COMPANY SECRETARY

The word "Secretary" is derived from the Latin word "Secretarius" meaning Confidential Officer.
A secretary is defined by the Oxford Dictionary as "one whose office is to write for another,
especially one who is employed to conduct correspondence, to keep records and to transact
various other businesses for another person or for a society, corporation or public body".
The Companies Act 1956, as amended by the Amendment Act of 1988, defines a secretary as
"any individual possessing the prescribed qualifications appointed to perform the duties which
may be performed by a Secretary under the Act and any other ministerial and administrative
duties".
Therefore the Secretary is one of the principal officers of the company with the requisite
qualifications to undertake secretarial work and management of the affairs of the company as per
the provisions of the Act and instructions laid down by the Board of Directors. The Board,
however, cannot alter the duties of the secretary as they are determined by the law.
TYPES OF SE-CRETARIES
There are various types of secretaries, such as 'private secretary, secretary to a club, cooperative
society, government company, etc., A brief description of these types is as follows:

PRIVATE SECRETARY
A private secretary is usually appointed by an important person such as a minister in the
government, member of parliament, manager, business magnate or professional men like
doctors, lawyers, etc, ' His work is to attend to the correspondence and other personal work or
office work of the employer. Sometimes, the private secretary may also be entrusted with
certain duties of a private nature such as handling banking transaction, arranging meeting,
parties, and drafting reports and speeches.
SECRETARY OF A CLUB OR ASSOCIATION
Non-profit making associations like Charitable institutions, cultural associations and
professional association, sports and athletic clubs may appoint a full-time secretary to conduct
the day-to-day activities of the association or club. As an honorary secretary cannot generally
be expected to devote his entire time to the work of the association or the club, paid
secretaries are appointed.
The important functions of the secretary of an association are:
1. The attend to administrative functions such as correspondence, maintenance of
accounts and records, supervision of staff and arranging for the audit of the accounts.
2. To conduct activities of the club or association such as registration of new members,
collection of fees, etc.
3. To convene meetings of members or executive committees and to prepare the
required documents and minutes of the meetings.
4. To advise the managing committee on various matters relating to the association and
to execute the decisions of the managing committee
SECRETARY OF A CO-OPERATIVE SOCIETY
Generally, full-time secretaries are appointed in cooperative society. In some cases, one of the
members of the managing committee may be elected to act as secretary.

The functions of the secretary of a cooperative society are:

1. To assist the managing committee in managing the affairs of the society.
2. To execute the decisions taken by the managing committee.
3. To maintain proper records and registers.
4. To arrange meetings and to attend conferences on behalf of the society.
SECRETARY OF A GOVERNMENT DEPARTMENT
Each department of the government is under the control of a secretary, e.g., Secretary,
Finance Department and Secretary, Education Department. He is also executive head and
adviser to the minister who is concerned with that particular department.
The duties of a government secretary are:
1. Administrative and executive functions such as overall control and day-to-day
administration of the office, guiding the subordinate officers of the department,
coordinating the various activities of the department as well as the activities of allied
department.
2. Advisory functions, which include advising the minister on all matters regarding
decisions and supplying whatever information is needed by the minister.
SECRETARY OF A LOCAL BODY
Usually, municipal corporations and Panchayats appoint a paid secretary who will functions as
an office executive. He is a link between the authorities and the staff. His functions are many
and varied. He has to supervise and coordinate all activities of the office, prepare budgets,
statements, arranging meetings, draft minutes, etc.,
SECRETARY OF A TRADE UNION
Generally, every trade union appoints a secretary .He is a powerful person wielding much
influence over the organized labourers. He is required to hold meeting of the union, to record
their proceedings, to maintain accounts and statutory books and to conduct the
correspondence on behalf of the union. He advises the 'union on various matters connected
with labour .In case of disputes, he negotiates with the employers on behalf of the labour and
makes efforts to settle the disputes.
COMPANY SECRETARY
The secretary of a company guides the management in the day-to-day work of Company Law
and mercantile law and of accounts, taxation, holding of meetings, drafting of reports.
Resolutions etc. His duties are of ministerial and administrative character and he is not
concerned with the directions. control or management of the affairs of the company. He is an
officer of the company and his duties are multifarious but primarily they consist of duties to the
Board, duties to the shareholders and duties to the company. Because of the vast expansion
of joint stock forms of organisation, the position of secretary has become pre-eminent in the
industrial and commercial world and has secured esteemed position and a high social status.
Section 2(45) of the companies Act of 1956, " A company secretary is a person who is a
member of the Institute of the Company Secretaries of India or any other individual
possessing the prescribed qualifications, appointed to perform the duties imposed on him by
the companies Act, the ministerial or administrative duties and managerial functions that are
delegated to him by the Board"
The Companies [Amendment] Act 19S5-provides that a company can appoint a secretary with
'limited executive' power of management delegated by the Board of Directors in addition to his
routine duties. If the, Board entrusts the Secretary with routine duties, he is called, -'Routine

Secretary', and if he is entrusted with limited executive managerial powers, he is called

'Executive Secretary'.
ROUTINE SECRETARY
A Secretary is called a Routine Secretary because his position can be compared to the
position of the head of a clerical department doing only such work as he is directed to do by
the board. A routine secretary is just the mouth-piece of the Board of Directors. He has to do
only what he is directed to do by the directors. He does not have any .discretion of his own,
and so, cannot do anything on his own.
The duties of a routine secretary relate to:
1. To supervise issues of shares and debentures.
2. Registration of transfer and transmission of shares
3. Attending to work relating to board meetings and general meetings.
4. Preparing dividend warrants and maintaining the statutory and other books of the
company.
5. Filing the necessary return of the company with the Registrar of the companies
EXECUTIVESECRETARY
When a secretary of a company, in addition to the performance of the routine office work, also
acts as the Chief Executive Officer of the company, he becomes an executive secretary .In
this case, he exercises managerial and administrative powers and performs many executive
and managerial functions delegated to him by the board. So, he is called an Executive
secretary.
An executive secretary, besides performing tile routine office work of a secretary, also
performs a number of other responsible jobs. The other important duties of an executive
secretary are:
1. To Organise and Control the whole office.
2. To carry on the correspondence work relating to the various departments of the
Company.
3. To attend to all matters relating to the Cost and company accounts.
4. To negotiate contracts with third parties on behalf of the Company.
5. To act as a Liaison officer, i.e., Establishing links between the company and outsiders.
6. To act as an adviser and guide to the board of directors on all important matters of
policy and administration.
APPOINTMENT OF A COMPANY SECRETARY
As per the Indian Companies Act, 1956, it was not compulsory for companies to appoint a
secretary. However, in practice all companies appointed secretaries. As per Rule 2(1) of
Companies [Appointment and Qualification of Secretary (Amendment)] Rules. 1993 it is obligatory
for a company having a paid-up capital of not less than Rs. 50 Lakhs to appoint a whole-time
secretary. As per Rule 2(1) above for companies having paid-up capital of less than Rs. 50 lakhs it
is not obligatory to appoint a whole-time secretary .Further, when the board of directors of any
such company comprises only two directors, neither of them shall be secretary of the company.
The Act also states that no individual can hold the office 'of 'secretary in more than one such
company. Further, only a individual possessing such qualifications as the central Government may
prescribe can be appointed as secretary of a company. Now, a company having paid-up capital of
Rs. 2 crores must have a whole time secretary. [This came into force from 11th June 2002].
The promoters of the company generally first appointment a secretary who assists them in he
formation of the company by attending to all preliminary work such as preparation of various
documents and statements required for registering the company, arranging the meetings of the

promoters, preparation of minutes, etc,. He is often referred to as Protem Secretary (i.e.

secretary for the time being) and his name may be included in the Articles of Association of the
Company. If the board of directors decides to appoint another person as secretary other then the
Protem Secretary after incorporation of the company, the first secretary who is appointment by
the promoters cannot sue the company. However, he should be given proper notice in such a
case, otherwise, he can sue the company for damages. Hence, to secure his position, the first
secretary who has been acting, as Protem Secretary must, immediately after the incorporation,
get his appointment confirmed by a resolution at the first board meeting.
The procedure for appointing a company secretary .other than the first secretary .is as follows:
1. A resolution has be passed at the board of directors' meeting appointing a secretary on
certain terms and conditions.
2. The particulars of appointment must be filed ill duplicate with the Registrar within 30 days
of the appointment.
3. I the person appointed as secretary functions as secretary in any other company, he to
notify the other company within 20 days of his appointment.
4. Any director interested in the appointment of secretary must disclose his intent and must
not take part in the discussion or voting on the resolution.
5. If the person appointed, as secretary is the director of a company or is a relative of a
director, a special resolution h-as to be passed in the general board meeting for such an
appointment.
The following persons are usually not qualified for appointment as the secretary in a public
limited company:
1. A director of a company
2. The auditor of the company
3. Any other person who is not eligible to enter into a contract.
The reasons for disqualifying the above persons are that the post of a secretary is deemed to
be a post of profit and the companies Act 1956 stipulates that no director can hold any place
of profit. But by obtaining the consent of a company by assigning a special resolution a
director can be appointed as a secretary. It should, however, be noted that in case a director is
appointed as a secretary, he cannot continue as a director.
As regards auditor as a secretary of a company, the Act states that no employee of a
company can act as auditor. As such we find that a secretary is an employee of a company
and therefore, a person cannot be appointed both as a secretary and as auditor of a company.
DUTIES AND FUNCTIONS OF COMPANY SECRETARY
The duties of .a secretary vary from company to company, depending upon the nature on the
business, size of the company and the powers enjoyed by and responsibilities entrusted with the
secretary.
The duties of a company secretary may be classified under the following broad heads:
1. Statutory duties
2. General Duties
a. Duties in relation to directors
b. Duties in relation to shareholders
c. Duties towards organisation and office
d. Duties in relation to the public
1. STATUTORY DUTIES

The statutory duties of a company secretary are those prescribed by the Companies Act or by
any other legislation such as the Income Tax Act, Sales tax Act, Stamp Act, Employee state.
Insurance Act, Industrial Disputes Acts, Contract Act, Monopolies and Restrictive Trade
Practices Act, etc,
The most important part of his statutory duties relates to the various provisions of the
Companies Act are:
1. Maintenance of books and registers of the company
2. Filing of the necessary returns with the Registrar of Companies
3. Supervising the issue, allotment, transfer and forfeiture of share and debentures.
4. Attending to meetings and recording their proceedings.
5. Safe Custody and proper use of the common seal of the company.
The Income-tax Act requires him to take steps for the deduction of income tax
from dividends, interest and salary and its payment to the tax authorities.
Under the Stamp Act, he has to see that stamps of the requisite amount are
affixed to documents, shares etc.,
Under the Sales-tax Act, he has to arrange for timely submission of returns and
payment of tax. In addition, he has to comply with the provisions of any other
.Act, which is applicable to that particular company. For instance, a
manufacturing company has to comply with the provisions of the Factories Act,
the Industrial Disputes Act, Minimum Wages Act and other industrial laws. The
secretary has to see that these provisions are complied with.
A company secretary is not only a servant of the company but also a servant of
the law.
2. GENERAL DUTIES
Duties in Relation to Directors:
The Secretary has to look after the correspondence with the director, convene board
meetings under the direction, of the managing director, prepare minutes and execute the
orders and instruction of the board. He has to advise the directors during the deliberations
at the meeting regarding the provisions of various Acts. He acts as a guide to the board of
directors.
The secretary is the confidential clerk of the board. While the directors lay down the broad
policies of the company at board meetings, the secretary interprets these policies. He
communicates board decisions to the staff and shareholders and because of this, he is
called the mouthpiece of the board of directors. Further, the secretary has to keep the
board posted with all developments relating to the activities of the company. As the
secretary is the agent of the board of directors, he must carry out their instructions. In
addition he keeps the common seal of the company and uses it as directed by the board.
Duties in Relation to Shareholders.
The secretary is also medium of communication between the company and shareholders.
-As the shareholders are the owners of the company, the secretary has to safeguard their
interest and should attend to their enquires regarding payment of dividend, issues of
share, etc., In dealing with shareholders the secretary has to be very tactful and, at the
same time, be courteous, friendly and helpful. He has to ensure that no confidential
information of the company is made available to a section of the members, which may
affect the interest of the company as a whole. . Further, he has to organize and supervise
correspondence with shareholders with regard to the following:
1. Application and allotment of shares.
2. Calls of shares.

3.
4.
5.
6.
7.
8.

Forfeiture of shares.
Transfer and transmission of shares.
Distribution of dividend
Notice and circulars to .members
Meetings of shareholders
Inquiries and complaints from shareholders.

Miscellaneous or other Duties:

The other duties of a company secretary are:
1.
2.
3.
4.
5.

He should not act without authority

He should discharge his duties honestly
He should Exercise reasonable care & diligence
He should Act in & emergency very cautiously in the interest of the company
He should not leak out the secrets or confidential matters of the company either to
the share holders or to the Public.
6. He should represent the company on social functions.
Duties towards Organization and Office.
The secretary is generally recognized as the head of the office of the company and has
control over departments such as shares, record and filing, accounts and statistics. He has
to ensure that the office works with maximum efficiency. He has to supervise various
activities of the office and also coordinate the activities of the different departments. In
order to get the best out of the staff, he has the overall duty to select, organize and guide
personnel. This requires that he should devote particular attention to the terms and
conditions of their service and also maintain personal contact with individual members of
the staff.
Duties in Relation to the Public.
The secretary being in possession of all-important information about the various aspects of
the company has to function as a medium of communication between the directors and the
general public consisting of debenture holders, bankers, solicitors, creditors and the
'prospective investors. He has to be in touch with them and provide information that may
be asked for. At the same time, he should take care to see that no confidential information
is divulged to the public. Further, he should function as liaison officer between the
shareholders and the directors, the company and the outsiders and should discharge his
duties in the best interest of the company.
QUALIFICATIONS OF THE SECRETARY
In the case of companies with a paid-up share capital of less than Rs. 2 crores any individual
possessing any go the following qualifications may be appointed as 'its whole-time secretary to
perform of duties of secretary.
(I) Membership of the Institute of Company secretary of India (ICST).
(II) Pass in the intermediate examination conducted by the Institute of Company Secretary in
India (ICSI).
(III) Post-Graduate degree in commerce or corporate secretaryship awarded by any university in
India.
(IV) Degree in Law awarded by any university.
(V) Membership of the Institute of Cost and. Works Accountants of India.
(VI) Membership of the Institute of Chartered Accountants of India.

(VII) Post-graduate in Company Law and Secretarial Practice granted by the University of
Udaipur.
(VIII) Membership of the Association of Secretaries and Manager, Calcutta.
(IX) Diploma in Corporate Laws and Management granted by the India Law Institute, New Delhi.
(X) Post-graduate degree or diploma in Management Sciences granted by any University.
(XI) Post-graduate degree or diploma granted by Indian Institutes of Management, Bangalore,
Calcutta, Lucknow, Ahmedabad or Calicut.
The qualifications possessed by a person holding the office as the secretary of a company
immediately before 30the October 1980 shall be deemed to be the qualification, which he shall he
required to possess in order to be eligible to continue in that company.
The Company (Secretary qualification) Rules stated above, do not apply to a limited company
which is formed for the promotion of commerce, arts and science, religion, charity etc,. and which
makes priority payment of dividends to its members (i.e. a company to which a license is granted
under Section 25 of the Companies Act).
QUALITIES OF THE COMPANY SECRETARY:
In addition to the statutory qualifications, a company secretary should possess certain other
qualities if he is to discharge his multifarious duties efficiently. The qualities are:
Sound General Education: A sound general education helps the secretary in grasping the
subject without taking much of his time and effort.
Command over Languages: As a large part of the secretary's work consists of
correspondence and preparation of report and prcis, it is necessary that he should have a
command over language. Further, he should also be conversant with certain specialized
business terms and expressions suited to his work. If his company has foreign connections, it
is better for him to have a knowledge of one or two foreign languages.
Knowledge of Office Administration: For the efficient organisation of the office, the
secretary should know the best system of filing and indexing and should have a knowledge of
labour saving devices, recruitment of office staff, methods of remuneration, delegation of work
etc.,
Knowledge of Accounting and Taxation: As company secretary is an executive office of the
company, he must also have a basic knowledge of the principles of accounting and taxation,
consisting of income tax and sales tax.
Knowledge of Company Law: A thorough knowledge of the various provisions of the
Companies, Act is essential for the secretary .Companies have to function within the legal
framework of the companies Act, hence a thorough knowledge of .the various provisions of
Companies Act is essential for a secretary.
Knowledge of various acts Relating to Staff: For the efficient handling of staff, the
secretary should have thorough knowledge of various acts of legislation which are applicable
to the staff, viz., the Factories Act, the Industrial Disputes Act, the Workmen's Compensation
Act, the Employees' Provident Fund Act, the Payment of Wages Act, Income Tax Act, etc.
Knowledge of Mercantile Law: Apart from the knowledge of the law relating to staff, a
working knowledge of the laws relating to contracts, negotiable instruments, sale of goods,
insurance etc, may be of immense help to the secretary in discharging his duties.
Knowledge of the Industry: He should have a thorough knowledge of the business of his
company and knowledge of the industry in which his company is engaged. This would help
him to give proper guidance to the chairmen and the board on various intricacies of business.
General Knowledge: General Knowledge helps the secretary in guiding the chairman and
board of directors, and in performing his duties confidently. Hence, apart from knowledge of
the industry, the secretary should have general knowledge likes current happenings,
economic conditions, political and social condition, market conditions, etc.

Impressive personality: The various qualifications and qualities mentioned above are essential,
but not sufficient. Besides these, for a company secretary to be successful executive, he must
have a good personality which is a comprehensive term consisting of so many personal virtues
and talents such as charming manners, organizing ability, imagination, initiative, strong common
sense, originality, efficiency arid intelligence, a sense of responsibility, alertness, self-discipline,
foresight, industriousness, courtesy and high moral character .
Rights
The rights of a company secretary mostly flow out of his service agreement with the company.
These may be summarized as follows:
1. Right to supervise the secretarial department. Being head of the secretarial department,
he has the right to control and supervise the activities of the department under his control
2. Right to sign documents. As a principal officer within the meaning of the Companies Act,
he has to sign documents requiring authentication of the company
3. Right to claim remuneration. The secretary is a servant (employee) of the company and
has a right to claim his salary during its lifetime. Before his services are terminated, he can
demand a reasonable notice and claim damages for his wrongful dismissal. In the event of
the winding up of the company he can claim his outstanding salary as a preferential
creditor
But the secretary has no right to:
1. Make allotment, or register transfer, of shares of the company unless he is specifically
authorised by the directors in that behalf and the Articles of the company allow the
directors to delegate this power to the secretary
2. Make any representation on behalf of the company or to enter into any contracts without
express authority and consent of the directors;
3. Borrow in the name of the company
LIABILITIES OF THE SECRETARY
The liabilities of the company secretary may be divided into two categories:
a) Statutory liabilities
b) Contractual liabilities
a) Statutory Liabilities
As the principal executive officer of the company, the secretary has certain statutory
obligations under the .Companies Act, Income tax Act and the Stamp Act, Sales .tax Act
etc. If the secretary fails to carry out the statutory obligations or duties imposed on him by
the various acts, certain liabilities are imposed on him by the Companies Act and other
acts. Such liabilities are called the Statutory liabilities. In short, statutory liabilities refer to
all those liabilities imposed on the secretary by the Companies Act and other acts for his
failure to discharge his statutory duties.
The various statutory liabilities imposed on the company secretary are:
1. If he fails to hold a statutory meeting.
2. If he does not circulate the statutory report.
3. If he fails to hold the Annual General Meeting.
4. If he fails to submit to the Registrar of Companies copies of annual accounts and other
statements.
5. If he fails to give notice of Board Meeting.
6. If he fails to record the minutes of Board and General Meeting.
7. If he does not maintain minute books at the registered office.
8. If he refuses to allow inspection of minutes by the members.
9. If he refuses to furnish copies of Minutes to members.

10. If he fails in making ready share certificates and debenture certificates within the
stipulated period.
11. If he fails to maintain a register of directors, shareholders and debenture holders.
12. If he fails to comply with the provisions of the Act regarding the appointment of auditors
and the auditor's report.
13. If he fails to rectify the mistake within a period of two months, in case the company has
been registered by a name which is identical with or too closely resembles the name of
an existing company.
14. If he fails in filing With the Registrar of the Companies relevant documents as required
by the Act.
15. If he fails in registering the resolutions etc, as required.
16. If he fails to have the name of the company engraved on the seals, etc.
17. If he fails to make entries in the member's register on the issue of share warrants.
18. If he fails to comply with the provisions of this Act particularly regarding the
appointment of auditor, audit reports, etc.
19. Under the Income Tax Act, 1961 the company secretary is responsible for collection
and payment of income tax.
20. Under the Indian Stamp Act, the company secretary is responsible for verifying the
correctness of documents needing stamps, etc.
b) Contractual Liabilities
Apart from the statutory liabilities, the company secretary has certain liabilities to the
company arising out of his contract of service with the company. These liabilities are
known as contractual liabilities.
1.
2.
3.
4.

He must carry out the orders given to him by the directors.

He must carry out the obligations of his service agreement with the company.
He should not disclose any confidential information of the company.
He should not do anything beyond his authority. If he acts beyond his authority, he
will be held personally liable for any damage or loss suffered by the company or
any third party as a result of his action.
5. He is expected to perform his duties .with reasonable care and skill.
6. He is liable for damages caused to the company by his wilful misconduct and
neglect of duties.
7. He is liable for any fraud on the part of any of his assistants if it is proved that he is
a paI1y to such fraud.
LEGAL POSITION OF THE SECRETARY
The Companies Act has recognised the secretary as the principal officer of the company and he is
responsible for the secretarial and other purely ministerial and administrative work of the
company. He has to file various returns and statements with the Registrar of Companies as per
the requirements of the Companies Act. In case he fails to fulfil these statutory obligations, he will
be held liable for such defaults.
In the eyes of law, the secretary is a mere servant of the company. He has to act in
accordance with the order or directions of the board of directors. Without authority, he cannot
enter into any contract with the third parties and cannot make any representation on behalf of the
company. He is appointed by the board and derives his authority from the board. He is under the
control of the board of directors and he has to carry out the orders of the board and cannot
exercise independent discretion in the work for which he is responsible. Thus, the secretary is a
mere servant and subordinate officer of the company without any managerial function.
ACTUAL POSITION OR STATUS OF A COMPANY SECRET
The actual position of a company secretary is not merely that of a servant or an agent, but
something more than that. In actual practice, a company secretary occupies a position of

importance in the administrative set-up of the company. He is not a mere tool in tl1e hands of the
board of directors or the mouth piece of the directors carrying out the orders of the directors. In
the company set up, both the board of directors and the: secretary play .a complementary role to
each other. The board of directors is responsible for the overall management of the company's
business. It plans, decides and formulates the policies of the company. But the responsibility of
the actual execution of the policies lies with the company secretary .It is the secretary who carries
out the orders of the board of directors. That is why, it has been rightly remarked that while the
directors are the brain of the company, the secretary is its eyes, ears and hands of the company.
The company secretary is in close touch with the work of the board and has access to the
confidential matters of the company. He exercises his discretion in most matters relating to the
routine affairs of the company. Similarly, in matters relating to staff, shareholders and. outsiders,
generally, the secretary is allowed .to exercise his discretionary power. This power of discretion is
given to the board because the directors may not be in a position to devote their time for taking
decisions relating to matters which are of a routine nature. He is often consulted by the chairman
and the board before taking any decision on policy matters or on any other important matter since
he, has an intimate knowledge of the company and is in constant touch with the staff, the
shareholders and the public. He is in a better position to advise the board on various matters
relating to the functioning of the company. Further, as he possess a thorough knowledge of the
various legislative enactments relating to companies, he is consulted by the board on various
legal matters.
The company secretary acts in different capacities and discharges many duties and
responsibilities. They are:
1. He acts as the agent of the board of directors and carries out the instructions of the board
of directors.
2. He acts as the registrar of the company and attends to the secretarial functions, such as
the filing of various returns and statements with the registrar of companies, registration of
transfers and transmission of shares and the work of correspondence.
3. He serves as the business executive of the company and carries out the routine office
work and also the managerial duties entrusted to him by the board.
4. He acts as an adviser and advises the directors and the chairman on important matters
affecting the business of the company.
5. He acts as a liaison officer between the board of directors on the one side and the staff,
shareholders and the general public on the other side.
6. He acts as a confidential officer and ensures that the confidential matters of the company
are not leaked out.
7. He is also required to act as a public relations officer of the company and improve the
image of the company in the minds of the public.
REMOVAL OR DISMISSAL OF A COMPANY SECRETARY
The Secretary may be removed from office by the board of directors, under the power expressly
given in the articles or under their general powers which the articles generally give them. A
secretary being a servant of the company, his suspension and dismissal are governed by the
normal law applicable to employer and employee. The services of a secretary may be terminated
by giving him notice as per the terms of the service agreement. If an agreement does not mention
any specific period of notice, reasonable notice must be given.
The services of the secretary may be terminated without notice if he makes profits secretly. He
may be dismissed for willful disobedience, misconduct, negligence, fraud; dishonesty, and
permanent disability .The appointment of a receiver or manager in a debenture holder's action
(suit) against the company, or making of an order by the court for compulsory winding up of the
company will operate as a termination of the services of the secretary.

LEGISLATIVE BACKDROP OF COMPANIES ACT

Meaning of Company Law:
Company law is that branch of law which deals exclusively with all aspects relating to companies, such as
incorporations of companies allotment of shares and share capital membership in companies management
and administration of companies, winding up of companies. etc.
Company law in India is that branch of Indian law which regulates companies in India.

HISTORY OF INDIAN COMPANY LAW

Joint stock companies act of 1850: Companies legislation in India owes its origin to the English Company
law. The companies acts passed from time to time in India have been following the English companies acts
with certain modifications to suit Indian conditions. The first legislative enactment for "Registration of Joint
stock companies" was passed in the year 1850. This Act was based on the English companies Act, 1844
(known as the Joint stock companies Act 1844) which recognized company as a distinct legal entity, but did
not grant to it the privilege of limited liability.
Joint Stock Companies act of 1857: The Joint stock companies act of 1850 was replaced by the Joint
stock companies act of 1857. This act of 1857 conferred, for the first time in India the benefit of limited
liability on the members of companies. But this act did not extend the benefit of limited liability to the
members of banking companies and insurance companies.
Joint Stock Companies Act or 1860: The Joint stock companies act of 1857 was replaced by the Joint
stock companies act of 1866. The Joint stock companies Act of 1860 extended the benefit of limited
liability to the members of Banking companies and insurance companies.
The companies Act or 1866: The Joint stock companies Act of 1860 was replaced by the companies Act of
1866. The companies Act of 1866 was the first comprehensive companies Act passed in India. The
companies Act of 1866 was based on the English companies Act of 1862. The companies Act of 1866 was
intended to consolidate and amend the law relating to the incorporation, regulation and winding up of
trading companies and other associations.
Companies Act of 1913: The Indian Companies Act, 1913 did not take into account the peculiar features of
the Indian trade and commerce and some peculiar institution such as "managing agency. The Act was,
therefore, found to be highly unsatisfactory in the course of its operation. As such, this Act was subjected to
a large number of amendments from time to time.
Companies Act of 1956: After the end of World War II, the need for a further revision of the company law
was felt. Many changes had taken place in the organization and management of Joint stock companies. The
government of India, therefore, appointed on 25th October, 1950. A committee of 12 members representing
various fields under the chairmanship of Shri. H. C. Bhabha for a comprehensive review of the Indian
companies Act 1913. The committee submitted its report on all aspects of company law in April 1952.
Based on the recommendation of the Bhabha Committee companies Act of 1956 was passed. The
companies Act of 1956 was based on the English companies Act of 1948, with some modifications to suit
the Indian conditions. The companies Act of 1956 came into force from 1st April, 1956. This act contains
658 sections and 14 schedules.

OBJECTIVE OF THE COMPANIES ACT OF 1956:

The main objectives of the companies Act of I956 are:

I.
II.

To protect the interests of the investors by furnishing fair and accurate information in the prospectus.
To recognize the rights of the shareholders to receive reasonable information for making an intelligent
judgment with reference to the management.
III. To ensure full and fair disclosure of the affairs of the companies in their published annual accounts.
IV. To protect the interests of the Share holders by ensuring the holding of general body meeting and
ensuring effective participation and control by the share holders and providing for prevention of
oppression of minority and mismanagement.
V. To protect the interest of the creditors by preventing reduction of capital, by convening the meeting of
creditors and appointment of liquidators, and taking over the companies in case of mismanagement.
VI. To enforce proper performance of duties by persons responsible for the management of Companies.
VII. To prevent misconduct and malpractices on the part of company's management and abuse of power
vested in them.
VIII. To promote the healthy growth of companies by ensuring integrity in the conduct and management of
the company by the board of directors, placing restrictions on the borrowing powers of the board of
directors and preventing any act which is prejudicial to the interest of the shareholders, the public and
the companies.
IX. To ensure that the activities of the company are carried on nut only in the interests of those directly
concerned with them but also in furtherance of the economic and social policy (i.e., the socialistic
pattern of society) of the country.
X. To empower the government to interfere and investigate into the affairs of the Company and to take
over the Company when the business of the Company is carried on in a manner prejudicial to the
interests of the Shareholders, the Company or the general public.
XI. To provide for the establishment of an appropriate authority for the administration of the Companies
Act.

JOINT STOCK COMPANY

Definition:
A Joint stock company is an incorporated association formed for the purpose of carrying on some
business. It is an artificial person having a distinctive name and a Common seal. It may be defined as an
artificial person created by law with a distinctive name and a separate legal entity, a common seal, a
common capital contributed by the members and comprising transferable shares of a fixed denomination,
with limited liability and with a perpetual succession.
According to Lord Justice Lindley defined a company as, "an association of many persons who contribute
money or money's worth to a common stock and employ it is some trade or business and who share the
profit and loss arising there from."

Feature of a Joint stock company.

1.
2.
3.
4.
5.
6.
7.

Registration
Separate legal entity
Common seal
Perpetual succession
Limited liability
Separation of ownership from management
Transferability of share

8. Separate property
1) Registration or incorporated association: Joint stock company is an Incorporated association. The
company is created only when it is registered under the Companies Act of 1956. It comes into existence
from the date mentioned in the certificate of incorporation for the formation of a public company atleast
7 person - and for private Company atleast 2 persons are necessary.
2) Separate Legal entity: A Joint stock companies has entity quite distinct or different and independent of
the existence of the members who constitute it. (It can enter into contracts, acquire and dispose of
properties, sue and be sued in its own name like natural person.
The Company has no physical existence, it cannot act by itself. It has to act only through some human
agency, i.e., Board of directors.
3) Common Seal: The common seal of the Company is the seal on which the name of the company is
engraved. The common seal of the company is used as its official signature, i.e., the common seal of the
Company is affixed to all those important documents which requires the signature of the company. The
common seal of the Company is formally adopted at the first board meeting held immediately after the
incorporation of the company. The common seal cannot be affixed to any document unless authorized
by the board of directors by a resolution.
4) Perpetual succession: Joint stock companies has a perpetual succession or continuous existence. It is
created by law and an end to it be put by the process of law only. In other words, the life of the
company is not affected by the death, insanity or insolvency of its members. Even if all the members of
a company were to die, it would not end the life of the Company. This is because the Company has a
separate legal existence quite different from that of its members.
5) Limited liability: The liability of the members of a Joint stock companies is:
a. Limited by shares
b. Limited by guarantee.
a) Limited by Shares: The liability of the members is limited only to the amount unpaid on their
shares, whatever may be the liability of the company. For e.g., if a shareholder holds 100 shares of
Rs. 10 each, and has already paid Rs. 6 per share, he is liable to pay only the amount unpaid on
his shares, i.e., Rs. 4 per share on his 100 shares, and if he has already paid the fun value of Rs. 10
per share on his 100 shares, his liability will be nil.
b) Limited by Guarantee: The liability of the members is limited to the extend of the amount
guaranteed by them i.e., the amount which the members have agreed to contribute to the assets of
the company in the event of its winding up.
6) Separation of Ownership from Management: In a company, shareholders are the owners but the
management is entrusted to aboard of directors who are separate from the body of the shareholder. The
shareholders do not directly participate in the day-to-day management of their company. However the
ultimate control of the Company rests with the members for the members are empowered to remove any
director and replace him by a new director and to amend the memorandum and the articles of
association.
7) Transferability of Shares: The shares of a public limited Company are freely transferable i.e., the
members of a public limited company can dispose of and transfer their shares to any persons they like
without the consent of the company or the other members, as per conditions laid in the articles of the
Company. But there are certain restrictions on the transfer of shares in respect of private limited
companies as the very nature of the Company indicates, namely, private.
The free transferability of the share provides:

i.

Liquidity to the investors.

ii.

It helps the Shareholders to sell their share in the open market and satisfy their financial needs.

iii.

It provides financial stability to the Company

8) Separate Property: A Company has a right to own and transfer property since it is a legal entity. A
shareholder has no proprietary right in the property of the Company but merely to their shares"ln-other
words, the property of a Company belongs to the Company and not to the individual shareholders of the
Company.
Differences between Company and Patnership:
A Company is an artificial entity created by law with limited liability, perpetual succession, a common seal
and a capital divided into transferable shares.
A Partnership is the relation between persons who agree to share the profit of a business carried on by all
or any one of them acting for all. The individuals agreed to enter into partnership with one another and
called individually as 'partners' and collectively as a 'firm'

Company
1. A Company is formed when registered under the Indian Companies Act, 1956.
2. A Private Company is formed with a minimum of 2 persons and a public company with 7 persons at
least
3. A private Company is limited to 50 members excluding its present and past employees. There is no
limit to the maximum numbers of members in case of a public company.
4. A Company has a separate legal entity distinct from the members who constitute it.
5. Properly belongs to the Company and not to the individual members.
6. The liability of the shareholders is limited.
7. Shares are freely transferable. In a private company the articles restrict the right of members to transfer
their shares.
8. A Company has a perpetuaI succession. It comes to an end in the event of winding up.
9. But the capital of a Joint stock companies is very large, as it is contributed by a large number of
Shareholders.
10. Audit of account by qualified auditor is compulsory.

Partnership:
I.

Partnership is created when agreed between the individuals. Registration of partnership firm is
optional under the partnership Act.
II. A partnership can be created by two persons.
III. The maximum number of members in a partnership firm is limited to 10 in case of banking business
and 20 in case of any other business.
IV. A partnership firm has no legal exisience apart from its members i.e., the partners and the firms are
one and the same.
V. Property of the partnership firm belongs to individual partners comprising the firm.
VI. The liability of partnership is unlimited.
VII. The partner cannot transfer his share without the consent of his co-partners.
VIII. Partnership comes to an end when a partner dies or becomes insolvent, unless otherwise provided in
the partnership deed.
IX. The capital of a partnership firm is limited, as it is contributed only by a few persons
X. Audit of account is not compulsory.

KINDS OF COMPANIES
Companies may be classified into different kinds or types from different points of view:
1. Classification of companies from the point of view of incorporation or registration: From the point
of view of their incorporation, companies can be classified into three types. they are.
a) Chartered companies: If a Company is incorporated under a special charter granted by the
monarch it is called a chartered companies and is regulated by that charter. Chartered companies
were common in the 17th and 18th centuries. For eg. British East India companies, Bank of
England, Chartered Bank of Australia etc. are examples of chartered companies. This form of
organization does not exist in India, as there is no monarchy.
b) Statutory Companies: A statutory Company is a company which is incorporated under a special or
separate act of the legisiature (i.e.., parliament). A statutory company requires special powers and
privileges which it does not get under the companies Act. So, it is registered under a special act of
the legislature. The powers and activities of a statutory companies are regulated by the special act
under which it is established. This method of incorporation is adopted for companies of national
importance and public utility companies, such as railway companies, electricity supply companies,
etc. The RBI, SBI, LIC, UTI, etc are examples of statutory companies.
c) Registered Companies: A company is brought into existence by registration with the registrar of
companies under the companies Act of 1956, is called a registered company. The activities of these
companies are governed by the comapanies Act. These constitute the most important Joint stock
companies.
2. Classification of Registered Companies on the basis of the liability of members: From the point of
view of the liability of the members, registered companies may be classified into three categories. They
are:
a) Companies Limited by Shares: Companies limited by share are companies in which the liability
of a member is limited to the nominal or face value of the shares held by him. In short, these are the
companies in which the liability of a member is limited only to the amount unpaid on the shares
held by him. These companies are mostly trading companies. Most of the companies registered
under the companies Act are of this type.
b) Companies Limited by Guarantee: Companies limited by guarantee are companies in which the
liability of each member is limited to a fixed amount which he has guaranteed ie., agreed to
contribute to the assets of the company to meet the liabilities of the company in the event of its
winding up. The amount guaranteed by each member is mentioned in the Memorandum of
Association or Articles of Association of the Company. The members are required to pay the
amount guaranteed by them, not during the life of the company but only when the company is
wound up and the assets of the company are not sufficient to meet the liabilities of the company.
These are mostly non-trading companies formed for the purpose of promoting art, culture, charity ,
science and education, etc.
c) Unlimited Companies: Unlimited companies are companies in which the liability of members is
unlimited i.e., members are liable for the debts of the company to an unlimited extent in the event
of its winding up. Each member is liable to contribute from his private assets in proportion to his
capital, in the company towards the amount required for the payment of the entire or full liabilities
of the company. If any of the members is unable to contribute anything from his private assets,
then, that addltlonal deficiency is to be shared among the remaining members in proportion to their
respective capital in the company.
3. Classification of companies on the basis of ownership: On the basis of ownership, companies may be

classified into two kinds. They are:

a. Government companies
b. Non-gnvemment companies
a) Government contpanies: A Company in which not less than 51% of the share capital is held by the
central government and or by any state government or governments is called a goverment
companies. It may be a public company or a private company. Some of the prominent government
companies are: Hindustan Machine Tools, Bharat Electronic Limited, Indian Telephone Industries
and Hindustan Aeronautics limited.
A Government company may be permitted by the central government to drop the words " Private
Limited" or the word "Limited" from its name. The Central Government can by notification in the
official gazette, restrict or modify the application of certain provision of the companies Act in
regard to government conlpanies.
b) Non- Government companies: A non-government company is a company which is owned and
managed by private investors.
4. Classifications of companies on the basis of nationality: On the basis of nationality, companies may
be classified into two kinds, Theyare.
a) Domestic companies
b) Foreign companies
a) Domestic companies: A Domestic company is a company which is inccrporated in India .Today
most of the Joint stock companies in India are domestic companies.
b) Foreign Company: A foreign Company is a Company which is incorporated in a foreign country,
but which has established a place of business in India. Although; foreign Companies are not
registered or incorporated in India, some of the provisions of the companies Act, are applicable to
them. The companies (Amendment) Act, 1974, has made several sections of the Act applicable to
foreign companies in order to bring into the ambit of the provisions applicable to Indian companies.
1. Under section 592 of the companies Act, every foreign company must file with the registrar of
companies within 30days of the establishment of its business in India, the following documents.
a. A certified copy of its charter, statute; memorandum and articles or other documents
defining its constitution.
b. The full address of the registered or principal office of the company.
c. List of the directors and secretary of the company with the required particulars
d. The name and address of the person authorized to receive any notice or document etc.,
required to be served on the companies.
e. The full address of the office of the company which is to be deemed its principal office of
business in India.
2. Under section 593 of the companies Act, in case there is any alteration in any of the above
particulars, the company is required to file a return of such alteration with the registrar of
companies within the prescribed time.
5. Classification of companies on the basis of control: On the basis of control companies may be
classified into
i)

Holding companies

ii) Subsidiary companies.

i)

Holding Companies and Subsidiary Companies: As per section 4 of the companies Act of 1956," a
holding Company is a company which is controlling a subsidiary company". In other words, a
holding con-tpany is a company
a) Which holds more than 70% of the nominal value ofihe equity share capitai of another
company or
b) Which controls the composition of the board of directors of another Company
c) Which controls more than 50% of the total voting power of another Company
d) Where a Company is a subsidiary of another Company which is a subsidiary of a holding
Company, that is, Company C is a subsidiary of Company B , whereas Company B is a
subsidiary of holding Company A.

As per section 4 of the companies Act of 1956, " a subsidiary Company is a Company which is controlled
by a holding Company". In other words, a Company becomes the subsidiary of another Company if:
a)
b)
c)
d)

The other Company holds more than 50% of the nominal value of its equity share capital or
The other Company controls the composition of its board of directors or
The other Company controls more than 50% of its total voting powers
It is a subsidiary of another Company which is subsidiary of the controlling company

Eg. When Company A has a control over company B, company A is known as a holding company and
company B which is so controlled is known as a subsidiary company.
6. Classification of companies on the basis of number of members: Registered companies with share
capital may be divided into two classes from the point of view of the the number of members
i) Private Companies
ii) Public Companies
i)

Private Companies: Section 3(1) (iii) of the companies Act of 1956 defines a private company as a
company which by its articles of association,
a) Restricts the right of its members to transfer shares, if any,
b) Limits the number of its member to fifty, excluding those members who are its present or past
employees
c) Prohibits any invitation to the public to subscribe to its shares or debentures

ii) Public Companies: Section 3 (I) (iv) of the companies Act of 1956 states that a "Public company is
a company which is not a private company". In other words, a public company is a company
a) Which has at least 7 members
b) Which has no maximum limit to the number of members,
c) Which can invite the public to subscribe to its shares or debenture, and which generally does
not restrict the right of its members to transfer shares.
7. Other Kinds of Companies:
a) One Man Companies / Family Companies: One man company refers to a company in which
one man holds practically the hole of or the substancial no. of shares of the companies, and has
controlling powers over the company and some dummy members who are mostly his relations
or friends, hold one or two shares each. The dummy members are included only to comply with
the statutory requirements of the minimum no. of members.
b) Licenced Companies: Association formed not for profit, but for promoting non trading

purposes, such as art, science, education, sports, regligion, charity, etc., can obtain a licence
from the central layout and get themselves registered as compaines with limited liability under
Sec. 25 (U/S 25) of the companies act. They are called companies not for profit or licenced
companies.
Eg. Education institutions, cultural association, sports, clubs, charitable association, etc.
COMPANY FORMATION
In the formation of a public limited company having share capital, mainly four stages are involved namely:
1. Promotion
2. Incorporation
3. Capital Subscriptions, and
4. Commencement of business or trading certificate.
In the case of the formation of a private company, only the first two stages are involved, because, a private
company can commence its business immediately after securing the certificate of incorporation from the
Registrar of companies. But in the case of formation of a public company, having share capital, there is
need for the promoters to secure from the Registrar, the certificate to commence business in addition to the
certificate o~ incorporation.
1. Promotion of Company
The person or persons who undertake responsibility of bring the company into existence are called'
Promoters. In other words, the work of promotion is done by a person called "Promoter" or group
of persons called "Promoters". Promotion involves discovery of specific business opportunity and
subsequent organisation of the factors of production. According to Haney, promotion may be
defined as the process of organizing and planning the finances of a business enterprise under the
corporate form in other words, the steps which are taken to persuade a number of persons to come
together for the achievement of a common objective through the company form of organisation is
called promotion. Promotion may be undertaken either for starting a new business or for expanding
the existing concern or for forming a holding company for a merger.
Steps in Company Promotion:
The work of promotion of a company involves four stages namely;
a) Discovery of an idea and Preliminary investigation
b) Detailed investigation
c) Assembling and
d) Financing the promotion
a) Discovery of an Idea: The promoter starts out with an idea to start some business either in a new
field which has not been commercially exploited or in some existing lines of manufacture or
business. He makes a preliminary investigation to find out whether it is worthwhile to make a
detailed investigation. He makes a rough estimate of probable revenues and expenditure.
b) Detailed Investigation: The promoter need to make a detailed investigation of his idea with the
assistance of many experts like engineer, chemist, market analyst, financial expert, management
consultant, etc,. On the basis of the reports of these experts, the promoters would be in a position to
know the capital requirements, place of location, size of the unit, demand condition in the market,
price of product, cost of production, probable return on capital, etc,. A detailed investigation will
help the promoter to decide...whether the estimated income will be adequate to take care of the
estimated cost of production and compension to the owner for risks and services.
c) Assembling: After a detailed investigation, if the promoter is satisfied with the practicability and
profitability of the proposed concern, he starts assembling the proposition. Assembling means
getting the support and consent of some other persons to act as directors or founders, arranging for
patents, a suitable site for the company! .machinery and equipment and making contracts for filling
the positions.

d) Financing the Proposition: After assembling, the proposition, the promoter prepares a 'prospectus'
to present to the public and to under writers to persuade them to, finance the 'proposition'. A
prospectus contains complete details of the proposition and also the reports of various experts who
have investigated the proposition. The promoter also takes steps to incorporate the company, and to
secure the certificate to commence the business. For incorporating the company and also for
obtaining the certificate to commence business, -the promoter has to full fill many legal formalities.
2. Incorporation
After taking all the preliminary steps for registration, an application along with the necessary
documents, stamp duty, registration and filing fees, has to be made to Registrar for the issue of the
'certificate of incorporation. The Registrar will scrutinize the documents and if satisfied will enter the
name of the company in the register .and will issue the company its birth certificate called the
Certificate of Incorporation.
Steps and Formalities for Incorporation of a Company
Promoters have to take certain steps for getting the certificate of incorporation from the Registrar of
Companies, on hearing from the Registrar about the availability of names for the proposed company;
they have to prepare the following documents and file them with Registrar of Companies' of the state in
which the registered office of company is to be situated.
A. The Memorandum of Association to which at least seven persons have subscribed, their names
and each one of them has taken at least one share. In the case of a private company, then
number of persons required to subscribe their names is only two.
B. The Articles of Association similarly signed except where Table' A' attached to the Companies
Act 1956, has been adopted as the Company's Articles.
C. The Address of the registered office of the company.
This is to be delivered in any case within 30 days of incorporation.
D. A, list of directors with their names, addresses and occupations. The return containing the
particulars of the directors should be filed within 30 days of their appointment.
E. Consent in writing of the directors to act as directors.
F. An Undertaking by the directors to take and pay for qualification shares, if any,
G. The statutory declaration by an advocate or an attorney or a chartered accountant practicing of
India, who is engaged in the formation of an company or by a person named in the articles as a
director manager, or secretary of the company.
At the time of filing these documents with the Registrar of Companies, necessary stamp duty,
registration fees and filing fees 'are to be paid. The Registrar will examine these documents and if he is
satisfied with the documents, he will enter the name of the company in the Registrar and will issue to
the company its birth certificate called the "Certificate of Incorporation".
3. Capital Subscription
A private company and a public company not having any share capital can commence business
immediately after obtaining the Certificate of Incorporation, but a public company having a share
capital can commence business only after obtaining another certificate called the 'Certificate of
Commence Business' from the Registrar of companies. Hence, a public company having a share capital
has to undergo two additional stages, namely
1. The subscription stage and
2. Commencement of business stage.
In the capital subscription stage, the company has to make arrangements for obtaining the necessary
capital of the company. For this purpose, immediately after getting the certificate of incorporation, the
company convenes a board meeting to deal with the following business:

1. Appointment or confirmation of the appointment of the secretary if one has already been
appointed by the promoters at the promotion stage.
2. Adoption of preliminary contracts.
3. Appointment of bankers, solicitors, legal advisors, brokers, auditors, etc.,
4. Adoption of draft prospectus or statement in lieu of prospectus.
5. Listing shares on the stock exchange.
6. Adoption of underwriting contracts.
Adoption of Preliminary Contracts
Before registering the company, the promoters enter into several contracts on behalf of the proposed
company such as contract for the purchasing of properties and assets, or contract for purchasing existing
business, if any. As these contracts were entered into by the promoters, when the company was not in
existence, they become valid only when they are ratified by the company. Hence, these contracts are ratified
in the first board meeting of the company.
Appointment of Bankers
According to the Companies Act, all money received by the company with the application for shares must
be deposited in a scheduled bank. Hence, before issuing prospectus, the Board of Directors appoint bankers
by passing a resolution to that effect. For opening an account with the bank, the secretary has to make an
application to the bank along with a copy of the memorandum of association, certificate of incorporation, a
certified copy of the board resolution authorizing the opening of a bank account and specimen signatures of
the persons who operate the account.
4. Commencement of Business
A public company cannot commence business without obtaining from the Registrar a certificate called
'certificate to commence business'. To obtain this certificate the following conditions must be fulfilled:
1. .A prospectus or a 'statement ill lieu of prospectus' has to be filed with the Registrar of companies.
A statement in lieu of prospectus has to be prepared by those companies, which do not find it
necessary to issue a prospectus for the issue of their shares. The statement must include all the
information which a prospectus must contain under the law; that is:
2. The number of shares allotted is not less than the minimum subscription mentioned in the
prospectus (or a statement in lieu of prospectus).
3. The directors have taken up and paid for their qualification shares. The amount paid on a share by
them is not less than the amount paid by other members.
4. The declaration that no money is liable to become refundable to applicants for shares for reason .of
failure on the part of the company to apply for, or to obtain permission for, the shares or debentures
dealt !n any recognized stock exchange.
5. A declaration by one of the directors or the secretary, or secretary in whole time to the effect that all
the conditions regarding the commencement of business have been complied with.
6. An application must be made by the company to the register of companies requesting him to agent
the Business Commencement Certificate
Minimum Subscription
The minimum subscription is the minimum amount, which in the opinion of the directors or signatories to
the memorandum, is required to commence business. In the case of a public company the registrar will issue
the certificate to commence business only when the amount raised by allotting shares, is not less than the
amount equivalent to the minimum subscription mentioned in the prospectus.
The amount fixed, as 'minimum subscription' must be sufficient to provide for:
(a) Purchase price of any property bought or to be bought;

(b)
(c)
(d)
(e)

Preliminary expenses and commission payable by the company;

The repayment of sums borrowed to provide for the foregoing;
Working capital; and
Any other expenditure.

Certificate of Commence of the Business

The Registrar after receiving the declaration of compliance with the provisions of Section 149 from the
secretary or one of the directors along with the required filing fees, will scrutinize the declaration and, if
satisfied, will issue a certificate to commence business. From the date of the issue of this certificate, the
company is entitled to commence business and also empowered 'to exercise its borrowing powers.
Further the company should get this certificate within one year of its incorporation. All ccntracts entered
into between the date of incorporation and the date of commencement of business are provisional and
would become binding on the company automatically only after it is entitled to commence business.
Duties of the Secretary before and after incorporation
Duties before incorporation
Before incorporation, the secretary has to assist the promoters in performing preparatory work and in
fulfilling many legal formalities. He has to assist the promoters in convening and conducting meetings,
.drawing up preliminary contracts and documents required for registration. At this stage, he may also take
the help of specialists such as a solicitor and a chartered accountant. The duties to be performed by the
secretary before incorporation are as follows:
1. To help the promoter in making a detailed, investigation of the proposed venture.
2. If necessary, on the advice of the promoters to secure the opinion of the experts in different fields
on the proposed venture.
3. To help the promoters in drawing up the financial plan for the proposed venture.
4. To attend to all preliminary meetings of the promoters, keep a record of proceeding of their
meetings and to help in the discussion
5. To secure the approval of the Registrar for the proposed name of the venture.
6. To help the promoters in the preparation of preliminary contracts
7. To help the promoters in the drafting and finalizing of documents such as memorandum, articles of
association etc,.
8. To follow the guidelines issued by SEBI
9. To see that all requirements of the Acts as to incorporation and registration are complied with and
that documents such as memorandum, articles, etc., with the required stamp duty, filing fees and
registration charges are duly filed with the Registrar.
10. To collect the certificate of incorporation from the Registrar.
11. To send a notice of the registered address of the company to the Registrar within 30 days of the date
of registration.
Duties of the Secretary after Incorporation:
1. To make himself thoroughly conversant with the contents of the memorandum and articles of
association.
2. To prepare the draft of prospectus or statement in lieu of prospectus.
3. To call the first board meeting and get the draft prospectus, preliminary contract etc,. approved by
the board.
4. To see that his own appointment is made and confirmed at the first board meeting
5. To get the necessary resolution passed for the appointment of bankers, legal advisers and other
responsible officers of the company.
6. To arrange for the listing of securities of the company
7. To arrange for the opening of a bank account as per the directors of the board.

8. To secure the necessary forms and stationery and to arrange for the preparation of the common seal
of the company.
9. To see that the prospectus or statement in lieu of prospectus is filed with the Registrar and to
arrange for the issue of the prospectus to the public.
10. To arrange with the bankers to receive the application money from the intending investors
11. To arrange a board meeting as soon as the minimum subscription is reached and to get the
necessary resolution passed for allotment of shares.
12. To arrange for the refund of application money to those who have not been allotted shares.
13. To issue letters of allotment/regret to applicants as per the decision of the board.
14. To see that all the legal requirements for commencement of business are complied with.
15. To see that a declaration is filed with the Registrar by one of the directors or the secretary himself,
stating that the conditions required to be fulfilled for getting the certificate of commencement of
business have been complied with
16. To collect the certificate of commencement from Registrar.
Difference between Public Company and a Private Company:
There are many differences between a public company and a private company. They are:
Sl.
No.

Objective

Public Companies

Private Companies

Formation

The formation of a public Whereas the formation of a

company is difficult
private company is easy

Certificates Required

The formation of a public

company
requires
two
certificates, i.e., certificate of
incorporation and certificate to
commence
business,
are
required to be obtained from the
registrar of companies

Commencement of Business

A public company cannot A

private
company
can
commence
business commence
business
immediately after incorporation. immediately after incorporation.
It can commence business only
after obtaining the business
commencement certificate

Filing
of
prospectus
or A public companies must file a
statement in lieu of prospectus
prospectus or statement in lieu
of prospectus with the registrar
of companies before alloting
shares.

Name of the Companies

The name of the public But the name of the private

company must end with the company must end with the
word Limited.
words Private Limited

Number of Members

In a public comapny the

minimum number of member is
seven and the maximum is
unlimited

In a private company the

minimum number of member is
two and the maximum is fifty
exclusive of members who are
its present or past employees.

Raising of Capital

A public companies can raise

huge capital therefore of
unlimited membership

A private company cannot raise

huge capital therefore of the
limitation on membership

For the formation of a private

company requires just one
certificate, i.e., certificate of
incorporation to be obtained
from the registrar of companies

But private companies need not

file a prospectus or a statement
in lieu of prospectus with the
registrar of companies

Invitation to the
subscribe

public

to Public companies can invite the

public to subscribe to its shares
or debentures

Transfer of Share

The shares of a public company The share of a private co., are

are,
generally,
freely not freely transferable
transferable

10

Signing of MOA and AOA

The memorandum and articles

of association of a public co.
have to be signed by seven
subscribers

The MOA and AOA of a private

co. have to be signed by two
subscribers.

11

Quotation in stock exchanges

The shares of a public co. are

dealt in the stock exchange.

The shares of a private co. are

not quoted in the stock
exchanges.

12

Issue of share warrants

A. public co. is allowed to issue

share warrants.

A private company is prohibited

from issuing share warrants.

13

Offer of further issue of shares.

While making any further issue

of shares, a public co. is
required to offer such shares
first to the existing shareholders.

A private co. is not required to

offer such share first to the
existing shareholders.

14

Minimum number of directors.

The minimum
directors is three.

15

Appointment of directors.

Each director
appointed by
resolution.

number

A private company cannot invite

the public to subscribe to its
shares or debentures.

of The minimum
directors is two.

has to be
a
separate

number

of

All the directors may be

appointed by a single resolution

PRIVILEGES OF PRIVATE COMPANIES

A. Privileges enjoyed by all private company's ( ie., both independent private' company's and
subsidiary private companies).
1. Only two members are sufficient for a private Company at the time of registration.
2. The company can immediately Commence business on obtaining certificate of incorporation. It need
not wait for certificate of commencement of business
3. A private Company need not file a prospectus or a statement in lieu of prospectus with the registrar of
companies.
4. A private company is not required to hold the statutory meeting or to file statutory report with the
registrar
5. A private company can proceed to allot the shares without observing the usual restriction applicable to
allotment of shares.
6. The minimum number of directors is two only.
7. Restriction imposed on public companies regarding further issue of share do not apply to a private
company.

Privileges Enjoyed by Independent private companies:

A private company which is not subsidiary of a public company enjoy certain privileges. The following can
be enumerated the privileges enjoyed by such a company.
1. I. It can issue any class of share equity shares, preference share, etc.
2. The directors of an independent private company are not liable to retire by rotation.

3.
4.
5.
6.
7.
8.
9.

Approval of central government is not necessary to increase the number of directors.

Requirement of qualification shares are not applicable to an independent private company.
Only one common resolution is sufficient to elect the directors.
Restrictions regarding appointment of managing director or manager are not applicable.
The constitution of the Board of Directors is free from the intervention of the central Government.
Restrictions regarding remuneration of directors are not applicable to an independent private company.
Approval of the central Government is not required in the matter of appointment, re- appointment,
remuneration of arranaging director, whole time director or manager of an independent private
company.

DOCUMENTS OF COMPANIES
For the incorporation or registration of a company two important documents are required to be
prepared and filed with the Registrar of Companies. They are:
1. Memorandum of Association
2. Article of Association
The Memorandum of Association is compulsory for every company. But the Articles of Association
are not compulsory for a Public Limited Company. Having share capital. A public limited company
having share capital can have its own Article of Association or can adopt Table 'A' (i.e. model
articles given in the companies Act) as its Articles of Association by ,merely making an
endorsement on Memorandum of Association to that effect. If a public limited company wishes to
raise capital or subscribe shares/debentures public, in such cases, the public limited company
must issue a prospectus. Therefore, Memorandum of Association, Article of Association &
prospectus are important documents of companies.
MEMORANDUM OF ASSOCIATION
The Memorandum of Association is the basic or most important document for the incorporation or
registration of every Joint Stock company. The Memorandum of Association is the life-giving
document of the company. In other words, it is the document which brings the company into
existence. It is the charter or constitution of the company containing the fundamental conditions
upon which the company is incorporated. It is the foundation on which the structure of the
company is built. It contains the objects or purposes of the incorporation of the company and
defines or determines the external operations of the company (i.e. company's relationship or
dealing with the creditors & other outsides).
Memorandum of association can be defined as,'' The purpose of the memorandum is to enable
the shareholders, creditors and those who deal with the company to know what is its permitted
range of enterprise"
The Memorandum has to be divided into-suitable paragraphs, constructively numbered and
printed. It must be signed by every one of the subscribers in the presence of a witness who shall
attest the signature. Every subscriber must give his address and descriptions and must take at
least one share. The Memorandum of a company limited by shares must contain the following
clauses:

Name clause
Situation clause
Object clause
Liability clause
Capital clause
Association clause

Importance:
The Memorandum of Association is important for a joint stock company for the following reasons:
1. It is necessary for the incorporation of the company.
2. It determines the jurisdiction of the Registrar and the court by stating the registered office
of the company.
3. It states the objectives and powers of the company for the information of the public.
4. It binds the company to carry out only those acts included in the object clause.
5. It states the authorized capital of the company and its division into shares of fixed amount.
6. It throws light on the liability of the members of the company.
7. It governs the articles of association.

CONTENTS:
The Memorandum of association of every company must contain the following clauses:
1. Name Clause:
This clause states the name of the company.
In the context of the name clause, the following points may be borne in mind:
1) A name is considered undesirable, when it includes words like 'Government', 'State',
'Municipality', etc., implying patronage or support of the Government, State or
Municipality, without the express permission of such authority.
2) A name is considered undesirable when it is identical with or too closely resembles the
name of an existing company.
3) The name of the company must end with the word "Limited" in the case of a public
company or the words "Private Limited" in the case of a private limited company.
4) The purpose of adding the word "Limited" or the words "Private limited" is to enable all
those dealing with the company to know that the liability of the members of the
company is limited.
5) Once a company is registered with a name, the name of the company must be painted
on signboards and displayed outside every office or place of business of the company.
The name must also be engraved in legible characters on the seal-of the company, on
its letter heads, notices, invoices, receipts, bills of exchange, advertisements, etc, .
However, if a company is 'formed not with the object of declaring dividends, but to promote
science, culture, etc, .The Central Government may permit the company to drop the word 'limited'.
2. Situation Clause or Domicile Clause:
1) This clause states the state in which the registered office of the company is to be
situated.
2) The name of the State, in which the registered office of the company is to be
situated, is stated in the Memorandum.
3) The provision insisting on the mere 'State has been made to avoid any
unnecessary legal formalities and expenses, if there is a subsequent change in the
address of the company.
4) It determines even the nationality of the company, i.e., whether the company is an
Indian company or a foreign company.
3. Object clause:
1) Of all the clauses in the memorandum, the object clause is the most important.
This clause states the objects or purposes and powers of the company. It should
specify in unambiguous languages the objects for which the company is formed.
Great care should be taken in drawing up this clause, as the company will not be
allowed to do any business, which is not specifically mentioned here.
2) The objects stated in this clause must not be contrary to the provisions of the
Companies Act and the general law of the country. The objects stated should be as
wide as possible because a company cannot carry out objects which are not
included in this clause. Acts done by 'the company which are not included in this
clause are 'Ultra Vires' and void [i.e., invalid}. "Ultra" mean "beyond" and "Vires"
means "authority or right". Therefore "Ultra Vires" means acting beyond
authority

3)

As it is difficult to alter the object clause later, it is necessary that promoters should
include in this clause all possible types of business (activities) in which a company
may engage in the future.
4) According to the amendment to the Companies Act made in 1965, the object
clause of a company formed after the commencement of the Amendment Act, must
contain
i. (a) Main objects of the company and objects incidental or ancillary, to the
attainment of these main objects.
(b) Other objects of the company not included above
ii. In case the objects are not to remain confined to one state, states whose
territories the objects extend.
4. Liability Clause
This clause states that the liability of members is limited to the face value of the shares
held by them. If a member has already paid some amount on the shares, he can be called
upon to pay only the unpaid amount on the shares.
5. Capital Clause
1) The capital clause states the registered, authorized or nominal capital of the
company (i.e. the minimum capital with which the company is proposed to be
registered) and the division of the authorized share capital into shares of fixed
amount.
2) In case the capital of the company consists of different classes of shares, then, the
division of the total authorized capital into different classes of shares and the face
value of shares of each class are also stated in this clause.
3) The rights and privileges attached to the different classes of shares are specified in
the Articles of Association.
4) It is better to fix the authorized capital at a sufficiently higher figure so that there
would be adequate provision for further issue of shares later on to finance the
extension or expansion of the company's business.
6. Association Clause, Subscription Clause or Declaration Clause:
1) This clause contains a declaration by the subscribers to the memorandum that they
are desirous of forming themselves into a company in pursuance of the
memorandum and agreed to take up and pay for the number of shares in the
capital of the company noted against their names. The subscribers should sign
their names and state their full addresses and the number of shares taken up by
them.
2) The declaration clause should be signed by at least seven persons in the case
of a public company, and by two persons in the case of private company.
3) Further, the signatures of the subscribes must be witnessed by at least one who
should give his signature, name, full address, description and occupation.
ALTERATION OF MEMORANDUM OF ASSOCIATION
The fundamental conditions or compulsory clauses found in the memorandum of association
cannot be altered ordinarily as a routine thing. Such a provision is made in order to protect the
interests of the creditors and other members of the public who deal with the company as well as
the interests of the shareholders of the company. It is because of this provision that the
memorandum of association is considered as an unalterable charter of a company.
However, the Companies Act has made provision for the alteration of the memorandum of
association in certain cases and to certain extent.

1. Alteration of the Name clause:

The alteration of the name clause can be considered under three heads. They are
a) When a company is registered with a name which is identical with or similar to the
name of an existing company by inadvertence (i.e. by mistake) ---ordinary
resolution should be passed at Extraordinary General Meeting.
b) When the Central Government directs a company to change its name--- ordinary
resolution should be passed at Extraordinary General Meeting.
c) When a company wants to change its name on its own accord --special resolution
should be passed at Extraordinary General Meeting.
Procedure to be followed to change the Name clause:
1. The name of a company can be altered by passing a specie' resolution at the
Extraordinary General Meeting.
2. Obtaining the approval of the Central Government for the change of name
3. Filing of a copy of the special resolution with the Registrar.
4. Filing of the Central Government's approval for the change with the Registrar.
5. Obtaining the fresh or new certificate of incorporation with the changed name.
6. Filing of the altered copies of Memorandum of Association and Article of Association
with the Registrar.
7. Incorporating the change of name in various documents.
Duties of the Secretary:
The procedure to be followed by the secretary to change th~ name clause can be summed up
as follows:
a) The secretary has to ascertain from the Registrar of Companies whether the
proposed name is undesirable.
b) If the Registrar informs him that the proposed name is undesirable, the secretary
has to obtain a written consent from the Central Government for the change of
name.
c) The secretary has to arrange a board meeting for the purpose of recommending
the changed name to be members and to convene an Extraordinary General
Meeting.
d) The Secretary has to get a special resolution passed at the extraordinary general
meeting and get copies of the special resolution signed by the chairman of the
meeting.
e) The secretary has to file a copy of the special resolution with the Registrar within
30 days of passing of the resolution.
f) On filing of the resolution, the registrar makes the necessary change in the register
and issues a fresh certificate of incorporation with the changed name.
g) The secretary has to arrange for the changing at name on all the documents of the
company, and for getting the new seal approved by the board, he should also notify
all parties dealing with the company, of the change of name.
h) Finally, the secretary has to arrange for the changing of name on all the documents
of the Company, and for getting the new seal approved by the board. He should
also notify all parties dealing with the Company, of the change of name.
2. Alteration of Domicile clause situation clause or registered office clause.
The alteration or change of the domicile clause is possible only when such a change enable s
the company to meet any of the purposes. Such as:

a)
b)
c)
d)

To carryon its business more economically or efficiently.

To attain its main purpose by new or improved means.
To enlarge or change its local area of operations.
To carry on some business which under existing circumstances can be conveniently or
advantageously combined with present business of the company.
e) To restrict or abandon any of the objects specified under the objects clause of the
memorandum of association.
f) To sell or dispose of the whole or any part of undertaking of the company.
g) To amalgamate the company with any other company or body of persons.
To change of the registered office of a company can be considered under three
heads:
a) Change of the registered office of a company from one locality to another locality in the
same city, town or village.
b) Change of the registered office of a company from one city, town or village to another
city, town or village in the same state.
c) Change of the registered office of a company from one state to another state.
a) Change of the registered office of a company from one locality to another
locality in the same city, town or village.
Change of the registered office from one locality to another locality in the same city,
town or village can be easily effected by a company. For this purpose, the following
procedure or steps should be taken: Passing of a resolution at the board meeting.
Giving of a notice of change of location to the Registrar.
Giving a public notice.
b) Change of the Registered Office of a company from one city, town or village to
another city, town or village in the same state.
A company can change its registered office from one city, town or village to another city,
town or village in the same state. For this purpose, the following procedure should be
followed:
Passing of a special resolution at the extraordinary meeting of the shareholders.
Filing of a copy of the special resolution with the Registrar.
Giving a notice of change of location to the Registrar.
c) Change of Registered office of a company from one state to another state. A company
can also change its registered office from one state to another state. But, for such a
change of location, a lengthy procedure has been prescribed by the Companies Act. The
procedure to be followed for such a change is as follows:
Passing a special resolution at the extraordinary general meeting.
Obtaining the sanction of the Company Law Board for the change.
Filing of a copy of the special resolution with the Registrar.
Filing of the copies, of the confirmation order of the Company Law Board with the
Registrar of the both the states.
Filing of the altered copies of memorandum of association and article of
association with the Registrars of both the states.
Obtaining certificates of registration of the transfer (i.e., shifting) from the
Registrars of both the States.

 Giving of a notice of the location of the new office to the registrar of the State to
which the registered of office is shifted.
Sending of all the documents of the company by the Registrar of the State from
which the registered office is shifted to the Registrar of the other State.
DUTIES OF SECRETARY
a) He must convene a board meeting to decide about the change of location and to fix
the date, time, place and agenda of the extraordinary general meeting of the
shareholders required to be held for approving the change of location.
b) He must give notice of the extraordinary general meeting to all the members along with
the draft special resolution and the explanatory statement giving the reasons for the
change.
c) He should make the necessary arrangements for the extraordinary general meeting.
d) At the extraordinary general meeting of the members, he should see that the special
resolution is passed, approving the change of location.
e) He should give a copy of the special resolution passed at the extraordinary general
meeting along with the explanatory statement to the Registrar of Companies within 30
days of passing the resolution.
f) He should obtain the confirmation or sanction of the Company Law Board for the
change of location,
g) He should file copies of the Company Law Board's sanction for the change of location
with the Registrars of both the states within 3 months of the receipt of the sanction.
h) He should file the altered copies of the memorandum of association and article of
association with the Registrars of both the states within 3 months of the receipt of the
company Law Board's sanction.
i) He should obtain the certificates of registration of the transfer (i.e. shifting) from the
Registrars of both the states.
j) He should file a notice of the change of location of the new office with the registrar of
companies of the state to which the registered office of the company is shifted within
30 days of the shifting.
3. Alteration of the Objects Clause.
A change in the objects clause can be effected by passing a special resolution and with the
sanction of the -Central Government. The Central Government has to be satisfied that the
alteration is necessary in order:
a)
b)
c)
d)

To carry on it s business more economically and more efficiently.

To attain its main purpose by new or improved means.
To enlarge or change the local area to its operation.
To carry on some business which under existing circumstances may conveniently or
advantageously be combine with the business of the company,
e) To restrict or abandon any of the objects specified in the memorandum.
f) To sell or dispose of the whole or any part of the undertaking of the company or any of
the undertakings of the company; or
g) To amalgamate with any other company or body of persons.
Further, before confirming the alteration, the Central Government must be satisfied with
the following requirements:
a) That sufficient notice has been given to carry creditor and every other person whose
interest will be affected by the alteration.
b) That with respect to every creditor, who in the opinion of the company law board is
entitled to object to the alteration, either his consent to the alteration has been

obtained or his debt has been discharge9 or has been determined or has been
secured to the satisfaction of the Central Government.
Procedure to be followed to change the objects clause:
The objects clause can be altered by adopting the following procedure
1. Passing of a special resolution at the extraordinary general meeting.
2. Filing of a copy of the special resolution with the registrar.
3. Obtaining the confirmation or sanction of the company law board.
4. Filing of a certified copy of confirmation order of the company law board with the
registrar.
5. Filing of the altered copy of the memorandum of the association with the registrar.
6. Obtaining the certificate of registration of the change.
Steps (Secretarial Procedure) to change the objects clause:
The Secretary has to take the following steps to change the objects clause:
1. To arrange a board meeting at which the directors discuss the proposed change and
also approve the explanatory statement which will be sent to the members along with
the notice. The board also resolves to call an extraordinary meeting to pass a special
resolution.
2. To send notice of the extraordinary general meeting with an explanatory statement to
all members and also to debenture holders and creditors whose interest may be
affected by the proposed change.
3. T o get the special resolution passed and to make a petition to the Central Government
for its sanction for the change. At the same time notice of the company's petition
should be sent to the Registrar.
4. If any person objects to the alteration, either his consent to the alteration has to be
obtained or his debt or claim has to be discharged or secured by adequate provision of
security. This arrangement should also be brought to he notice of the Central
Government.
5. On receipt of the confirmation order from the Central Government, a copy of the order
and a copy of the altered memorandum should be filed with Registrar within three
months from the date of the board's order.
The Registrar will register the change and will issue a certificate of registration within a
month. The alteration will be effective only on getting a certificate of registration from the
Registrar.
4. Alteration of Liability clause:
The liability clause can be altered so as to make the liability of the directors unlimited.
However, the liability of the shareholder cannot be made unlimited. The liability clause can be
altered by passing a special resolution. A copy of the resolution must be filed with the
Registrar within 30 days.
5. Alteration of Subscription Clause
The subscription clause of the memorandum of association cannot be altered.
6. Alteration of Capital
The procedure for alteration of capital and power to make such an alteration is generally provided
in the articles of a company. If the power and procedure are not laid down in the articles, the

company must first alter the articles suitably by passing a special resolution. If so authorized by
the articles, a company may in a general meeting alter its capital for the following purposes:
(a) For increasing the capital.
(b) For the reduction of capital.
In order to increase its share capital, the company has to pass only an ordinary resolution. But to
reduce the share capital, there is a need for the company to pass a special resolution and also to
obtain the sanction of the court.
1. Increase of Share Capital
A company may increase its share capital in two way, viz.
(a) by the issue of un issued shares, and
(b) by increasing its authorized capital.
Increase of Share Capital by the Issue of Unissued shares (sec.81 )
When the issued capital is less than the authorized capital, a company after the expiry of two
years from the date of its formation or one year from the first allotment of shares, whichever is
earlier, may increase its shares capital by a further issue of unissued shares and make it nearer or
equal to the authorized capital. For instance, if the authorized capital of the company is Rs.25
Lakhs and the issued and subscribed capital is Rs.15 lakhs, the company may increase its capital
by a further issue of shares to the maxtmum extent of Rs.10 Lakhs, i.e. the amount of the
unissued capital.
The provisions with regard to increase of subscribed capital by the issue of unissued shares are
as follows:
a. The offer of shares shall be made to the present equity shareholders on a pro-rata basis.
b. The offer for such shares must be made by a notice specifying the number of shares
offered and the offer should be open to members for at least 15 days.
c. The members shall also be given the right of renunciation of the offer in favour of any
other person.
d. After the expiry of the time limit of 15 days, the board can dispose of the balance of the
shares not taken up by the members in the manner most beneficial to the company.
e. Shares may be offered to any member of the public in the open market. However I they
have to pass a special resolution or pass an ordinary resolution in the general meeting and
also obtain the permission of the Central govt.
2. Increase in the authorized capital:
If the company has already issued the shares for the entire amount of its authorized capital, and if
it wants to increase its authorized capital by further issue of shares, it can do so by passing a
resolution in the general meeting. First of all a company has to alter the capital clause of the
memorandum of association of the company. Usually the articles empower the company to alter
its share capital by passing an ordinary resolution. The steps involved for increasing the
authorized capital of the company are as follows:a) If the articles do not empower the company to increase its authorized capital it must first
alter the articles suitably by passing a special resolution in the general meeting.
b) A meeting of the board will be held to consider the plan of the issue, the terms of issue and
to fix the date of the extra ordinary general meeting.
c) The register of transfer will be closed for the purpose of preparing the list of members.
d) The secretary will issue notices to the members relating to the general meeting.

e) The company will pass a resolution at the general meeting for increasing the authorized
capital.
f) The secretary files with the registrar a notice of increase of capital specifying the amount
within 30 days of passing the resolution and pays the necessary fees and capital duties.
g) Necessary changes in the memorandum and articles of association will be effected, and
altered copies of these documents will be filed with the Registrar within three months of
alteration.
h) To arrange with the company's bankers to receive the letter of acceptance, along with the
application money.
i) After the expiry of the time limit for receiving letters of acceptance, and checking the
entries and particulars in the provisional allotment sheet.
j) To file a copy of letter of rights with the registrar.
k) To arrange another board meeting to finalize the allotment and to, approve the issue of
final allotment.
l) Disposal of the balance of shares not taken up by the existing members by the, directors
in the manner, which is beneficial to the company.
m) To issue allotment letters to all the allotees and file a return of allotment with the registrar
within 30 days of the final allotment.
n) Finally the secretary will have to make the final entries in the registrar of members and
issue the shares certificate to all the allotees.
REDUCTION OF SHARE CAPITAL
It means reduction of issued, subscribed and paid-up capital of company by a special resolution
under section 100 of the act. The act provides that the company can reduce its share capital only
if:
a) When it is authorized by its articles to do so.
b) By a special resolution passed at the general meeting.
c) By obtaining the permission of creditors.
d) By obtaining the sanction of the court. However a company may feel the necessity of
reducing Its share capital under the following circumstances:
When its capital is more than its requirements.
When it wants to write down its asset at their real value.
When it is unable to declare a satisfactory rate of dividend on the paid-up share capital.
Methods of reducing share capital
Following are the methods of reducing share capital:
a) By extinguishing the liability of members for uncalled capital.
b) By canceling any part of the paid-up capital, which is lost or unrepresented by available
assets.
c) By repaying of capital, which is in excess of the need of the company.
Duties of the secretary in connection with reduction of share capital
The steps to be taken by the secretary in their connection are as follows:
a) To arrange a broad meeting to consider a plan of reduction and fix the date of extra
ordinary general meeting.
b) To send notice of extra ordinary general meeting to all the shareholders along with the
explanatory statement.
c) To get a special resolution passed at the extra ordinary general meeting for reduction of
capital and to get the minute signed by the chairman of the meeting.
d) To file the copies of the special resolution and minutes with the registrar.

e) To make an application to the court along with the copies of special resolution and minutes
for the confirmation order.
f) To take necessary steps for the settlement of the list of objecting creditors and for the
satisfaction of their clients.
g) To receive the court order of confirmation for reduction of share capital.
h) To file a copy of the court order describing particulars of reduction with the registrar.
i) To obtain the certificate of registration of the court order.
j) To file altered copies. of memorandum of association and articles of association with the
registrar.
k) To take necessary steps to execute the scheme of reduction of the capital.
l) To add the words "and reduced" in the company's name for a certain period.
ARTICLES OF ASSOCIATION
The articles of association constitute the second important document for the incorporation of a
joint stock company. The articles of association are a document, which contains the bye-laws or
the rules and regulations for the internal management of a company, i.e., for the day-to-day
conduct of the business of the company. They govern the relationship between the company and
its members and also the relationship between members themselves. However, they have nothing
to do with the outsiders.
The preparation of articles by a company limited by shares is not compulsory. In case the articles
are not prepared, the company must adopt Table 'A' of the Companies Act, which contains model
rules and regulations. If the company's own articles are silent on any point, the relevant provisions
of Table 'A' will apply. It may be noted here that a private company cannot adopt Table 'A' and it
should have its own articles. Similarly, an unlimited company and a company limited by guarantee
should have its own articles.
Importance of Articles of Association
The articles of association are next in importance to the memorandum of association. While the
memorandum of association lays down the objects or purposes for which a company is formed,
the articles of association prescribe the rules and regulations for the attainment of the objects
contained in the memorandum of association. The articles of association provide the rules and
regulations for the internal management or the day-to-day administration of the company and
embody the powers of the directors and the officers of the company as well as the rights and
duties of the shareholders or members of the company. They also regulate the relationship
between the company and its employees, between the company and its members and between
the members themselves.
Contents or Provisions:
The Articles contain rules and regulations regarding:
1. Share capital and variation of rights.
2. Exercise of lien by the company.
3. Calls on shares.
4. Transfer, transmission, forfeiture and surrender of shares.
5. Issues of share warrant.
6. Alteration and reduction of capital.
7. Voting powers of members.
8. Borrowing Powers.
9. Proceeding at the board and at the general body meetings.
10. Appointment, powers, duties qualifications! remuneration etc,. of directors
11. Appointment of manager, managing director and secretary .
12. Dividends and reserves.

13. Maintenance of books of accounts and their audit

14. The company's seal.
15. Winding up. ,
Alteration of Articles of Association;The articles of association of a company can, at any time, be altered by a special resolution, but
the alteration should be restricted to within the scope of the company's powers as laid down by its
memorandum. Thought there is no need to get the sanction of the court for alteration of Articles,
he court can disallow any alteration if it is unfair or inequitable between the members and contains
something that is illegal.
The power to alter the Articles is wide, but it is subject to a large number of limitations such as:
1. It should not violate any provision of the Companies Act and general or common law of the
country.
2. It must be within the scope of Memorandum of Association of the company.
3. It should not break any existing contact.
4. It must be just and equitable. It must be in the best interests of the company as a whole and
should not constitute a fraud on a small minority.
5. It must not impose on any member the obligation to subscribe for more shares or to increase
his liability on his existing shares.
6. The alteration must not be inconsistent with the alteration ordered by the court. The court has
the power to alter a company's memorandum of association and articles of association in any
way it thinks fit. As such, if the court has altered the articles of association of a company, the
company cannot make any alteration, which is inconsistent with the court's order without the
leave of the court.
7. No alteration should be made so as to enable the company to commit any breach of contract
with outsiders.
8. Any alteration requiring the approval of the Central Government can be made only with the
approval of the Central Government. The approval of the Central Government is, usually,
necessary to alter the following:
a. Conversion of public company into a private company.
b. Appointment or re-appointment of managing director, whole-time director, director not
liable to retire by rotation and manager.
c. Increase in the remuneration of a managing director, whole-time director or manager.
Procedure to be followed for the alteration of the Articles of Association
1.
2.
3.
4.
5.
6.

Passing of a special resolution at the extraordinary general meeting.

Filing of a copy of special resolution with the registrar.
Obtaining the approval of the Central Government
Filing of the copy of the altered articles with the registrar.
Incorporating the alteration in the articles.
Making the copies of the altered articles of association available to the members.

Duties of Secretary:
The Secretary has to take .the following steps in order to alter articles:
To arrange a board meeting to decide on the alterations in the articles and to fix up the day
for an extraordinary general meeting for passing a special resolution to effect a change in
the Articles.
To see that the alterations do not violate any provision of Companies Act, the general law
or the company' memorandum of association. Further, it should not be a fraud on a small
minority and it should be in the general interest of the members and the company.

 To issue notices of the general meeting along with the proposed special resolution and an
explanatory statement at least 21 days before the meeting.
To get the special resolution passed at an Extraordinary Meeting.
To file a copy of the special resolution along with the explanatory statement with the
Registrar within 30 days of passing the resolution.
He should get the approval of the Central Government wherever the approval of the
Central Government is required for the alteration of the Articles.
To file with the Registrar an altered or revised printed copy of the Articles of Association
within three months of the passing the resolution.
Distinction Between Memorandum and Articles of Association:Both the Memorandum of Association and articles of association are important documents of
the company. The distinctions between the two are as follows:
1. The Memorandum is the charter of the company setting out its constitution. It lays down
the conditions of incorporation and defines the limits and powers of the company. Articles
on the other hand, contain the bye-laws of the company for the conduct of its internal
administration. They define the rights and duties of the directors, members, etc,
2. The Memorandum states the objects for which the company is established, whereas the
Articles state the rules or manner of carrying out the business as stated in the
Memorandum. They cannot provide anything contrary to the powers and objects set forth
in the Memorandum.
3. A company cannot be incorporated without preparation and filing of the Memorandum with
the Registrar, whereas the preparation of article is not compulsory. If the articles are not
prepared by any company, Table 'A' of the Companies Act is applied.
4. The Memorandum governs the external relations of the company i.e., relations between
the company and the public including creditors, buyers, sellers, debtors, etc,: outsiders
dealing with the company know what its permitted range of business is. The articles, on
the other hand, define the relationship between the members and the management of the
company. Their main concern is to provide rules and regulations for the internal working of
the company.
5. The Memorandum is a primary and fundamental document. It is the foundation of the
company's structure and is responsible for the company's birth. It is .unchallenged on
statutory matters. Articles of association are a secondary, subordinate and subsidiary
document. They should be read and understood in the light of the memorandum. They
complement and supplement the memorandum.
6. The Memorandum lays down the scope or area of the company beyond which the
company cannot go. All acts of the company which are beyond its scope are ultra vires or
illegal and they cannot be ratified by the company.
As Articles are subordinate to Memorandum, their activities should be confined to the area
of scope of the Memorandum. However, all acts which are ultra vires the articles( beyond
the scope of articles), but intra virus (within) the Memorandum are not void and can be
ratified by the company by a special resolution.
7. The Memorandum can be altered only by a special resolution and subject to sanction of
the court or the Central Government as the case may be. The articles can be altered by a
special resolution and sanction either from the court or the government is not necessary.
8. The Memorandum of association is subordinate only to the companies act. But the articles
of association are subordinate not only to the companies act, but also to the memorandum
of association.
9. A memorandum of association is deemed to be an unalterable document, as far as the
conditions are concerned. So, the conditions in the memorandum of association cannot be
altered except in the mode and in the cases and to the extent for which express provision
is made in the Companies Act. On the other hand, the articles of association can be
altered at any time and any number of times.

10. The procedure required by law to alter the memorandum of association is complicated. But
the procedure required bylaw to alter the articles is simple. The articles can be altered by
passing a simple resolution.
TABLE 'A'
Meaning of Table 'A'
At the end of the Companies Act, in Schedule 1, a set of 99 articles are given as model articles of
association for the benefit of public companies limited by shares. These model articles of
association are known as Table 'A'.
Items found in Table 'A'
The items found in Table 'A' i.e., the model articles are:
1. Interpretation of certain terms.
2. Share capital and variation of rights
3. Lien on shares.
4. Calls on shares.
5. Transfer of shares,
6. Transmission of shares.
7. Forfeiture of shares.
8. Conversion of shares into stocks.
9. Share warrants.
10. Alteration and reduction of capital.
11. General meetings and proceedings at general meetings.
12. Votes of members.
13. Board of Directors.
14. Proceeding at board meetings.
15. Manager, managing directors and secretary.
16. Company's seal
17. Dividends and reserves.
18. Accounts.
19. Capitalisation of profits.
20. Winding up.
21. Indemnity to officers or agents of the company.
Differences between Table 'A' and Articles of Association:
The main differences between table 'A' and the Articles of Association are as follows:1. Regulations or provisions in Table 'A' are model articles. That means they are general. On
the other hand, the provisions in the articles of association of each company are specific.
2. Table 'A' can be adopted only by public companies limited by shares. It cannot be adopted
by unlimited companies, companies limited by guarantee and private companies limited by
shares. Specific articles of association can be had by every type of companies.
3. All the provisions in Table A are legal beyond doubt. But the provisions in the specific
articles of association mayor may not be legal beyond doubt.
4. 4. When a company adopts Table 'A' as its articles, it need not file the same with the
registrar of companies. It has to just make an endorsement to that effect in its
memorandum of association submitted to the Registrar. On the other hand, when a
company has a separate set of articles of its own, it has to file a copy of the same with the
Registrar of Companies.

PROSPECTUS
After the receipt of the certificate of incorporation, if promoter of a public company wishes to invite
the public to subscribe for its shares or debentures, he must prepare and issue a document know
as prospectus, giving the required information. The Companies Act 1956 defines prospectus as
an prospectus, notice, circular, advertisement or other document inviting offers from the public for
the subscription or purchase of any shares in, or debentures of a body corporate.
OBJECTS OF PROSPECTUS
The main objects of the prospectus are:
1. To inform the public about the formation of a new company
2. To state the prospectus of the company and thereby induce the public to subscribe to the
shares or debentures of the company.
3. To invite the members of the public to purchase the shares or debentures of the company.
4. To preserve an authentic record of the terms and conditions on which the shares or
debentures are issued by the company.
5. To create confidence in the public about the company by providing complete, accurate and
reliable information and by making the directors responsible for the information mentioned
therein.
Statement in Lieu of Prospectus:
If the promoter can secure capital without public subscription, he need not issue the prospectus
but instead can prepare a statement containing similar information for filing with the registrar, in
lieu of the prospectus. Thus, there can be a public company without inviting the public to
subscribe to the share capital of the company. The statement in lieu of the prospectus must be
submitted to the Registrar of Companies at least three days before allotment.
ISSUE of Prospectus Rules:
Rules and provisions to the issue of prospectus are as follows:
1. Generally, a prospectus is issued after the formation of a company. However, it can also
be issued for a company which is proposed to be formed.
2. The prospectus of a company must be dated because the date of prospectus is
considered to be the date of its publication.
3. The statement of an expert, (e.g., engineer, accountant, valuer etc.,) may be3 included in
the prospectus if the concerned expert is not engaged in or interested in the formation,
promotion or management of the company. In case the prospectus contains experts
statement it is necessary to obtain his written consent of the issue of the prospectus.
4. A copy of prospectus which is signed by every director or proposed directors of the
company must be filled with the Registrar of Companies for registration before it is issued
to the public.
5. The prospectus must be issued to the public within 90 days after the date of filing the copy
with the Registrar. The prospectus issued must state on its face, that a copy has been filed
with the Registrar.
6. After the registration of prospectus, the terms of any contract stated in the prospectus
cannot be varied except with the approval of the members in the general meeting.
7. When the company issues an application form for the purchase of its shares or
debentures, then the form must be accompanied by an abridged form of prospectus. In
Companies (Amendment) Act, 1988, the word prospectus is substituted by words "by a
memorandum containing such salient features or a prospectus as may be prescribed",
Such memorandum is the abridged form of prospectus. Thus, now the company is not

required to issue full prospectus along with the application for shares etc,. The full
prospectus is to be issued only on the request of the applicant.
Content of Prospectus:Matter to be stated and reports to be set in prospectus.
The object of the promotion and direction the issuing prospectus is to make it as attractive as
possible, while the object of the legislation is to prevent the public from being misled.
Section 56 of the Companies Act lays down that every prospectus shall(a) State the matter specified in Part II of Schedule II.
(b) (b) Set out the reports specified in Part 11, and Schedule II.
These provisions as stated above shall have the effect subject to the provisions contained in
Part III of Schedule II.
The Government has received the format of prospectus given in schedule II of the Act. The
revised format is effective from 1st November 1991. This step has been taken by the
Government to provide for greater information regarding the company so as to enable the
investors to take an informed decision regarding investment in shares and debentures, which
are offered.
Part I of Schedule II
I.

General Information
(a) Name and address of registered office of the company.
(b) Names of Regional Stock Exchange and other stock: exchanges where application made
for listing of present issue.
(c) Date of opening of the issue.
Date of closing of the issue.
Date of earliest closing of the issue.
(d) Name and address of auditors and lead managers.
(e) Underwriting of the issue.
(Names and addresses of the underwriters and the amount underwritten by them).

II.

Capital Structure of the company.

(a) Authorised, Issued, Subscribed and Paid-up capital.
(b) Size of present issue giving separately reservation for preferential allotment to promoters
and others.
(c) Paid-up capital.
I. After the present issue.
II. After conversion of debentures.
Part II of Schedule II
A. General Information
1. Consent of Directors, Auditors, Solicitors/Advocates, Managers to issue, Registrar of
issue, Bankers to the Company, Bankers to the issue and experts.
2. Expert opinion obtained, if any.
3. Change, if any, in directors and auditors during the last three years, and reasons thereof.
4. Authority for the issue and details of resolution passed for the Issue.

5. Procedure and time schedule for allotment and issue of certificates.

6. Names and Addresses of the company Secretary, Legal Adviser, Lead Managers, Comanagers, Auditors, Bankers to the Company, Bankers to the issue and Brokers to the
issue.
B. B. Financial Information
C. Statutory and Other Information
1. Minimum subscription.
2. Expenses of the issue giving separately fee payable to:
a. Advisers
b. Registrars to the issue.
c. Managers to the issues.
d. Trustees for the .debenture holders.
3. Underwriting commission and brokerage.
4. Previous issue for cash.
5. Previous public or rights issue.
a. Date of Allotment: Closing Date:
Date of Refunds:
Date of Listing on the stock exchange.
b. If the issue(s) at premium or discount, the amount thereof.
c. The amount paid or payable by way of premium, if any, on each share which had
been issued within the two years preceding the date of the prospectus.
6. Commission or Brokerage on previous issue.
7. Issue of shares otherwise than for cash.
8. Debentures and redeemable preference shares and other instruments issued by the
company outstanding as on the date of prospectus and terms of issue.
9. Option to subscribe.
10. Details of Purchase of Property.
11. (i) Details of Directors, proposed directors, whole-time directors, their remuneration,
Appointment and Remuneration of Managing Directors, Interest of Directors, their
borrowing powers and Qualification shares.
12. Rights of members regarding voting, dividend, lien on shares and the process for
modification of such rights and forfeiture of shares.
13. Restrictions if any, on transfer and transmission of shares/debentures and on their
consolidation splitting.
14. Revaluation of assets.
15. Material contracts and inspection of documents e.g.
a. Material Contracts.
b. Documents.
c. Time and Place at which the contracts together with documents will be available for
inspection from the date of prospectus until the date of closing of the subscription
list.
Liabilities for Mis-statements or non-disclosure of material facts in the prospectus
As the prospectus is a document which sets forth the future prospectus of the company and
invites the public to subscribe to its shares or debentures, it is but reasonable that it must contain
only facts, it has been rightly said that the prospectus must tell the truth, the whole truth and
nothing but the truth. That means, the must not be misrepresentations or mis- statements in the
prospectus. Further, the prospectus must not conceal any facts. In short, there must be full and
accurate disclosure of all material and essential facts in the prospectus. This is known as the
golden rule as to the framing of prospectus.

Any mis-statement, mis-representation or -suppression of facts in the prospectus renders the

persons and / or directors responsible for its publication liable to heavy penalties. They may incur
both civil and criminal liability.
Civil Liability:
The Companies Act, has provided for civil liability against the company as well as the director or
promoter or any other person responsible for the mis-statement or non-disclosure of material facts
in the prospectus.
Civil Liability Against the Company:
A person who has purchased the shares pr debentures of a company on the basis of mis-leading
statement in the prospectus, has two remedies against the company. They are:
He can rescind the contract, return the shares or debentures purchased by him and ask
for the refund of the money already paid on the shares or debentures with interest.
If he has suffered loss by acting on the mis-leading statements in the prospectus, he can
return the shares or debentures purchased by him and sue the company for damages or
compensation.
Remedy against the Director or Any Other Person Responsible for the Mis-statements in
the Prospectus.
Besides the above two remedies against the company, the aggrieved party has also a civil
remedy against the promoter, director, or any other person responsible for the mis-statement in
the prospectus. That is, he can claim damages or compensation for the loss suffered by him from
the promoter, director or any other person responsible for the mis-statement or wrongful
disclosure of material facts in the prospectus.
However, there are several defences open to the guilty. The guilty can escape from the civil
liability by providing that:
1. He withdrew his consent to become a director before the issue of the prospectus and gave
a public notice to that effect.
2. The prospectus was issued without his knowledge or consent, and on becoming aware of
it, immediately, he gave public notice to the effect that the prospectus was issued without
his knowledge or consent.
3. After the issue of the prospectus, but before allotment, immediately after becoming aware
of the false statement, he withdrew his consent and gave public notice to that effect.
4. He had reasonable grounds to believe that the statement was true and he believed it to be
true.
5. The statement made by the expert was taken by him as one made by a competent person
and was correct.
Criminal Liability:
The Act also provides for-criminal liability for giving an untrue statement in a prospectus. Thus,
every person who authorised the issue is punishable with imprisonment extending to two years or
with a fine up to Rs.5,000 or with both. A person can, however, escape such liability only if he can
prove that
the statement was immaterial or
that he had reasonable grounds to believe and did believe up to the time of issue of
prospectus that the statement was true.

Further, if a person knowingly makes any statement of forecast which is false and misleading, or
conceals material facts and induces others to subscribe to the shares of the company, he shall be
punishable with imprisonment extending to five years or with a fine up to Rs.10, 000 or with both.
Differences between Prospectus and Statement Prospectus:
There are certain differences between a prospectus and a statement in lieu of prospectus. They
are: 1. A prospectus can be considered as the prospectus proper, whereas a statement in lieu of
prospectus can be considered as a proforma prospectus.
2. A prospectus serves more purposes and has a greater significance than a statement in
lieu of prospectus.
3. The need for prospectus arises only when a public limited company intends to invite the
public to subscribe to it shares or debentures. On the other hand, the need for a statement
in lieu of prospectus arises when a public limited company does not intend to invite the
public to subscribe to its shares or debentures.
4. A prospectus is issued to the public, whereas a statement in lieu of prospectus is not
issued to the public. It is just filed with the registrar of companies.
5. A prospectus is required for filing with the registrar of companies and also for issuing to the
public. On the other hand, a statement in lieu of prospectus is required only for the
purpose of filing with the registrar of companies.
6. A prospectus should accompany every application for shares or debentures. But a
statement in lieu of prospectus need not accompany any application form.
7. A prospectus must contain all the provision specified in Part I and Part II of Schedule II of
the Companies Act. On the other hand, a statement in lieu of prospectus must contain the
provisions specified in Schedule III of the Companies Act.
Listing of Shares
A stock exchange does not deal in the securities of all companies. Only those securities that are
listed can be bought and sold at the stock exchange. For the purpose of listing of securities, a
company has to apply to the stock exchange. The stock exchange after receiving application from
the company will decide whether to list the securities of the company or not. If permission is
granted by the stock exchange to deal in the securities therein, then such a company is included
in the official, trade list of the stock exchange and this is known as the 'listing of securities'.
Advantages of Listing:
Some of the advantages of listing are:
It provides a continuous market for securities;
It enhances the prestige of the company;
It provides an indirect check against manipulation by the management.
UNDERWRITING AGREEMENT
Underwriting is an arrangement (or agreement) entered into by [the promoters of] a company with
one or more individuals or institutions known as underwriters under which the underwriters
undertake (agree} to take up the whole or a certain portion of the offered shares or debentures as
are not subscribed for by the public in consideration of a certain remuneration called underwriting
commission. In other words, Underwriting is an arrangement under which one or more individuals
or institutions called underwriters agree to take up the whole or a certain portion of the
unsubscribed shares or debentures of a company for certain remuneration called underwriting
commission.
Types of Underwriting:

1. Complete underwriting.
2. Partial underwriting.
1. Complete Underwriting:
Complete Underwriting is an arrangement under which the whole of the issue of shares or
debentures of a company is underwritten by the underwriters. The whole of the issue of
the shares or debentures of the company may be underwritten either by a single
underwriter or by two or more underwriters.

2. Partial Underwriting:
Partial underwriting is an arrangement under which only a part of the issue of shares or
debentures of a company is underwritten by the underwriters. The part of the issue of
shares or debentures of the company may be underwritten either by a single underwriter
or by two or more underwriters
Importance or Advantages of Underwriting:
The advantages of underwriting are as follows:
1. Underwriters render, .valuable service in the promotion of companies by guaranteeing the
promoter against the sale of the shares and uncertainty and risk.
2. As the promoter gets from the underwriters a large sum of cash at once, irrespective of the
sale of the securities, the company is enabled to proceed with its projects without waiting
for the actual sale of securities.
3. The company gets assurance from the underwriters for subscribing the entire capital within
a definite period and thus escaping the danger of under capitalization.
4. Underwriters possess specialized experience and skill and many times they provide expert
advice to the companies regarding the form or price of the new securities.
5. Underwriters are very often men of financial integrity and established reputation, the
association of whose names with an issue often raises the issue high in public estimation.
6. As underwriters maintain working arrangements with brokers in other areas, geographical
dispersion of securities is facilitated.
7. Prospective buyers are also benefited by the underwriters. The fact that the securities of a
particular concern are underwritten by a reputed firm, acts as a guarantee for the
soundness of the securities. An investor, therefore, is in a safer position when he buys
securities which have been underwritten.

SHARE CAPITAL AND SHARES

SHARE CAPITAL
The term share capital' refers to the amount of capital raised (or to be raised) by a company through the
issue of shares.
Features of share capital
The main features of share capitals are
1. Share capital can be raised only by companies limited by shares and registered with share capital
2. Share capital can be raised by a company either at the time of its formation for starting its operations or
later on for further expansion.
3. Share capitals (except in the case of redeemable preference share), one raised, cannot be returned by the
company to the shareholders as long as it continues to exist, It can be returned only at time of the
winding up of the company.
Classes Types or Kinds of Share Capital:
The various kinds or sub-divisions of share capital are:
1. Authorised Capital, Registered Capital or Nominal Capital:
Authorised capital is the sum stated in the capital clause of the memorandum of association as the
capital of a company. It is the maximum amount of share capital, which the company is authorized by
its memorandum of association to raise through the issue of shares. It is called authorized capital,
because it is the capital, which a company is authorized to raise from the public. It is called registered
capital, because it is the capital with which a company is registered. It is also called nominal capital,
because it is not the real or actual capital of a company. A company has this capital only in name.
Further, it is the total nominal value of the shares, which a company can Issue.

2. Issued Capital:
A company, usually, does not need the whole of the authorized capital in the beginning. It needs only a
part of the authorized capital. So, in the beginning, it, usually, issues only a part of the authorized
capital to the public for subscription. That part of the authorized capital to the public for subscription.
The part of the authorized capital which is issued or offered, for the time being, to the public for
subscription is, usually, called the issued capital.
3. Subscribed Capital:
There is no guarantee that the entire capital issued by a company to the public for subscription will be
subscribed or taken up by the public. The public may subscribe in full or in part. That part of the issued
capital, which is subscribed or taken up by the public, is called subscribed capital.

4. Called-up Capital:
Generally, a company does not need the entire face value of the shares subscribed by the public
immediately. So, it calls or demands only a part of the nominal value of the shares subscribed or taken
up by the public immediately and collects the balance later, as and when necessary, by making further
calls. That part of the subscribed capital, which has been called up or demanded by the company is
called called-up capital.

5. Paid -up Capital:

There is no guarantee that all the subscribers pay the full amount called up or demanded from them. In
fact, in many cases, some of the subscribers do no pay the full amount called up from them. That
means, often, only a part of the called-up capital may be paid by the subscribers or shareholders. That
part of the called-up capital, which has been actually paid, by the subscribers or shareholders is called
paid-up capital.
SHARES

A share is the interest of a shareholder in the company, measured by a sum of money for the purpose of
liability in the first place, and of interest in the second, but also consisting of other rights given by the
articles. A share can be defined as, "a share is a fractional part of the capital of a company which forms the
basis of certain rights of a member of the company as well as his liabilities vis--vis (i.e., as against) the
company"
Features of Shares:
The main features of shares are.
i. A share is not a sum of money. It is only an interest or right, measured in .a sum of money, to participate
in the profits of the company during its life and in the assets of the company when it is wound up.
ii. A share is given a face or nominal value, and is paid for in money or money's worth.
iii. The person who holds the share or shares of a company is called a shareholder or member of the
company.
iv. The title of a member to a sharp is evidenced by the share certificate issued by the company under its
Common seal.
v. Each share in a company having share capital is distinguished by its specific or appropriate number.
Kinds or Types of Shares:
A company issue different types of shares in order to satisfy the requirements of different classes of
investors and to collect more capital. A public company can issue only two types of shares, viz., (1)
Preference Shares. (2) Equity Shares.
1. PREFERENCE SHARES.
Meaning of Preference shares:
Preference shares are shares, which have preferential rights (i.e., first priority or preference over other
kinds of shares) in respect of payment of dividend during the existence of the company, and also in respect
of repayment or refund of share capital in the event of the winding up of the company. In fact, it is because
of their preferential rights in respect of the payment of dividend and repayment of capital that these shares
are 1 mown as preference shares.
Types of Preference Shares:
1. Cumulative Preference Shares: The holders of cumulative preference share are entitled to receive a
fixed percentage of dividend before anything is given, tot other classes of shareholders. Apart from this
right, in the case of these shares, if the company has no profits or inadequate profits in any year to
declare dividend, the arrears of dividend would accumulate and become payable out of the future
profits before anything is given to other classes of shareholders.
2. Non-Cumulative Preference Shares: Non-Cumulative preference shares are entitled to a fixed rate of
dividend in the first instance (i,e., before anything is given to other types of shareholders). But they are
entitled to receive the fixed percentage of dividend in the first instance only for the year or years when
the company earns sufficient profits and dividend is declared. In case the company has no or
inadequate profits in any year to declare dividend, then, the arrears of dividend do not accumulate and
become payable out of future profits in the case of these shares.
3. Participating Preference Share: The holders of these shares, in addition to a fixed percentage of
dividend, are also entitled to participate in the surplus profits of the company along with the equity
shareholders. Only if there is a specific or special provision in the articles of association of the
company giving the holders of these shares special rights to participate in the surplus profits. They are
also entitled to participate in surplus assets of the company on its winding up.
4. Non-Participating Preference Share: The holders of non-participating preference shares will get only
a fixed rate of dividend, of course, in the first instance (i.e., before any dividend is paid to equity
shareholders). But they are not entitled to participate in the surplus profits of the company.

5. Convertible Preference Shares: The holders of convertible preference shares are given the rights to
convert their shares into equity shares later on (i.e., after a certain period).
6. Non-Convertible Preference Share: The holders of non-convertible preference share are not given
the right to convert their shares into equity shares later on.
7. Redeemable Preference Shares: Redeemable preference shares are those preference shares, which
can be redeemed (i.e., returned or paid back) even during the existence of the company. These shares
can be redeemed as per the terms of issue either at a definite date after the expiry of a stipulated (fixed)
period or at the option of the company, i.e., whenever the company wants, after giving proper notice.
Redeemable preference shares can, be redeemed by a company. But their redemption is subject to the
conditions
a) The articles of association of the company should provide for the issue and redemption of these shares.
b) Only fully paid shares can be redeemed. Partly paid shares cannot be redeemed.
c) They can be redeemed only out of the profits of the company which would be otherwise available for
dividend (i.e., out of the divisible profits of the company) or out of the proceeds of fresh issue of shares
made for the purpose of redemption.
d) Any premium paid on their redemption must be paid out of the profits of the company or out of the
company's share premium account.
8. Irredeemable Preference Shares: Irredeemable preference shares are those preference Share, which
are not (i.e. refundable) until the company is wound up.
2. EQUITY SHARES.
Equity snares are those, which are not preference shares. In other words, these are shares, which do
not enjoy any preferential right either in respect of payment of dividend or in respect of the repayment
of capital at the time of the winding up of the company. These shares are knows as equity shares, as
they are the 'ownership shares' conferring the ownership of the company on the holders of these
shares, i.e., the holders of these shares are the real owners of the company.
Differences between Preference Shares and Equity Share:
There are many differences between preferences shares and equity shares. The main differences between
them are:
1. Generally, the face value of preference shares is relatively higher than that of equity shares.
2. Preference shares have priority over equity shares in the payment of dividend as will in the
repayment of capital in the event of the winding up of the company.
3. The rate of dividend on preference shares remains fixed from year to year. But the rate of dividend
on equity shares varies from year to year depending upon the amount of profits available for
distribution.
4. The rate of dividend on preference shares, in generally, fixed by the articles of association. But the
rate of dividend on equity shares is dependent on the discretion of the board of directors.
5. Preference shares cannot participate in the surplus profits and in the surplus assets in the event of
the winding up to the company. Even the participating preference shares can participate in the
surplus profits and in surplus assets only if there is a specific provision to that effect in the surplus
profits and in surplus assets always.
6. Except those preference shares which are issued as non-cumulative, all preference shares are
cumulative. That means, preference shares can get the arrears of dividend. But equity shares cannot
get the arrears of dividend.
7. As the rate of dividend on preference shares is fixed or stable, the market value of preference shares
remains more or less stable. On the other hand, as the rate of dividend on equity shares fluctuate
from year to year, the market value of equity shares fluctuates greatly from year to year.
8. Preference shares, i.e., redeemable preference shares, are redeemable during the existence of the
company. But equity shares are not redeemable during the life of the company.

9. Preference shares have limited voting rights. They have voting rights only on those matters, which
directly affect their interests. On the other hand, equity shares have full voting rights. They can vote
on any matter, which may come up before the company.
10. As there is steady dividend like rent, preference shares capital is considered as rentier capital. On
the other hand, as there is much risk in equity shares, equity share capital is considered as risk
capital.
11. As there is not much risk in preference shares, preference shares appeal to cautious investors who
do not want to assume risks. On the other hand, equity shares appeal to adventurous investors who
are prepared to assume risks.
12. The holders of preference shares do not have much control over the management of the company.
On the other hand, the holders of equity shares have much control over the management of the
company.
Issue of Shares or Terms of Issue of Shares :
Issue of Shares at Par:
When shares are issued by a company to the public at a price equal to their face value (i.e., the price written
on the face of the share certificates), they are said to be issued at par. For example, if shares of the face
value of Rs.10 each are issued by a company to the public at Rs.10 each, the shares are said to be issued at
par.
Issue of Shares at a Premium:
When a company finds at there is a great demand for its shares, it may issue shares at a premium. Issue of
shares at a premium means the issue of shares by a company at a price higher than the face value of the
shares. (The difference between the issue price, i.e., the price at which the shares are issued, and the face
value of the shares is called share premium) for example, when shares of the face value of Rs.10 each are
issued at a price of Rs.12 per share, the shares are said to be issued at a premium.
Issue of shares at a Discount:
When a company wants to raise further capital at a time when its shares are not demanded, and so, quoted
in the market below par, it may issue shares at a discount.
Issue of shares at a discount means the issue of shares at a price less than the face value of the shares. (The
differences between the face value and the issue price of the shares are the discount allowed on the shares.
The discount allowed is a capital loss to the company.). For instance, when shares of the face value of Rs.10
each are issued at Rs.9 each, the shares are said to be issued at a discount.
RIGHTS SHARES
If a public company issues additional or further shares at any time after the expiry of two years of its
formation or one year of the first allotment of shares, which ever is earlier, such additional shares must be
offered to the existing equity shareholders of the company in proportion to the capital paid up on their
shares, such shares are called rights shares. Such shares are called rights shares, as the existing equity
shareholders are given preferential rights (i.e., first preference) in the allotment of such shares.
The right of existing equity shareholders to be offered new shares before they are offered to the public is
called shareholders' right of preemption.
Object of Right Issues:
The object of rights issue is that there should be an equitable distribution of shares among the existing
equity shareholders and the proportion of holding of shares by the existing equity shareholders should not
be affected by the issue of the additional shares.
BONUS SHARES
Bonus shares are shares issued by a company out of its accumulated reserves or profits to the existing
equity share holders either as fully paid shares or partly paid shares free of cost.

Differences between Bonus Shares and Rights Shares:

1. Bonus shares are issued to the existing members (i.e. free of costs. But rights shares are issued to the
existing member for money.
2. Bonus shares can be issued by a company only when it has sufficient. Accumulated reserves or profits.
But the issue of rights shares is not at all related to the availability of accumulated reserves or profits.
3. The purpose of bonus issue is to bring the issued capital of the company in line with the true worth of
the undertaking so that the net profit of the company may not appear to be excessively high as
compared to its paid -up capital. But the purpose of rights issue is to raise additional share capital for
the company.
4. For the issue of bonus shares, the permission of the controller of capital issues is necessary; whatever
may be the amount of issue of bonus shares. On the other hand, for the issue of right shares, the
permission of the controller of capital issues is necessary only when the issue exceeds Rs.1 crore in a
period of 12 months.
5. For the issue of bonus shares, sanction of the shareholders is necessary always. But for the issue of
rights shares, the sanction of the shareholders is necessary only when the rights issue involves increase
in the authorized capital. ,
STOCK
Stock can be defined as, "stock is a bundle of fully paid shares put together for convenience". In other
words, it is the aggregate of fully-paid shares of a company consolidated or put together for the purpose of
facilitating its division and transfer in fraction of any denomination or amount.(i.e., for helping the stock
holders to sub-divide and transfer their stocks in fractions or parts of any amount, even odd amount).
Features of Stock:
The main features of stock are:
A stock is the consolidated amount of fully-paid shares. In other words, it is the capital which consists
of fully-paid shares put together for convenience.
There cannot be an original issue of stocks by a company. Only fully paid shares can be converted into
stock.
A stock may be split up and transferred by the holders in fraction of any denomination or amount.
Stocks are not divided into uniform or equal denomination.
Stocks do no bear distinctive numbers.
The title of the holders of stocks is represented by stock certificates issued to them. The holders of stock
are also the members of a company.
The stock holders enjoy the same rights and privileges which are enjoyed by the shareholders
Stock can be reconverted into shares of any denomination.
Advantages of Stock Holders and the companyStocks are advantageous to the stockholders and the company
The main advantages of stocks to the stockholders are'
1. A stock holders can enjoy all the rights and privileges enjoyed by a shareholder
2. Besides enjoying the rights and privileges of a shareholder, a stock holder has an additional advantage.
That is, he can split up or divide and transfer his stock in fractions of any amount, even in odd amount.
3. Stock denotes that the company has recognized the fact that the holder of stock has paid the complete or
full payment due from him to the company this recognition will help the stockholder to transfer his
stock easily,
The main advantage of the stock to the company is that, as the stocks are not numbered, the company need
not keep a detailed record of stocks transferred.

Differences between Shares and Stock:

Shares differ from stocks' in many respects. The main differences between shares arid stocks are:
1. Shares may be fully or partly paid. But stocks are always fully paid.
2. Shares have distinctive numbers, whereas stocks do not have distinctive numbers.
3. A share has nominal value, whereas a stock has no nominal value.
4. Shares are always of equal denominations or values. But stocks can be of various denominations or
values.
5. Shares can be issued not only by limited companies having share capital, but also by unlimited
companies. But stocks can be issued only by limited companies having share capital.
6. Shares can be issued by a company originally. But stocks cannot be issued by a company originally. But
the stocks cannot be issued by a company originally. Only fully paid shares can be converted into stock
later on.
7. Consent of the shareholders is not necessary for the issue of shares. But the consent of the shareholders
is necessary for the issue of stocks.
8. Shares can be transferred only in round numbers. They cannot be transferred in fraction. But stocks can
be transferred in fraction.
9. Registration of share capital with the registrar of companies is necessary before the issue of shares. But
stocks can be issuer by just giving a notice of conversion with the registrar of companies.
10. The holder of shares is a member of the company. But the holders of stocks is not necessarily a member
of the company.
SHARE CERTIFICATE:
A share certificate is a document issued by a company under its common seal specifying the number of
shares held by a member and the amount paid on each share and evidencing the title of the member to those
shares. It is a prima facie evidence of the title of a member of the shares specified therein.
Contents of a Share Certificate:
A share certificate must contain the name and the registered office of the company. It must bear the
common seal of the company. It must contain the signatures of at least two directors who are authorized to
sign and also the counter signature of the secretary of the company.
In addition to the above, it must contain the following particulars:
1. Name and address of the member
2. Share certificate no.
3. Number and class of shares.
4. Distinctive numbers of the shares included in the certificate.
5. Face value of the amount paid on each share.
6. Date of issue of the share certificate.
7. A revenue stamp.
SHARE WARRANTS OR SHARE WARRANT PER BEARER OR SHARE WARRANTS TO
BEARER
A share warrant is a document issued by a public limited company under its common seal to its
shareholders in respect of fully paid shares, stating that the bearer of the instrument (i.e., the share warrant)
is entitled to the shares mentioned therein. In short, it is bearer document of title to the shares issued by a
public limited company to its shareholders.
Advantages of Share Warrants:
Share warrants have certain advantages. They are:
1. Share warrants are bearer instruments. So, they are transferable by mere delivery.
2. A share warrant is regarded as a negotiable instrument under mercantile custom and usage.
3. Share warrants are very helpful in securing loans from banks or other financial institutions.

Limitation of Share holders:

1. There is the risk of loss of ownership of shares represented by a share warrant. As a share warrant is
transferable by mere delivery , in case of loss of a share warrant, the finder of the share warrant
becomes its owner
2. Heavy stamp duty is payable (n share warrants. On account of these serious limitations, share
warrants are not popular.
Differences between a Share Certificate and Share Warrant:
They are many differences between a share certificate and a share warrant. They are
1. Share certificates can be issued by public companies as well as private companies. But share warrants
can be issued only by public companies limited by shares.
2. Share Certificates can be issued for fully-paid as well as partly paid shares, whereas share warrants can
be issued only for fully paid shares.
3. No authorization by the articles of association is necessary for the issue of shares certificates. But
share warrants cannot be issued by a company unless their issue is authorized by the articles of
association.
4. No sanction or approval of the Central Government is necessary for the issue of shares certificates,
whereas the approval of the Central Government s necessary for the issue of share warrants.
5. Shares represented by a share certificate are considered as qualification shares for the directorship of a
company. But the shares represented by a share warrant are not considered as qualification shares for
the directorship of a company.
6. The stamp duty payable on the issued of share certificates is just nominal, whereas the stamp duty
payable on the issued of share warrants is heavy
7. The name of the bolder of a share certificate appears in the register of members. But the name of the
holder of a share warrant does not appear in the register of members.
8. A share certificate is not a negotiable instrument, whereas a share warrant is considered as a negotiable
instrument under mercantile usage and custom.
9. A share certificate can be issued originally. But a share warrant cannot be issued originally. Only share
certificates can be converted into share warrants later on.
10. A share certificate is only a prima facie evidence of the title of the holder to the shares specified
therein. On the other hand, a share warrant is a conclusive evidence of the title of the holder to the
shares specified therein, provided he is a bonafide holder for value.
Secretary's duties in connection with the Issue of Share warrants:
o He should make sure that the articles of the company provide for the issue of the share warrants.
o On the receipt of the application for the issue of share warrants, he should check up whether the
application is accompanied by the relevant share certificates. He should issue a lodgment ticket to the
applicant acknowledging the receipt of the share certificate for the issue of share warrants.
o He should convene a board meeting for the approval of the issue of share warrants.
o He should also make the necessary arrangements for the issue of share warrants.
o On the receipt of the Central Government's approval, he should proceed with the work of preparation
of the share warrants. He should get them sealed and signed by the directors and counter-signed by him
self.
o He should see that a circular is issued to the applicants asking them tot take delivery of the share
warrants in exchanges for the lodgments tickets.
o After the issue or delivery of the share warrants, he should see that the names of such shareholders are
struck off from the register of members, and the necessary particulars regarding the issue of share
warrants are entered in the remarks column of the register for the members. He must also see that the
names of the shareholders to whom share warrants are issued are entered in a separate register called
The Register of Share Warrant Holders.
o He should see that the unused share warrant forms are kept in safe custody so as to prevend their
misuse.
TRANSFER AND TRANSMISSION OF SHARES

TRANSFER OF SHARES:
When a registered shareholder passed on the property or interest in his shares by sale or otherwise (say) by
gift) to another person voluntarily) there is said to be transfer of shares. So, transfer of shares refers to the
passing on of the property or interest in the shares by a registered shareholder to some other person
voluntarily for a valuable consideration.
TRANSMISSION OF SHARES:
Transmission of shares refers to the passing of property in shares by the operation of law, and not by sale by
the original owner, on the happening such events as death, insolvency or lunacy of a shareholder, to his
legal representative.
Differences between Transfer of Shares and Transmission of Shares:
The main points of distinction between transfer of shares and transmission of share are:
1. Transfer of shares is the result of a voluntary and deliberate act of the holder of shares, whereas
transmission of shares is the result of the operation of law.
2. Transfer of shares is a common or general method of passing of property in the shares from one person
to another. But transmission of shares takes place only under certain special circumstances, such as the
death, lunacy or insolvency of a shareholder.
3. As the transfer of shares is a voluntary act of the parties, there must be adequate and valid
consideration for the transfer of shares. On the other hand, as the transmission of shares is the result of
the operation of law, the question of consideration does not arise in the case of the transmission of
shares.
4. As the transfer of shares take place for valid consideration, stamp duty is payable in case of Transfer of
shares. (The stamp duty is payable on the market value of the shares transferred). But as the
transmission of shares take place without any consideration, no stamp duty is payable in the case of
transmission of shares.
5. For the transfer of shares, an instrument of transfer is required to be executed by the transferor in
favour of the transferee. On the other hand, for the transmission of shares, there is no need for an
instrument of transfer. Share are transmitted to the legal representative on his producing mere proof of
his title to the shares transmitted.
6. In the case of transfer of shares, as soon as the transfer is complete, the liability of the transferor ceases
completely. But in the case of transmission of shares, the shares transmitted continue to be subject to
the liability of the original holder to the company.
What is Forfeiture of shares?
Forfeiture of shares means the confiscation (i.e., taking away) of the shares of a shareholder by way of
penalty for the non-repayment of any call made on him, and compulsory termination of his membership.
What is Surrender of shares?
Surrender of shares means the return (i.e., giving back) of shares by a shareholder to the company
voluntarily for cancellation. It is a shortcut to the long and cumbersome procedure of forfeiture of shares.
What is Lien on shares?
Lien is the right of a person to retain the property of another person in respect of any lawful debt due from
the latter to the former. So, lien on shares is the right of a company to retain the shares and even the
dividends payable thereon belonging to a shareholder in respect of the outstanding call amount or any other
debt (except trade debt) due from the shareholder to the company
What is Blank transfer?
When an instrument of transfer duly completed and signed by the transferor, but the name, address and
signature of the transferee left blank, is delivered by the transferor to the transferee along with the relevant
share certificate, there is said to be a blank transfer. A blank transfer is so called, because the name, address
and signature of the transferee are left blank in the transfer form.

What is Forged transfer?

An instrument of transfer which is not signed by the true owner of shares, but is signed by some other
person as the true owner is called a forged transfer. In other words, an instrument of transfer which contains
the forged signature of the transferor is called a forged transfer.
What is Certificate of Transfer?
When a shareholder wants to transfer only a part of the shares represented by one share certificate or
wants to transfer the shares represented by one share certificate to two or more buyers, he, generally,
executes a transfer form [ where only a part of the shares are transferred to one buyer] or two or more
transfer forms [ where the shares are transferred to two or more buyers] and sends the transfer form or
forms to the company along with the original share certificate for certification. After a preliminary
scrutiny of the transfer form or forms and the share certificate, if the secretary is satisfied that everything
is in order, he affixes the rubber stamp called "Certification Stamp" and puts his signature. This process is
known as Certificate of transfer, and the instrument of transfer is known as "certified transfer" or
"certified transfer form".