winding up order, it shall be the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order, within 2 [thirty days] from the date of the making of the order. (Sub Section (1)) 2 -Such order shall be deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued (Sub Section (3)) -Such order shall be deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued (Sub Section (3)) S Suits stayed on winding up order. S Suits stayed on winding up order. 5/2/

291 Effect of winding up order S Effect of winding up order.- An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. S Effect of winding up order.- An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. The effect of an order of winding up is to put the company into the hands of the Official Liquidator for completing the process. Till an order of the court for distribution of the company's assets has been obtained and the assets have been distributed, the properties continue to be those of the company. The company under liquidation continues to exist as a juristic personality until an order under S. 481 for dissolution is made. It is only thereafter that the company can be said to become non-existent in the eye of the law. Official Liquidator of Gannon Dunkerley v. Urban Land Tax, (1992) 73 Com Cases 168 (Mad). 5/2/

292 CERTAIN PROVISISONS – OFFICIAL LIQUIDATOR Appointment of Official Liquidator – Sec.448 Appointment of Official Liquidator – Sec.448 Official Liquidator to be Liquidator – Sec.449 Official Liquidator to be Liquidator – Sec.449 Appointment and powers of provisional liquidator – Sec.450 Appointment and powers of provisional liquidator – Sec.450 General Provisions as to Liquidators – Sec.451 General Provisions as to Liquidators – Sec.451 Style, etc., of liquidator – Sec.452 Style, etc., of liquidator – Sec.452 Receiver not to be appointed of assets with Liquidator – Sec.453 Receiver not to be appointed of assets with Liquidator – Sec.453 Statement of Affairs to be made to Official Liquidator – Sec.454 Statement of Affairs to be made to Official Liquidator – Sec.454 Report by Official Liquidator – Sec.455 Report by Official Liquidator – Sec.455 Custody of company’s property – Sec.456 Custody of company’s property – Sec.456 Powers of Liquidator – Sec.457; Discretion of liquidator – Sec.458 Powers of Liquidator – Sec.457; Discretion of liquidator – Sec.458 Exclusion of certain time in computing periods of limitation – Sec.458A Exclusion of certain time in computing periods of limitation – Sec.458A Provision for legal assistance to liquidator – Sec.459 Provision for legal assistance to liquidator – Sec.459 Exercise and control of liquidator’s powers – Sec.460 Exercise and control of liquidator’s powers – Sec.460 Books to be kept by liquidator – Sec.461 Books to be kept by liquidator – Sec.461 Audit of liquidator’s accounts – Sec.462 Audit of liquidator’s accounts – Sec.462 Control of Central Government over liquidators – Sec.463 Control of Central Government over liquidators – Sec.463

293 S CUSTODY OF COMPANY’S PROPERTY - take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled. - take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled. -by writing request the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction such property, effects or actionable claims or any books of account or other documents of the company may be found to take possession thereof, To securing compliance with the provisions of subsection, they may take or cause to be taken such steps and use or cause to be used such force as may in his opinion be necessary.] -by writing request the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction such property, effects or actionable claims or any books of account or other documents of the company may be found to take possession thereof, To securing compliance with the provisions of subsection, they may take or cause to be taken such steps and use or cause to be used such force as may in his opinion be necessary.] - All the property and effects of the company shall be deemed to be in the Custody of the Court as from the date of the order for the winding up of the company. - All the property and effects of the company shall be deemed to be in the Custody of the Court as from the date of the order for the winding up of the company. 292

294 STEPS INVOLVED IN THE WINDING UP-1 To take into custody or under control, all the property, effects and actionable claims to which the company is or appears to be entitled. To take into custody or under control, all the property, effects and actionable claims to which the company is or appears to be entitled.  To take steps to provide security guards to protect such properties;  To make inventory of such properties with reference to Statement of Affairs;  To get properties valued  To put properties for sale  To call and adjudicate claims of all creditors  To distribute the amount so realized among the creditors on the principle of pari passu and on pro rata basis with reference to their respective priorities 5/2/

295 STEPS INVOLVED IN THE WINDING UP-2 To get the accounts audited twice in the year and submit to the court; To get the accounts audited twice in the year and submit to the court; To invest the realized amounts in investments as per the court orders To invest the realized amounts in investments as per the court orders To file misfeasance application in case of frauds; To file misfeasance application in case of frauds; To file dissolution application To file dissolution application 5/2/

296 BASIS FOR ON IDENTIFICATION ASSETS Audited financial statements Audited financial statements Interim financial statements Interim financial statements General Ledger General Ledger Other specifically maintained asset registers (e.g.. investments, receivables, fixed assets or bank accounts) Other specifically maintained asset registers (e.g.. investments, receivables, fixed assets or bank accounts) 5/2/

297 CONDUCTING OF THE INSOLVENCY All correspondence should clearly indicate that the company is insolvent. All correspondence should clearly indicate that the company is insolvent. Meeting and accounts Meeting and accounts Realization of assets (power of sale) Realization of assets (power of sale) Tracing of assets if necessary Tracing of assets if necessary Identifying creditors Identifying creditors Litigating if required Litigating if required Suggest Court Order for any major decisions especially sale or disposal of major assets. Suggest Court Order for any major decisions especially sale or disposal of major assets. Distribution to creditors (interim or final) dividends or return of capital Distribution to creditors (interim or final) dividends or return of capital 5/2/

298 VOLUNTARY LIQUIDATIONS Members’ resolution by passing a special resolution at a general or special meeting. Members’ resolution by passing a special resolution at a general or special meeting. Creditors liquidation through members’ resolution Creditors liquidation through members’ resolution Officers and Directors powers cease. Officers and Directors powers cease. 5/2/

299 MARSHALLING AND DISTRIBUTION OF ASSETS Cost & expenses including Insolvency Practitioner remuneration. Cost & expenses including Insolvency Practitioner remuneration. Preferred creditors Preferred creditors Ordinary creditors Ordinary creditors Members Members 5/2/

300 5/2/ PROOF OF RANKING OF CLAIMS Section 528 to 530 Section 528 to 530 Sections 541 to 542 _Misfeasance Proceedings against delinquent; Sections 541 to 542 _Misfeasance Proceedings against delinquent; Companies (Court) Rules 1956 Proof of debts: fixation of date by the OL by advertisement; claimants to prove their debt; liquidator to communicate acceptance or rejection of debt – Rules Companies (Court) Rules 1956 Proof of debts: fixation of date by the OL by advertisement; claimants to prove their debt; liquidator to communicate acceptance or rejection of debt – Rules Appeal by creditor against decision of OL – Rule 164 Appeal by creditor against decision of OL – Rule 164 Proof and list of creditors to be filed in court – Rule 167 Proof and list of creditors to be filed in court – Rule 167 Application of the assets of the company Application of Insolvency Rules – sec 528/529; Priority of Payments – sec 529/529A/ 530 Application of the assets of the company Application of Insolvency Rules – sec 528/529; Priority of Payments – sec 529/529A/ 530 Section 481- Dissolution of company. Section 481- Dissolution of company.

301 5/2/ CROSS-BORDER INSOLVENCY IN INDIA There is no mechanism under the Companies Act, 1956; There is no mechanism under the Companies Act, 1956; The question of choice of law arises in all cross-border transactions due to (1) development of international trade in which inter-country debtor-creditor relations across the border develops; (2) development of transnational and multinational institutions through building up trans border organizational structure through permanent establishment, branches or franchises; (3) development of organizational relations through chain of organization structure of subsidiaries, and joint venture and finally (4) development of complexities in modern business relations. The question of choice of law arises in all cross-border transactions due to (1) development of international trade in which inter-country debtor-creditor relations across the border develops; (2) development of transnational and multinational institutions through building up trans border organizational structure through permanent establishment, branches or franchises; (3) development of organizational relations through chain of organization structure of subsidiaries, and joint venture and finally (4) development of complexities in modern business relations.

302 5/2/ “UNCITRAL” MODEL INSOLVENCY LAW STILL UNDER DISCUSSION The UNCITRAL came out with a Model Law on Cross-Border Insolvency negotiated among more than 40 countries representing a broad spectrum of differing legal systems. The UNCITRAL came out with a Model Law on Cross-Border Insolvency negotiated among more than 40 countries representing a broad spectrum of differing legal systems. The law applies in the following situations where: The law applies in the following situations where: (1) assistance is sought in a state by a foreign court or a foreign representative in connection with a proceeding under the domestic law of a state; (2) assistance is sought in a foreign state in connection with a proceeding under the domestic law of a state; (3). a foreign proceeding and a proceeding under the domestic law of a state in respect of the same debtor are taking place concurrently; or (4) creditors or other interested persons in a foreign state have an interest in requesting the commencement of, or participating in, a proceeding under the domestic law of the state.

303 5/2/ CONSTITUION OF HIGH LEVEL EXPERT COMMITTEES In the year 1999, the Government of India set up a high level committee headed by V.B. Balakrishna Eradi, J., for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field. In the year 1999, the Government of India set up a high level committee headed by V.B. Balakrishna Eradi, J., for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field. In 2001, the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra committee, made several recommendations on bankruptcy law reforms, the first among which was consolidation of bankruptcy laws into a separate code. However, no legislative steps have still been taken in this regard. In 2001, the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra committee, made several recommendations on bankruptcy law reforms, the first among which was consolidation of bankruptcy laws into a separate code. However, no legislative steps have still been taken in this regard.

304 Non Banking Financial Companies (NBFCs)-1 Non Banking Financial Companies- ACTIVITIES Non Banking Financial Companies- ACTIVITIES COVERED UNDER NBFC SECTOR: COVERED UNDER NBFC SECTOR: 1. MERCHANT BANKING 2. UNDER WRITING 3. PORTFOLIO MANAGEMENT SERVICES 4. INVESTMENT ADVISORY SERVICES 5. FINANCIAL CONSULTANCY 6. STOCK-BROKING 7. ASSET MANAGEMENT 8. VENTURE CAPITAL 9. CUSTODIAL SERVICES 10. FACTORING CREDIT REFERENCE AGENCIES 12. CREDIT RATING AGENCIES 13. LEASING & FINANCE 14 HOUSING FINANCE 15. FOREX-BROKING 16. CREDIT CARD BUSINESS 17. MONEY-CHANGING BUSINESS 18. MICRO-CREDIT 19. RURAL CREDIT 1. MERCHANT BANKING 2. UNDER WRITING 3. PORTFOLIO MANAGEMENT SERVICES 4. INVESTMENT ADVISORY SERVICES 5. FINANCIAL CONSULTANCY 6. STOCK-BROKING 7. ASSET MANAGEMENT 8. VENTURE CAPITAL 9. CUSTODIAL SERVICES 10. FACTORING CREDIT REFERENCE AGENCIES 12. CREDIT RATING AGENCIES 13. LEASING & FINANCE 14 HOUSING FINANCE 15. FOREX-BROKING 16. CREDIT CARD BUSINESS 17. MONEY-CHANGING BUSINESS 18. MICRO-CREDIT 19. RURAL CREDIT 5/2/

305 Non Banking Financial Companies (NBFCs)-2 Chit Fund Companies; Chit Fund Companies; Collective Investment Scheme (CISs) Companies (Eg. Plantation companies etc) Collective Investment Scheme (CISs) Companies (Eg. Plantation companies etc) Others doing business at the cost of investors investments Others doing business at the cost of investors investments Note:- In certain matters, the above category companies have proved to be detrimental to the interest of investors. The NBFCs fall under the jurisdiction of RBI. The Collective Investment Schemes (CISs) Companies fall under the jurisdiction of the Stock and Exchange Board of India. The Chit Fund business comes under the purview of the A.P. Chit Fund Act. The Listed Companies (Public Issue Companies) comes under the jurisdiction of SEBI mostly and in certain issues which come under the purview of the Registrar of Companies. 5/2/

306 NBFCs – Chit Fund or Deposit Accepted Companies in Liquidation-1 In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietary firms for doing finance business. The claim of chit holders / deposit holders is that In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietary firms for doing finance business. The claim of chit holders / deposit holders is that  The successful bidders kept their bid amount as deposit in the firm. 5/2/

307 NBFCs – Chit Fund or Deposit Accepted Companies in Liquidation-2  The firm promised that the interest earned on the said FD will be adjusted towards chit installments. Hence the chit holders are contending that they are not liable to pay balance subscription.  The FD holders of finance firm are lodging claims against the chit fund company under liquidation on the ground that both the firm and the Company in liqn. are under the same management. 5/2/

308 During adjudication of claims, i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers? i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers? ii. Whether to consider the large cash payments made towards future installments in respect of which the company has not conducted the chit auctions ? iii. Whether to consider dividends already earned ? 5/2/

309 Services of CAs is vital – investigation of claims in respect of Chit Fund Companies During adjudication of claims: i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers? i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers? ii. Whether to consider the large cash payments made towards future installments in respect of which the company has not conducted the chit auctions ? - Claims Investigation in complicated transactions – Chartered accountant service is vital; valuation of properties of companies; preparation of Balance sheet for the gap periods 5/2/

310 STATEMENT OF AFFAIRS DETAILS TO BE FURNISHED IN THE STATEMENT OF AFFAIRS DETAILS TO BE FURNISHED IN THE STATEMENT OF AFFAIRS Statement of Affairs to be filed as on the date of order for winding up in Form No.57 and is required to be seconded with the Affidavit of concurrence of other directors as per Form No.58. Statement of Affairs to be filed as on the date of order for winding up in Form No.57 and is required to be seconded with the Affidavit of concurrence of other directors as per Form No.58. 5/2/

311 Assets not specifically pledged : List-A: Assets not specifically pledged : List-A: Assets not specifically pledged : List-A: Balance at Bank: To be furnished along with full address of the Banks, Account Nos., amounts lying therein supported by the statement of account for the last one year. Balance at Bank: To be furnished along with full address of the Banks, Account Nos., amounts lying therein supported by the statement of account for the last one year. Marketable securities: Full details of the securities such as shares etc along with certificates, their realizable value as on date etc. Marketable securities: Full details of the securities such as shares etc along with certificates, their realizable value as on date etc. Trade debtors: Names, address, L.F.No., date of transaction, last date of payment, Book value, realizable value, details of security if any and other relevant information. Trade debtors: Names, address, L.F.No., date of transaction, last date of payment, Book value, realizable value, details of security if any and other relevant information. Loans & Advances: Names, address, date of security if any and other relevant information. Loans & Advances: Names, address, date of security if any and other relevant information. Freehold properties: Detailed description of the properties, estimated value, title documents etc. Freehold properties: Detailed description of the properties, estimated value, title documents etc. 5/2/

312 Assets not specifically pledged : List-A: (In continuation) Leasehold properties: Details of lease, lease documents, unexpired period of lease, transferability of lease, its value etc. Leasehold properties: Details of lease, lease documents, unexpired period of lease, transferability of lease, its value etc. Details of Plant & Machinery, furniture fittings etc, vehicles, investments other than marketable securities such as deposits etc : location of the assets, inventory/description, maturity value (deposits), realizable value of other assets etc. Details of Plant & Machinery, furniture fittings etc, vehicles, investments other than marketable securities such as deposits etc : location of the assets, inventory/description, maturity value (deposits), realizable value of other assets etc. Debts from contributories: Name of the shareholder, address, S.No. in share register, nature of debt, amount due, security held etc. Debts from contributories: Name of the shareholder, address, S.No. in share register, nature of debt, amount due, security held etc. 5/2/

313 Assets specifically pledged and creditors fully or partly secured: Complete description of the assets charged, list of plant and machinery, current assets, date of mortgage, estimated value of security, details of each creditor, date of contract, consideration etc., to be given separately. 5/2/

314 List ‘C’ Preferential creditors under Sec.530 including workmen: Details such as, name and address, nature of claim, period of accrual of the claim, due date, amount of claim, amount payable, details of workmen such as E.No., basic, allowances, Gratuity dues, last date of payment etc. Details such as, name and address, nature of claim, period of accrual of the claim, due date, amount of claim, amount payable, details of workmen such as E.No., basic, allowances, Gratuity dues, last date of payment etc. 5/2/

315 List ‘D’ Debenture holders: Name of the holder, address, amount, assets secured. List ‘D’ Debenture holders: Name of the holder, address, amount, assets secured. List ‘E’ Unsecured Creditors: Name and address of the creditor, amount of debt, date of contract, LF No., Consideration. List ‘E’ Unsecured Creditors: Name and address of the creditor, amount of debt, date of contract, LF No., Consideration. Details of Preference and equity share holders such as Register No., Name, address, number of shares held, nominal amount of share, amount called up per share, total called up amount. Details of Preference and equity share holders such as Register No., Name, address, number of shares held, nominal amount of share, amount called up per share, total called up amount. 5/2/

316 Difficulties in Liquidation Proceedings The ex-Directors are not traceable. The ex-Directors are not traceable. Statement of Affairs is not filed or is defective. Statement of Affairs is not filed or is defective. Books of Accounts are not delivered. Books of Accounts are not delivered. Registered office is not traceable. Registered office is not traceable. Books seized are irrelevant/in dilapidated condition. Books seized are irrelevant/in dilapidated condition. Diversion and misappropriation of funds. Diversion and misappropriation of funds. Ledgers are not updated. Debts become time-barred. Ledgers are not updated. Debts become time-barred. Manipulation of Records & receipts is found. Manipulation of Records & receipts is found. Monies/properties are attached/sold by courts/consumer forums on complaints by the depositors. Monies/properties are attached/sold by courts/consumer forums on complaints by the depositors. Ex-Directors fail to respond to the queries of Official Liquidator. Ex-Directors fail to respond to the queries of Official Liquidator. Details of assets secured to the Bond holders is not furnished or no charge is created with the Registrar of Companies with regard to such bonds. Details of assets secured to the Bond holders is not furnished or no charge is created with the Registrar of Companies with regard to such bonds.

317 HOW BEST THE SERVICES OF CAs BE AVAILED IN INSOLVENCY PROCEEDINGS: I The classical investigative auditing goals in insolvency cases fall mainly into three fields: The classical investigative auditing goals in insolvency cases fall mainly into three fields:  Irregular activities of the managers or employees of the company in the pre insolvency era – dilution of funds or assets of the company;  Possible frauds committed by clients or suppliers in respect of the company in pre insolvency era; and  Tracing assets belonged to the company and disappeared in the final stages of the company closure before insolvency or even beforehand. -(creditcontrol.co.uk) 5/2/

318 II - Latest available balance sheet with the ROC is ordinarily 3 to 5 years older to the winding up order; - Latest available balance sheet with the ROC is ordinarily 3 to 5 years older to the winding up order; - Difficulties in identifying the properties’ - Difficulties in estimating the actual/realisable values – resolution – to get a balance sheet prepared with the help of CA for the gap period; - Money laundering, diversification of funds, manipulation of accounts, destruction of records; - Collusion with the borrowers and allowing the debts time barred 5/2/

319 Services of CAs is vital – investigation of records of Chit Fund Companies In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietory firms for doing finance business. The claim of chit holders / deposit holders is that In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietory firms for doing finance business. The claim of chit holders / deposit holders is that  The successful bidders kept their bid amount as deposit in the firm.  The firm promised that the interest earned on the said FD will be adjusted towards chit installments. Hence the chit holders are contending that they are not liable to pay balance subscription.  The FD holders of finance firm are lodging claims against the chit fund company under liquidation on the ground that both the firm and the Company in liqn. are under the same management. 5/2/

320 Services of CAs – E-form based - Tracking and analyzing e-from based accounts; - Dubious transactions – diversification of - funds for personal gain; - -Ascertaining loss- Misfeasance - -Amalgamation – voluntary liquidation matters; - - Office purpose- auditing specific 5/2/

321 Company Law Settlement Scheme, 2010 All India level more than companies have not filed documents All India level more than companies have not filed documents In the state of Karnataka, more than companies have not filed documents In the state of Karnataka, more than companies have not filed documents

322 Issued under Sec.611 (2) and 637B (b) of the Companies Act, 1956 Sec.611 (2) and 637B (b) of the Companies Act, 1956 Not applicable to Sec.637B (a) of the Companies Act, 1956 Not applicable to Sec.637B (a) of the Companies Act, 1956

323 Who can avail Defunt company Defunt company - a company registered under the - a company registered under the Companies Act, 1956 which is not Companies Act, 1956 which is not carrying over any business activity or carrying over any business activity or operation on or after 01/04/2008 and operation on or after 01/04/2008 and includes a company which has not includes a company which has not raised its paid up capital to threshold limit raised its paid up capital to threshold limit. In case the defunct company is govt. company No objection from the concerned Ministry or department or state govt. shall be attached. It should be an active company on the MCA portal portal

324 Who cannot avail the scheme Listed companies Listed companies Sec.25 Companies Sec.25 Companies Vanishing Companies Vanishing Companies Where inspection or investigation is ordered and being carried out or yet to be taken up or where completed prosecutions arising out of such inspection of investigation are pending in the court Where inspection or investigation is ordered and being carried out or yet to be taken up or where completed prosecutions arising out of such inspection of investigation are pending in the court contd…. contd….

325 Who cannot avail the scheme Where order Sec.234 of the CA 1956 has been issued and reply thereto is pending or where prosecution, if any, is pending in the court Where order Sec.234 of the CA 1956 has been issued and reply thereto is pending or where prosecution, if any, is pending in the court Prosecution for non compoundable offence is pending before a court Prosecution for non compoundable offence is pending before a court Public deposits which are either outstanding or the company is in default in repayment of the same Public deposits which are either outstanding or the company is in default in repayment of the same contd… contd…

326 Who cannot avail the scheme Having secured loan Having secured loan Having management dispute Having management dispute Where the filing of the documents have been stayed by Court or Company Law Board or central government or any other competent authority Where the filing of the documents have been stayed by Court or Company Law Board or central government or any other competent authority Having dues towards income tax or sales tax or central excise or banks and financial institutions or any other central government or state government departments or authorities or any local authorities Having dues towards income tax or sales tax or central excise or banks and financial institutions or any other central government or state government departments or authorities or any local authorities

327 How to make application Form EES 2010 Form EES 2010 No fee is payable No fee is payable To be digitally signed by Managing Director or Director or Manager or Secretary To be digitally signed by Managing Director or Director or Manager or Secretary Shall be authorised by board resolution Shall be authorised by board resolution Resolution shall be attached Resolution shall be attached contd…. contd….

328 How to make application In case form is not digitally signed by any of the Director or Manager or Secretary, a physical copy of the form duly filled in manually by a director authorised shall be attached with the form In case form is not digitally signed by any of the Director or Manager or Secretary, a physical copy of the form duly filled in manually by a director authorised shall be attached with the form Shall be certified by chartered accountant in whole time practice or company secretary in whole time practice or cost accountant in whole time practice Shall be certified by chartered accountant in whole time practice or company secretary in whole time practice or cost accountant in whole time practice

329 Attachments Affidavit as per Annexure A by each of the existing director sworn to before a first class judicial magistrate or executive magistrate or oath commissioner or the notary shall be attached Affidavit as per Annexure A by each of the existing director sworn to before a first class judicial magistrate or executive magistrate or oath commissioner or the notary shall be attached Indemnity Bond executed by each of director as per Annexure B shall be attached Indemnity Bond executed by each of director as per Annexure B shall be attached Statement of Account as per Annexure C prepared on a date not prior to one month of preceding the date of filing and duly certified by a stautory auditor or chartered accountant in whole time practice Statement of Account as per Annexure C prepared on a date not prior to one month of preceding the date of filing and duly certified by a stautory auditor or chartered accountant in whole time practice

330 AFFIDAVIT Proof of Directorship – in case no DIN is allotted – to be certified by Chartered Accountant/ Company Secretary/ Cost Accountant in practice or a Company Secretary in full time employment Proof of Directorship – in case no DIN is allotted – to be certified by Chartered Accountant/ Company Secretary/ Cost Accountant in practice or a Company Secretary in full time employment Address Proof – permanent and present address to be attested by Chartered Accountant/ Company Secretary/ Cost Accountant in practice or a Company Secretary in full time employment alternatively an affidavit sworn before a Magistrate to be attached. Address Proof – permanent and present address to be attested by Chartered Accountant/ Company Secretary/ Cost Accountant in practice or a Company Secretary in full time employment alternatively an affidavit sworn before a Magistrate to be attached.

331 Some teething problems Where there is only one director – what to do Where there is only one director – what to do Company has huge unsecured loans not coming under the definition of public deposit Company has huge unsecured loans not coming under the definition of public deposit Whether earlier year balance sheets shall be filed especially when the company has huge assets and liablities – discretion of the ROC Whether earlier year balance sheets shall be filed especially when the company has huge assets and liablities – discretion of the ROC

332 What ROC shall do Registrar shall give notice, if found in order, to the company under Sec.560 (3) by e mail to the address giving 30 days time Registrar shall give notice, if found in order, to the company under Sec.560 (3) by e mail to the address giving 30 days time Shall put the name of the company and date of making application on daily basis in MCA portal inviting objections within 30 days from the stakeholders Shall put the name of the company and date of making application on daily basis in MCA portal inviting objections within 30 days from the stakeholders contd…. contd….

333 What ROC shall do ROC shall at the end of every week shall send intimation to other regulators such as RBI and SEBI in respect of NBFCs and Collective Investment Management Company inviting objections giving 30 days time ROC shall at the end of every week shall send intimation to other regulators such as RBI and SEBI in respect of NBFCs and Collective Investment Management Company inviting objections giving 30 days time ROC shall at the end of every week to Income Tax Department in respect of every company giving 30 days time ROC shall at the end of every week to Income Tax Department in respect of every company giving 30 days time Strike off the company and send notice under Sec.560(5) for Gazette Publication Strike off the company and send notice under Sec.560(5) for Gazette Publication

334 Immunity Certificate Necessity Necessity By filing documents belatedly only an end to offence is made; does not mean that the offence has not taken place By filing documents belatedly only an end to offence is made; does not mean that the offence has not taken place Sec.611 (2) – without preudice to any other liability Sec.611 (2) – without preudice to any other liability

335 Immunity Certificate Hanuman Mills pvt. Ltd. And others Vs. State AIR 1968 All 604 Hanuman Mills pvt. Ltd. And others Vs. State AIR 1968 All 604 Pylo Luka Muricken Vs. ROC, Kerala (1977) 47 Com Cas 291 (Ker) Pylo Luka Muricken Vs. ROC, Kerala (1977) 47 Com Cas 291 (Ker)

336 Duration of the scheme and the quantum of additional fee 30/05/2010 to 31/08/ /05/2010 to 31/08/2010 Basic statutory filing fee and additional fee of 25 percent of the actual additional fee standardised under Sec.611 (2) are to be paid Basic statutory filing fee and additional fee of 25 percent of the actual additional fee standardised under Sec.611 (2) are to be paid

337 Who can avail Any defaulting company Any defaulting company In case the defaulting company has no adequate paid up capital it must be raised first In case the defaulting company has no adequate paid up capital it must be raised first Company means a company registered under the Companies Act, 1956 and a foreign company falling under Sec.591 of the Act Company means a company registered under the Companies Act, 1956 and a foreign company falling under Sec.591 of the Act Companies against which action Sec.560 (5) is initiated cannot avail Companies against which action Sec.560 (5) is initiated cannot avail

338 Whether the scheme can be used for all documents Not to apply to Not to apply to (a) incorporation documents; (a) incorporation documents; (b) documents for establishment of place of (b) documents for establishment of place of business in India; business in India; (d) where specific order for condonation of (d) where specific order for condonation of delay or prior approval under the delay or prior approval under the provisions of the companies Act, 1956 is to provisions of the companies Act, 1956 is to be obtained from the CLB or CG or Court or be obtained from the CLB or CG or Court or any other Competent Authority any other Competent Authority

339 What about appeals filed by the company It shall have to withdraw the appeal petition before filing application for grant of immunity certificate It shall have to withdraw the appeal petition before filing application for grant of immunity certificate In case petition under Sec.633 for relief is filed it should also be withdrawn In case petition under Sec.633 for relief is filed it should also be withdrawn Proof of withdrawal shall be filed along with application for grant of immunity certificate Proof of withdrawal shall be filed along with application for grant of immunity certificate

340 Application for immunity certificate Shall be made in the form annexed Shall be made in the form annexed No fee is payable; No fee is payable; Shall be made after the closure of the scheme and the documents are taken on file, on record or approved Shall be made after the closure of the scheme and the documents are taken on file, on record or approved Shall be made before the expiry of six months from the date of closure of the scheme Shall be made before the expiry of six months from the date of closure of the scheme

341 When immunity certificate will be issued Designated authority (ROC) shall consider the application and upon being satisfied shall grant immunity certificate in respect of documents filed in the scheme Designated authority (ROC) shall consider the application and upon being satisfied shall grant immunity certificate in respect of documents filed in the scheme

342 341 Presented By CA Swatantra Singh, B.Com, FCA, MBA CA Swatantra Singh, B.Com, FCA, MBA ID: ID: New Delhi, , New Delhi, ,

343


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