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Gauhati University BCOM 2nd Sem CBCS Pattern
[Corporate Law Solved Question Paper 2022]
COMMERCE (Honours)
Paper: COM-HC-2026
Full Marks: 80
Time: Three hours
The figures in the margin indicate full marks for the questions.
1. Choose the most appropriate answer for the following questions (any ten) 1x10=10
(a) The minimum number of members in a public company is
(1) 2.
(2) 5.
(3) 7.
(4) 10.
(b) Which of the following documents establishes the relationship between a company and the outside world?
(1) Memorandum of Association.
(2) Articles of Association.
(3) Prospectus.
(4) Statement in lieu of prospectus.
(c) Who is responsible for Company Law administration?
(1) Registrar of Companies.
(2) Central Government.
(3) NCLT.
(4) None of the above.
(d) How many ‘One Person Company’ can be incorporated by a person?
(1) One.
(2) Two.
(3) Five.
(4) Seven.
Ans: (1) One.
(e) GDR is –
(1) a debt instrument.
(2) a financial instrument.
(3) a statutory book of the company.
(4) None of the above.
Ans: (2) a financial instrument
(f) Which of the following document must authorizes a company to issue bonus share?
(1) Memorandum of Association.
(2) Articles of Association.
(3) Prospectus.
(4) Preliminary Contract.
Ans: (2) Articles of Association.
(g) In case of a ‘One Person Company’, the maximum number of director / (s) is/are –
(1) one.
(2) two.
(3) five.
(4) fifteen.
Ans: (1). One.
(h) Independent director refers to –
(1) Managing director.
(2) Whole time director.
(3) Nominee director.
(4) None of the above.
Ans: (4) None of the above.
(i) Who can remove a company director?
(1) Central Government.
(2) Registrar of companies.
(3) National Company Law Tribunal.
(4) None of the above.
Ans: (3) National Company Law Tribunal.
(j) The Articles of Association must authorize a company to declared dividend. This statement is
(1) Correct.
(2) Incorrect.
(k) ‘NSDL’ is a depository participant. This statement is .
(1) Correct.
(2) Incorrect.
Ans: (1) Correct.
(l) ‘The Depositories Act was passed in the year 1986.”This statement is” –
(1) Correct.
(2) Incorrect.
Ans: Incorrect, The Depositories Act was passed in the year 1996.
(m) “Appointment of Internal auditors is a listed company is mandatory”. This statement is
(1) Correct.
(2) Incorrect.
Ans: Incorrect. (Appointment of internal auditors is not mandatory for a listed company, but it is recommended.)
(n) “According to the Companies Act, 2013, writing the word ‘Limited’ at the end of its name is not mandatory for a Private Company.” This statement is –
(1) Correct.
(2) Incorrect.
Ans: Incorrect. (A private company is required to use the word 'Limited' or 'Private Limited' at the end of its name.)
(o) “Five members personally present shall be the quorum for a meeting of private company.” This statement is –
(1) Correct.
(2) Incorrect.
Ans: Correct.
2. Give brief answer to the following questions: (any five) 2x5=10
(a) Define a company.
Ans: A company is a legal entity formed by individuals or groups of individuals to conduct business activities. It is a separate legal entity from its owners, known as shareholders, and has its own rights and liabilities.
(b) State any two advantages of a joint stock company.
Ans: Two advantages of a joint stock company are:
1. Limited liability: Shareholders are only liable for the company's debts up to the value of their shares, providing personal asset protection.
2. Capital raising: Joint stock companies can raise capital by issuing shares, allowing for large-scale investments and business expansion
(c) State any two limitations of the Articles of Association.
Ans: Two limitations of the Articles of Association are:
1. Rigidity: Once the articles are adopted, they can only be changed through a special resolution, making it difficult to adapt to evolving business needs.
2. Legal restrictions: The articles must comply with the applicable laws and regulations, limiting the flexibility to include provisions outside the legal framework.
(d) What is meant by Red Herring Prospectus?
Ans: A Red Herring Prospectus is a preliminary document issued by a company intending to go public. It contains information about the company and its operations but does not disclose the offer price or the number of shares being offered. It is used to generate investor interest and gather indications of interest before the final prospectus is issued.
(e) What is the Director's Identification Number (DIN)?
Ans: Directors Identification Number (DIN) is a unique identification number assigned to individuals who wish to be appointed as directors of companies in India. It serves as a digital signature and helps track the director's activities and associations with various companies.
(f) State the meaning of interim dividend.
Ans: Interim dividend refers to the dividend declared and paid by a company before the final determination of profits for a financial year. It is a dividend distributed based on the company's interim financial statements and is often paid out in the middle of the financial year.
(g) Who appoints the first director in a public company?
Ans: The first director in a public company is appointed by the promoters or subscribers to the Memorandum of Association. They play a crucial role in the initial formation and establishment of the company.
(h) Write the meaning of insider trading.
Ans: Insider trading refers to the buying or selling of company securities (such as stocks or bonds) by individuals who have access to non-public, material information about the company. It is considered illegal as it provides unfair advantages to those with inside information and undermines the integrity of the financial markets.
3. Answer the following questions in about 200 words each: (any four) 5x4=20
(a) Differentiate Private Company and Public Company.
Ans:
Private Company:A private company is a type of business entity that is privately owned and operated. Here are the key characteristics that differentiate a private company from a public company:
1. Ownership and Shareholders: A private company is owned by a small group of shareholders, often including founders, family members, or a select group of investors. The number of shareholders is limited, typically ranging from 2 to 200. Shares of a private company are not freely traded on a public stock exchange.
2. Capital Formation: Private companies raise capital through private investments, personal funds of shareholders, loans, or contributions from a limited group of individuals or entities. They are not open to public investment through the sale of shares on the stock market.
3. Disclosure and Compliance: Private companies have fewer disclosure and compliance requirements compared to public companies. They are not obligated to disclose their financial statements or other sensitive information to the public. However, they still need to comply with certain regulatory requirements, such as filing annual financial statements with the relevant authorities.
4. Management and Control: Private companies are often managed by their owners or a small board of directors. The decision-making process is typically more agile and less bureaucratic compared to public companies. The management structure can be more flexible, allowing for quicker responses to market changes.
Public Company: A public company, on the other hand, is a business entity that has its shares publicly traded on a stock exchange. Here are the key characteristics that differentiate a public company from a private company:
1. Ownership and Shareholders: A public company has a large number of shareholders, including individual and institutional investors. The shares of a public company are freely tradable on stock exchanges, allowing anyone to buy or sell them.
2. Capital Formation: Public companies raise capital by issuing shares to the public through an initial public offering (IPO) or subsequent offerings. They have access to a broader investor base and can raise substantial amounts of capital for expansion, acquisitions, or other purposes.
3. Disclosure and Compliance: Public companies have stringent disclosure and compliance requirements. They must comply with regulations regarding financial reporting, corporate governance, and disclosure of material information to shareholders and the public. They are required to file regular financial statements, annual reports, and other disclosures with relevant regulatory authorities.
4. Management and Control: Public companies often have a more complex management structure, with a board of directors overseeing the company's operations. Decision-making processes are typically more formalized, involving multiple levels of approval. Public companies may also have more stringent regulatory oversight and scrutiny.
In summary, private companies have limited shareholders, their shares are not publicly traded, and they have fewer disclosure requirements. Public companies have a larger shareholder base, publicly traded shares, and stricter compliance obligations.
(b) Explain the procedure of online registration of a company.
Ans: The online registration of a company involves a series of steps and procedures to establish a legally recognized business entity. While the specific process may vary depending on the jurisdiction, here is a general overview of the procedure:
1. Obtain Digital Signature Certificates (DSC): The first step is to obtain digital signature certificates for all proposed directors and shareholders. DSCs serve as an electronic signature and are required for online filing of documents.
2. Obtain Director Identification Number (DIN): Each proposed director must apply for a Director Identification Number (DIN) from the Ministry of Corporate Affairs (MCA) or the relevant authority. This unique identification number is mandatory for individuals serving as directors of a company.
3. Name Reservation: The next step is to select and reserve a unique name for the company. The proposed name should comply with the naming guidelines set by the regulatory authority. The name availability can be checked online through the MCA portal or the respective registrar of companies.
4. Prepare and File Incorporation Documents: The required documents for company registration, such as the Memorandum of Association (MOA) and Articles of Association (AOA), need to be prepared. These documents outline the company's objectives, rules, and regulations. Once prepared, these documents are filed online along with the necessary forms, such as the SPICe (Simplified Proforma for Incorporating Company Electronically) form.
5. Pay Registration Fees: The applicable registration fees based on the authorized capital of the company and other factors must be paid online through the MCA portal or the authorized payment gateway.
6. Obtain Certificate of Incorporation: After successful submission of the documents and payment of fees, the Registrar of Companies (ROC) verifies the application. If everything is in order, the ROC issues the Certificate of Incorporation, which serves as proof of the company's existence.
7. Apply for Permanent Account Number (PAN) and Tax Registration: After obtaining the Certificate of Incorporation, the company must apply for a Permanent Account Number (PAN) from the Income Tax Department. Additionally, depending on the nature of the business, the company may need to apply for Goods and Services Tax (GST) registration or other tax registrations.
It is important to note that the specific requirements, forms, and procedures may vary in different jurisdictions. It is advisable to consult the official website of the relevant regulatory authority or seek professional assistance to ensure compliance with the specific online registration process in a particular jurisdiction.
(c) Explain the differences between Memorandum of Association and Articles of Association.
Ans: The Memorandum of Association and Articles of Association are two essential documents that outline the constitution and rules of a company. While both are crucial for company formation, they serve different purposes.
The Memorandum of Association sets out the company's fundamental objectives, scope of activities, and its relationship with the outside world. It defines the company's name, registered office, authorized capital, and details of its subscribers. This document establishes the company's identity and its main goals, providing a legal framework for its existence.
On the other hand, the Articles of Association define the internal regulations and operational procedures of the company. They lay down the rules governing the management, administration, and decision-making processes within the organization. The Articles cover aspects such as shareholders' rights, board meetings, appointment of directors, issuance of shares, and dividend distribution. These rules ensure smooth functioning and governance of the company's affairs.
In summary, the Memorandum of Association focuses on the company's external aspects, such as its objectives and scope of operations, while the Articles of Association deal with its internal management and operational procedures. Both documents work together to establish the legal foundation and operational framework of a company.
(d) What do you mean by bonus share? What its advantages and disadvantages?
Ans: A bonus share, also known as a stock dividend, refers to the issuance of additional shares to existing shareholders of a company without any cost. It is a way for a company to distribute its profits or reserves to shareholders in the form of additional shares instead of cash dividends.
Advantages of bonus shares include:
1. Retained earnings utilization: Bonus shares allow a company to distribute accumulated profits or reserves among shareholders without depleting its cash reserves. This helps the company retain funds for future investments or expansion.
2. Increased liquidity: Bonus shares enhance the liquidity of existing shareholders by increasing the total number of outstanding shares. It provides shareholders with more tradable securities and the opportunity to increase their holdings if desired.
3. Positive market signal: Bonus shares often signify the company's confidence in its future prospects and financial stability. This can generate a positive perception among investors, potentially leading to an increase in the company's share price.
Disadvantages of bonus shares include:
1. Dilution of ownership: As bonus shares increase the total number of shares, the ownership percentage of existing shareholders gets diluted. This dilution may reduce their control and voting rights in the company.
2. Lower dividend per share: With more shares in circulation, the company's profits are divided among a larger number of shareholders, resulting in a lower dividend per share.
3. Market perception: Although bonus shares can indicate positive aspects of the company, some investors may interpret them as a lack of cash liquidity or inability to provide cash dividends, potentially impacting the market perception of the company.
It's important to note that the advantages and disadvantages of bonus shares can vary depending on the specific circumstances of the company and the preferences of its shareholders.
(e) Explain brief about the provisions of the Companies Act, 2013 relating to quorum of company meetings.
Ans: The Companies Act, 2013 provides provisions regarding the quorum of company meetings. Quorum refers to the minimum number of members required to be present at a meeting for it to be considered valid and capable of transacting business. The Act specifies the following rules regarding quorum:
1. Board Meetings: For a board meeting of a company, the quorum should be one-third of the total strength of directors or two directors, whichever is higher.
2. General Meetings of Public Companies: In the case of public companies, the quorum for a general meeting is:
a. At least five members present if the total number of members is up to 1,000.
b. At least fifteen members present if the total number of members is between 1,000 and 5,000.
c. At least thirty members present if the total number of members exceeds 5,000.
3. General Meetings of Private Companies: For private companies, the quorum should be at least two members present personally throughout the meeting.
4. Meetings of Creditors: In the case of meetings of creditors, the quorum should be present in person or by proxy representing one-fourth of the total value of outstanding debts.
It's important to note that if the quorum is not met, the meeting cannot proceed, and any resolutions passed in such a meeting will be invalid.
(f) Explain briefly about the different types of company meetings.
Ans: Different types of company meetings include:
1. Board Meetings: These meetings are held by the board of directors of a company to discuss and make decisions on various matters related to the company's management, operations, and strategic direction.
2. Annual General Meeting (AGM): The AGM is a mandatory meeting held by a company once a year. It provides an opportunity for shareholders to receive updates on the company's performance, approve financial statements, appoint or reappoint directors, and discuss other important matters.
3. Extraordinary General Meeting (EGM): An EGM is called to address urgent or specific matters that cannot wait until the next AGM. These meetings are held at any time other than the AGM and can be called by the board of directors, shareholders, or as required by law.
4. Class Meetings: Class meetings are conducted for specific classes or categories of shareholders or creditors, such as preference shareholders or debenture holders. These meetings are held to discuss matters that may affect the rights or interests of the particular class.
(g) Write a short note on the different modes of winding up of a company.
Ans: Winding up refers to the process of closing down or liquidating a company's operations and affairs. There are various modes or methods of winding up a company, each with its own circumstances and implications. Here are the main modes of winding up:
1. Voluntary Winding Up: This mode of winding up occurs when the shareholders or members of a company pass a resolution to voluntarily wind up the company. It can further be classified into two types:
a. Members' Voluntary Winding Up: This mode is applicable when the company is solvent, meaning it can pay off its debts in full within a specified period, usually not exceeding 12 months.
b. Creditors' Voluntary Winding Up: This mode is used when a company is insolvent, and it is unable to meet its financial obligations. The company's directors make a declaration of insolvency, and the liquidation process is carried out for the benefit of the creditors.
2. Compulsory Winding Up: This mode of winding up is initiated by an order of the court, usually due to various reasons such as insolvency, inability to pay debts, or a failure to commence business operations. The court appoints a liquidator who takes control of the company's assets, settles its liabilities, and distributes any remaining funds to the stakeholders.
3. Winding Up by the Tribunal: In certain jurisdictions, there might be a separate tribunal or authority empowered to oversee the winding up process. This tribunal has the authority to wind up a company based on specific grounds defined by the law.
4. Summary Winding Up: This mode of winding up is a quicker and simplified process available for small companies with relatively straightforward affairs. It allows for a more streamlined liquidation process without the need for lengthy court proceedings.
5. Provisional Liquidation: In some cases, the court may appoint a provisional liquidator to safeguard the company's assets and interests during a pending winding up application or legal dispute. The provisional liquidator manages the company until the court makes a final decision.
The winding up process involves various steps, including realization of assets, settlement of debts, distribution of remaining funds, and ultimately, dissolution of the company. It is important to note that the specific procedures and regulations regarding winding up may vary depending on the jurisdiction in which the company operates.
(h) Who are the different classes of directors? Explain.
Ans: The different classes of directors typically found in corporate governance structures are:
1. Executive Directors: These directors are typically full-time employees of the company and are responsible for the day-to-day management and operation of the organization. They often hold senior management positions such as CEO, CFO, or COO, and their primary role is to implement the strategic decisions made by the board of directors.
2. Non-Executive Directors: Non-executive directors are individuals who are not employed by the company but serve on the board to provide an independent perspective and oversight. They bring a diverse range of skills, expertise, and experience from various fields. Non-executive directors are often appointed based on their industry knowledge, governance expertise, and ability to contribute to the company's strategic direction.
3. Independent Directors: Independent directors are a specific subset of non-executive directors who have no material relationship with the company other than serving on the board. They are expected to bring objectivity and impartiality to the decision-making process. Independent directors play a crucial role in safeguarding the interests of shareholders and ensuring transparency and accountability within the organization.
4. Non-Independent Directors: Non-independent directors refer to those board members who have some form of relationship or affiliation with the company. They may be major shareholders, representatives of institutional investors, or executives from other companies within the same group. While they may provide valuable insights and industry expertise, their potential conflicts of interest need to be managed and disclosed appropriately.
5. Nominee Directors: Nominee directors are individuals appointed to the board by a particular shareholder or group of shareholders, often as a result of a significant investment or strategic partnership. These directors represent the interests of the appointing party and are expected to align their decisions with the shareholder's objectives. Nominee directors can bring specific expertise or strategic insights but need to balance their allegiance to the appointing shareholder with the broader interests of the company.
4. Answer any four from the following questions in about 600 words each: 10x4=40
(a) Elaborately discuss the basic features of a company citing relevant case laws.
Ans: A company is a legal entity formed by individuals or shareholders to carry on a business or any other lawful activity. It has distinct features that differentiate it from other forms of business organizations. Let's discuss the basic features of a company and cite relevant case laws to illustrate these features:
1. Separate Legal Entity:
One of the fundamental features of a company is its separate legal entity. A company is considered a legal person in the eyes of the law, distinct from its shareholders. This means that the company can own assets, enter into contracts, sue or be sued, and engage in legal activities in its own name. The concept of separate legal entity was established in the landmark case of Salomon v. Salomon & Co. Ltd. (1897), where it was held that a company is a separate entity from its shareholders, and the liability of the shareholders is limited to the value of their shares.
2. Limited Liability:
Limited liability is another important feature of a company. Shareholders of a company are generally not personally liable for the debts and obligations of the company. Their liability is limited to the amount unpaid on their shares or the value of their shares. This principle was reinforced in the case of Macaura v. Northern Assurance Co. Ltd. (1925), where it was held that a shareholder's interest in a company is distinct from their personal assets, and they cannot claim insurance on the company's property owned by the company.
3. Perpetual Succession:
A company has perpetual succession, meaning it has a continuous existence that is not affected by the death, bankruptcy, or retirement of its shareholders or directors. The company continues to exist even if there are changes in its ownership or management. This feature was upheld in the case of Lee v. Lee's Air Farming Ltd. (1961), where it was held that the company had a separate legal existence and could employ its sole shareholder as an employee.
4. Transferable Shares:
Shares in a company are transferable, allowing shareholders to freely buy and sell their shares, subject to any restrictions in the company's Articles of Association or Shareholders' Agreement. This feature promotes liquidity and ease of ownership transfer. In the case of Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (1982), it was held that the shares of a company are movable property and can be transferred like any other property.
5. Common Seal and Contracts:
A company can enter into contracts and execute documents using its common seal. The common seal is a stamp bearing the company's name and is affixed on important legal documents to indicate the company's agreement or authorization. This feature was highlighted in the case of Borland's Trustee v. Steel Brothers & Co. Ltd. (1901), where it was held that a company's common seal is its signature and has the same legal effect as a natural person's signature.
6. Centralized Management:
A company has a centralized management structure where the affairs of the company are managed by its directors. Shareholders appoint directors to manage the day-to-day operations of the company and make strategic decisions. Directors owe fiduciary duties to the company and must act in its best interests. The case of Smith v. Croft (1986) established that directors have a fiduciary duty to act honestly and in good faith, exercising their powers for proper purposes and in the best interests of the company.
These are some of the basic features of a company. It's important to note that case laws can vary based on the jurisdiction and the specific legal framework governing companies. The cases cited here provide notable examples that have contributed to the understanding and development of company law principles in various jurisdictions.
(b) What is a private company? Discuss the privileges enjoyed by a private company. 2+8=10
Ans: A private company, also known as a privately held company, is a type of business entity that is privately owned by a limited number of shareholders. Unlike a public company, a private company cannot offer its shares to the general public and usually operates with a more restricted ownership structure. Here is a discussion on the privileges enjoyed by a private company:
1. Limited Liability: One of the key privileges enjoyed by a private company is limited liability. The liability of the shareholders is limited to the extent of their shareholding in the company. In case of financial obligations or legal liabilities of the company, the personal assets of the shareholders are generally protected. This allows shareholders to invest in the company without exposing their personal assets to the same risks.
2. Ease of Formation: Private companies typically have simpler and less stringent requirements for formation compared to public companies. The process of incorporating a private company involves fewer legal formalities, reduced disclosure requirements, and less regulatory oversight. This streamlined formation process enables entrepreneurs to establish and start operating their businesses more quickly.
3. Flexibility in Shareholding: Private companies offer flexibility in terms of shareholding structure. They can be owned by a single individual or a small group of individuals, commonly known as shareholders. Private companies can issue different classes of shares, such as equity shares and preference shares, with varying rights and privileges. This allows for customized ownership arrangements and facilitates the allocation of specific rights and benefits to different shareholders.
4. Restricted Transfer of Shares: Private companies have more control over the transfer of shares compared to public companies. The shares of a private company are usually subject to certain restrictions on transfer, as specified in the company's Articles of Association or Shareholders' Agreement. These restrictions can include pre-emption rights, which require existing shareholders to be given the first opportunity to purchase the shares being transferred. This provides stability and control over the ownership structure of the company.
5. Confidentiality and Privacy: Private companies enjoy greater confidentiality and privacy compared to public companies. They are not required to disclose detailed financial information or business operations to the public. This enables private companies to maintain a higher level of privacy regarding their financial performance, strategic plans, and proprietary information.
6. Less Regulatory Compliance: Private companies have relatively lower regulatory compliance requirements compared to public companies. They are subject to fewer reporting and disclosure obligations. Private companies are not required to file their financial statements publicly or hold annual general meetings. This reduces administrative burdens and costs associated with regulatory compliance, allowing private companies to focus more on their business operations.
7. Greater Management Autonomy: Private companies have more flexibility and autonomy in their management decisions. The decision-making process is typically faster and less bureaucratic compared to public companies. The board of directors and shareholders have greater control over the company's strategic direction, operational decisions, and policies. This enables private companies to be more agile and responsive to market conditions and opportunities.
It's important to note that the privileges enjoyed by a private company may vary based on the jurisdiction and specific legal framework governing companies in that jurisdiction. The Companies Act or relevant company laws in each country outline the specific privileges and obligations applicable to private companies.
(c) What are the different clauses in the Memorandum of Association? Explain in detail about name clause and capital clause. 2+4+4=10
Ans: The Memorandum of Association (MoA) is a legal document that sets out the fundamental details and provisions of a company. It is one of the key documents required for the formation of a company. The MoA contains various clauses, and two important clauses are the Name Clause and Capital Clause. Let's discuss these clauses in detail:
1. Name Clause:
The Name Clause specifies the name of the company. It is the first clause in the Memorandum of Association and holds significant importance as it serves as the company's identity. Here are the key aspects related to the Name Clause:
- Unique Name: The name of the company must be unique and not identical or closely resembling the name of any existing company. This requirement ensures that there is no confusion or misleading representation in the business community or among the public.
- Approval by Registrar: Before finalizing the name, the promoters of the company need to submit an application to the Registrar of Companies (RoC) with proposed names. The RoC examines the availability and appropriateness of the name based on certain guidelines. If the proposed name meets the requirements, the RoC approves it.
- Legal Designations: The name should also include the appropriate legal designations based on the type of company being formed. For example, "Private Limited" for a private company, "Limited" for a public company, or "One Person Company" for a single-member company.
- Restrictions and Regulations: The name should comply with the restrictions and regulations set by the Companies Act or other relevant laws and regulations. These restrictions may include prohibitions on the use of certain words, phrases, or symbols that are misleading, offensive, or against public interest.
2. Capital Clause:
The Capital Clause specifies the authorized capital of the company and the division of the capital into shares. Here are the key aspects related to the Capital Clause:
- Authorized Capital: The authorized capital represents the maximum amount of capital that a company is authorized to raise by issuing shares. It is mentioned in the Memorandum of Association. The company cannot issue shares beyond this authorized capital without amending the MoA.
- Currency and Value: The Capital Clause states the currency in which the authorized capital is denominated (usually the local currency) and the total value of the authorized capital. This value can be any amount as determined by the promoters, subject to the minimum capital requirements prescribed by the relevant laws.
- Division into Shares: The Capital Clause further divides the authorized capital into shares. It specifies the total number of shares authorized, the face value of each share, and the type of shares (e.g., equity shares, preference shares). The division of shares determines the ownership structure of the company.
- Alteration of Capital: If the company intends to alter its share capital at any point, such as increasing the authorized capital or altering the division of shares, it requires a special resolution passed by the shareholders and subsequent approval from the Registrar of Companies.
The Name Clause and Capital Clause are fundamental elements of the Memorandum of Association. The Name Clause establishes the unique identity of the company, while the Capital Clause defines the authorized capital and the division of shares. These clauses provide the foundation for the company's formation, identity, and financial structure.
(d) What are the different matters that must be stated in the prospectus? Who can be held responsible for misstatement in the prospectus? 6+4=10
Ans: The prospectus is a legal document issued by a company to invite the public to subscribe to its shares or debentures. It contains essential information about the company, its operations, financials, and the offer being made. Let's discuss the different matters that must be stated in the prospectus and who can be held responsible for any misstatements:
1. Promoters and Management: The prospectus must provide information about the promoters, their background, and their involvement in the company. It should also disclose the particulars of the management team, including the directors, their qualifications, experience, and remuneration.
2. Company Information: The prospectus should include details about the company's incorporation, its registered office address, and the objects for which it was formed. It should also mention the company's history, major subsidiaries, and any changes in its name, registered office, or capital structure.
3. Capital Structure: The prospectus must outline the company's authorized, issued, and subscribed capital. It should specify the number and types of shares or debentures being offered, their face value, and the issue price. Details regarding any share premium, if applicable, should also be provided.
4. Financial Information: The prospectus should contain financial statements, including balance sheets, profit and loss statements, and cash flow statements. These financial statements must be audited and should cover at least the previous three financial years. The prospectus should also disclose any material changes in the company's financial position since the last audited financial statements.
5. Risk Factors: The prospectus must outline the risks associated with investing in the company's shares or debentures. These risks may include industry-specific risks, regulatory risks, competition, and any other factors that may impact the company's performance and prospects.
6. Litigation and Defaults: Any pending litigation, disputes, or defaults involving the company or its promoters should be disclosed in the prospectus. This includes any legal proceedings, regulatory actions, or defaults on debt obligations that may have a material impact on the company's financials or reputation.
7. Statutory and Legal Information: The prospectus should provide information about the company's compliance with statutory and legal requirements. This includes details about statutory approvals, licenses, permits, and any non-compliance issues or penalties imposed on the company.
8. Expert Opinions: If the prospectus contains statements made by experts, such as valuers, accountants, or engineers, their names, qualifications, and consent to the inclusion of their opinions should be provided. These statements should be based on reliable information and be fairly presented.
The responsibility for the misstatement in the prospectus can be attributed to various parties involved, including:
- Directors and Promoters: The directors and promoters of the company are primarily responsible for the contents of the prospectus. They have a duty to ensure that the information disclosed is accurate, complete, and not misleading.
- Experts: If the prospectus includes statements or opinions by experts, they can be held responsible for any misstatements or omissions in their respective areas of expertise.
- Company: The company itself can be held responsible for any misstatements in the prospectus if it fails to exercise due diligence and proper verification of the information provided.
- Other Parties: In some cases, intermediaries, such as underwriters, registrars, or legal advisors, may also be held responsible if they are found to have actively participated in the preparation or dissemination of a misleading prospectus.
It's important to note that the specific liabilities and legal consequences for misstatements in a prospectus may vary across jurisdictions. It's advisable to consult the relevant securities laws and regulations applicable in your specific jurisdiction for precise guidance.
(e) Examine the provisions of the Companies Act 2013 relating to appointment of company.
Ans: The Companies Act 2013, which is the primary legislation governing companies in India, provides provisions relating to the appointment of directors in a company. Let's examine these provisions in detail:
1. Eligibility and Qualifications:
Section 152 of the Companies Act 2013 specifies the eligibility criteria and qualifications for the appointment of directors. According to this section, a person must:
- Be an individual.
- Have attained the age of majority.
- Possess a Director Identification Number (DIN) issued by the Ministry of Corporate Affairs (MCA).
- Not be disqualified under the Act from being appointed as a director.
2. Appointment of Directors:
The appointment of directors is primarily governed by the following provisions:
- Section 152: This section outlines the procedure for the appointment of directors. It states that directors, other than the first directors, are appointed by the shareholders through an ordinary resolution in a general meeting.
- Section 160: This section allows any member of the company to propose a person's name for appointment as a director. The member needs to submit a written notice to the company at least 14 days before the meeting, along with the necessary documents and consent to act as a director.
- Section 161: This section provides for the appointment of additional directors and alternate directors by the board of directors. However, such appointments are subject to subsequent approval by the shareholders at the next general meeting.
- Section 162: This section allows small shareholders to elect a director in companies where the Articles of Association provide for such a provision.
3. Independent Directors:
Section 149 of the Companies Act 2013 introduces the concept of independent directors. It mandates the appointment of independent directors in certain categories of companies to bring in independent judgment and enhance corporate governance. The provisions specify the criteria, tenure, and obligations of independent directors.
4. Director Identification Number (DIN):
Section 154 of the Companies Act 2013 establishes the requirement for every individual intending to be appointed as a director to obtain a DIN. The DIN serves as a unique identification number and is obtained by making an application to the MCA.
5. Consent and Disclosure:
Section 152(5) and Section 184 of the Companies Act 2013 state that a person being appointed as a director must give his/her written consent to act as a director and provide a declaration confirming his/her eligibility, absence of disqualification, and other necessary disclosures.
6. Rotation of Directors:
Section 152(6) and Section 164 of the Companies Act 2013 provide for the rotation of directors. As per these provisions, certain classes of public companies are required to rotate their directors by retiring one-third of the directors by rotation at every annual general meeting. Retiring directors are eligible for reappointment unless disqualified.
It's important to note that the Companies Act 2013 also contains provisions related to the removal, resignation, retirement, and disqualification of directors, which further regulate the appointment process.
These provisions aim to ensure that the appointment of directors in a company is conducted in a transparent and accountable manner, promoting good corporate governance and safeguarding the interests of shareholders and stakeholders.
(f) What is meant by dividend? Discuss the statutory provisions relating to declaration of dividend by a company. 2+8=10
Ans: A dividend is a distribution of profits made by a company to its shareholders. It represents the portion of earnings that a company decides to distribute to its shareholders as a return on their investment. Dividends are typically paid in cash, but they can also be in the form of additional shares or other assets.
The statutory provisions relating to the declaration of dividends by a company:
1. Authority to Declare Dividend:
The power to declare dividends is vested in the company's board of directors. The board exercises this authority on behalf of the shareholders. The specific authority to declare dividends is usually granted by the company's Articles of Association or bylaws.
2. Availability of Profits:
Before declaring a dividend, the company must ensure that it has sufficient distributable profits available. Distributable profits generally include the accumulated profits of the company, reserves that can be distributed, and any other amounts that may be authorized for distribution under applicable laws and regulations.
3. Board Resolution:
The board of directors holds a meeting to consider the declaration of a dividend. They review the company's financial statements, evaluate the available profits, and determine the amount to be distributed. The board passes a resolution approving the dividend declaration.
4. Approval by Shareholders:
In many jurisdictions, the declaration of a dividend requires approval by the shareholders. This approval is typically obtained during the company's annual general meeting (AGM). The shareholders review the board's proposal for the dividend, and if approved by the requisite majority, the dividend is declared.
5. Record Date and Payment Date:
After the dividend is declared, the company establishes a record date. The record date is the date on which shareholders must be on the company's books as registered shareholders to be eligible for the dividend. The payment date, also known as the dividend payment date, is the date on which the dividend is actually paid to the eligible shareholders.
6. Compliance with Legal Requirements:
When declaring a dividend, the company must comply with the legal requirements and regulations applicable in the jurisdiction. These requirements may include restrictions on the distribution of dividends, such as maintaining a minimum level of capital, meeting solvency tests, or settling any outstanding liabilities.
7. Dividend Warrants or Electronic Transfers:
The company issues dividend warrants or uses electronic transfer systems to distribute dividends to shareholders. Dividend warrants are physical documents that entitle the shareholder to receive the dividend payment. Electronic transfers are more common nowadays, where the dividend amount is directly credited to the shareholder's bank account.
It's important to note that the specific statutory provisions and regulations governing the declaration of dividends may vary across jurisdictions. It's advisable to consult the applicable company law and regulations in your specific jurisdiction for accurate and detailed information.
(g) Discuss the procedure of appointment of company auditors. Also state the procedure of removal of company auditor. 7+3=10
Ans: The appointment and removal of company auditors are important processes that ensure the integrity and accuracy of a company's financial statements. Let's discuss each procedure in detail:
1. Appointment of Company Auditors:
The appointment of auditors is typically governed by the company's governing documents, such as the Articles of Association or bylaws. The procedure for appointing auditors generally involves the following steps:
a. Eligibility and Qualifications: The auditor must meet the eligibility criteria specified by the applicable laws and regulations. These criteria often include professional qualifications and certifications, such as being a registered public accountant or a member of a recognized professional accounting body.
b. Board Approval: The appointment of auditors is usually initiated by the company's board of directors. The board identifies potential candidates based on their expertise, reputation, and independence. They may also consider recommendations from the company's shareholders.
c. Shareholder Approval: In many jurisdictions, the appointment of auditors requires approval by the shareholders. This is typically done during the company's annual general meeting (AGM). The shareholders are provided with information about the proposed auditors, their qualifications, and any existing relationships with the company.
d. Term of Appointment: The shareholders approve the appointment for a specific term, which is often one year. However, some jurisdictions allow longer terms, usually up to a maximum of five years. After the term ends, the auditors may be reappointed if approved by the shareholders.
e. Legal Compliance: The appointed auditors must comply with any legal requirements and regulations applicable to their role. They may be required to sign engagement letters or contracts outlining the scope of their work, responsibilities, and fees.
2. Removal of Company Auditor:
There may be instances when a company needs to remove its auditor due to various reasons, such as a lack of confidence, non-performance, or legal requirements. The removal procedure typically involves the following steps:
a. Board Resolution: The board of directors discusses and evaluates the reasons for the removal of the auditor. If a sufficient majority of the board members agrees, they pass a resolution recommending the removal of the auditor.
b. Extraordinary General Meeting (EGM): The company must convene an EGM to seek shareholder approval for the auditor's removal. The EGM must be called in accordance with legal requirements and company bylaws, specifying the notice period and the agenda.
c. Shareholder Approval: During the EGM, the shareholders vote on the resolution to remove the auditor. The resolution must usually pass by a specified majority, such as a simple majority or a special majority, as defined by the applicable laws and regulations.
d. Notification and Compliance: Once the resolution is passed, the company must notify the relevant regulatory authorities and the outgoing auditor of the decision. The company may also need to provide the reasons for the removal as required by the applicable laws.
e. Appointment of a New Auditor: After the removal of the previous auditor, the company needs to appoint a new auditor following the procedure outlined earlier.
It's important to note that the specific procedures for the appointment and removal of auditors can vary depending on the jurisdiction and the company's governing documents. It's advisable to consult the relevant laws and regulations applicable in your specific jurisdiction for precise guidance.
(h) Discuss the rights and obligations of depositories under the Depositories Act, 1996.
Ans: Under the Depositories Act, 1996, depositories play a vital role in the Indian securities market by facilitating the electronic holding, transfer, and settlement of securities. The Act outlines the rights and obligations of depositories, which are summarized as follows:
Rights of Depositories:
1. Right to maintain and operate securities accounts: Depositories have the right to maintain and operate securities accounts on behalf of investors. These accounts hold securities in electronic form, eliminating the need for physical certificates.
2. Right to transfer securities: Depositories can transfer securities from one investor's account to another investor's account through a book-entry system. This facilitates seamless and efficient transfer of securities without the need for physical movement or paperwork.
3. Right to receive corporate benefits: Depositories have the right to receive corporate benefits, such as dividends, interest, rights issues, bonus issues, and other entitlements, on behalf of the investors holding securities in their accounts. Depositories ensure that these benefits are credited to the respective investor accounts.
4. Right to inspect and access information: Depositories have the right to inspect and access information from issuers, participants, and other entities involved in the securities market. This enables them to carry out their functions effectively and ensure compliance with relevant laws and regulations.
Obligations of Depositories:
1. Obligation to maintain records: Depositories are obligated to maintain accurate and up-to-date records of all securities held in electronic form. These records include details of investors, securities balances, transfers, and other relevant information.
2. Obligation to maintain confidentiality: Depositories must maintain the confidentiality of investor information and protect it from unauthorized access or disclosure. They are required to establish robust security measures to safeguard the integrity and privacy of investor data.
3. Obligation to provide services: Depositories are responsible for providing efficient and reliable depository services to investors, issuers, and other market participants. These services include account maintenance, transfer and settlement of securities, corporate actions, and other related activities.
4. Obligation to comply with regulations: Depositories must comply with the regulations, guidelines, and directions issued by the Securities and Exchange Board of India (SEBI) and other regulatory authorities. They are required to establish and follow robust operational and risk management practices to ensure the integrity and stability of the depository system.
5. Obligation to resolve investor grievances: Depositories are responsible for promptly addressing investor grievances related to their services. They must establish a grievance redressal mechanism and provide investors with a fair and transparent process for resolving complaints or disputes.
By fulfilling their rights and obligations, depositories contribute to the efficient functioning of the securities market, promote transparency, reduce risks associated with physical securities, and facilitate ease of trading and settlement for investors.
(i) Discuss the provisions of the Companies Act, 2013 relating to allotment of shares. Also state the meaning of irregular allotment. 8+2=10
Ans: The Companies Act, 2013 in India contains provisions governing the allotment of shares by companies. Here are some key provisions related to the allotment of shares:
1. Allotment of Shares: Section 39 of the Companies Act, 2013 deals with the allotment of shares. According to this provision, a company can allot shares to individuals or entities who have applied for shares and made the necessary payment. The allotment must be made within 60 days from the date of receipt of the application money.
2. Authorized Share Capital: Section 61 of the Companies Act, 2013 specifies that a company cannot allot shares in excess of the authorized share capital mentioned in its Memorandum of Association, unless it has obtained the approval of the shareholders through a resolution passed in a general meeting.
3. Issue of Securities in Dematerialized Form: The Act also emphasizes the issue of securities in dematerialized form. As per Section 29 of the Companies Act, 2013, every public company must issue securities only in dematerialized form. This provision aims to promote transparency, efficiency, and ease of trading in securities.
4. Rights Issue: Section 62 of the Companies Act, 2013 deals with rights issue, which is the offer of shares to existing shareholders in proportion to their existing shareholding. It specifies the procedures and requirements for making a rights issue, including the issue of a letter of offer, the time limit for acceptance or renunciation of rights shares, and the consequences of non-acceptance or renunciation.
5. Private Placement: Section 42 of the Companies Act, 2013 governs private placement, which refers to the offer and allotment of securities to a select group of people (not exceeding 200) without a public offer. It outlines the procedures, disclosures, and compliances to be followed for private placement.
Now, let's discuss the meaning of irregular allotment:
Irregular Allotment: Irregular allotment refers to the allotment of shares that does not comply with the provisions of the Companies Act, 2013 or any other applicable laws or regulations. It includes instances where the company makes allotments in violation of the prescribed procedures, without obtaining necessary approvals, or exceeding the authorized share capital, among other non-compliances.
Irregular allotments are considered improper and can have legal implications. They may render the allotment voidable, meaning it can be challenged by affected parties or regulators. In such cases, the company may be required to rectify the irregularity, cancel the allotment, or face penalties and other consequences as provided by the law.
It is crucial for companies to ensure strict compliance with the provisions of the Companies Act, 2013 and other relevant laws while making share allotments to maintain transparency, protect shareholders' interests, and comply with regulatory requirements.
(j) What are the different committees required to be formed by the Board of Directors of a company? State the functions of these committees. 2+8=10
Ans: The different committees required to be formed by the Board of Directors of a company can vary depending on the specific requirements and regulations of each jurisdiction. However, some commonly formed committees include:
1. Audit Committee:
- Function: Oversees the financial reporting process, internal controls, and audit functions.
- Responsibilities: Reviews financial statements, monitors internal controls, selects and evaluates external auditors, ensures compliance with accounting standards, and assesses financial risks.
2. Nomination and Remuneration Committee:
- Function: Deals with matters related to the appointment, remuneration, and evaluation of directors and key managerial personnel.
- Responsibilities: Identifies and recommends suitable candidates for board positions, determines the remuneration policy, evaluates performance, and ensures transparency in remuneration practices.
3. Risk Management Committee:
- Function: Identifies and manages various risks faced by the company.
- Responsibilities: Assesses risks, formulates risk management policies, implements risk mitigation strategies, and monitors risk exposures across the organization.
4. Corporate Social Responsibility (CSR) Committee:
- Function: Oversees the company's CSR activities and ensures compliance with CSR regulations.
- Responsibilities: Develops CSR policies and programs, approves CSR projects, monitors their implementation, and ensures transparency in reporting CSR activities.
5. Governance and Compliance Committee:
Function: Ensures compliance with corporate governance principles and regulatory requirements.
Responsibilities: Reviews the company's corporate governance practices, monitors compliance with applicable laws and regulations, establishes internal control mechanisms, and addresses governance-related issues.
6. Strategy Committee:
- Function: Assists the board in formulating and evaluating the company's strategic plans.
- Responsibilities: Reviews business strategies, assesses market conditions, identifies growth opportunities, monitors industry trends, and provides guidance on long-term strategic decisions.
It's important to note that the specific functions and responsibilities of these committees can vary based on the company's size, industry, and legal requirements. Additionally, some companies may establish additional committees based on their specific needs, such as technology committees, ethics committees, or mergers and acquisitions committees.
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