Page 1 of 16 COMPANY.LAW

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1 Page 1 of 16 COMPANY.LAW Definition ;- Sec 3 (I) (i) of the Companies Act, 1956 defines a Company as A Company means a Company formed and registered under this Act or an existing Company. An existing Company means a Company, formed and registered under any of the former Companies Act. However this definition fails to provide us with any idea as to the characteristics of a company. A Company may therefore be defined as a voluntary incorporated body, which is an artificial legal person, having a separate legal entity, with a perpetual succession, common seal, a common capital consisting of transferable shares and carrying a limited liability. Characteristics of a Company. 1) Independent Corporate Existence :- A Company is vested with corporate personality which is independent of and distinct from its members. Consequently a member of the company cannot be held liable for any acts and debts of the company even though he may virtually hold the entire share capital. Case :- The decision of the House of Lords in Salomon v Salomon and Co Ltd is a well known authority on the subject. In this case, One Salomon incorporated a company to take over his personal business of manufacturing boots and shoes. The seven subscribers to the memorandum were all the members of his own family each taking only one share. The company s board of directors was composed of Salomon as the managing director, and his sons and daughter. Through this board, Salomon business was transferred to the company at an agreed price in payment of which Salomon was allotted 20,000 shares of 1 Pound each and debentures worth pounds creating a charge on the company s assets. Within a year the company came to be wound up and its state of affairs was like this : Assets 6,000 pounds, Liabilities (1 ) Debenture Creditors 10,000 pounds, (2) Ordinary Creditors 7,000 pounds. It was argued on behalf of unsecured creditors that, though incorporated under the companies Act, the company never had an independent existence. It was Salomon himself trading under another name. But the House of Lords held that Salomon and Co must be regarded as a separate person from company 2) Perpetual Succession. :- Members may come and go but the company goes on for ever. 3) Limited Liability :- The liability of the members of the company is limited to the extent of the nominal value of the shares held by them. In no event the member is liable to pay anything more than the unpaid value of his share except in the case of Company limited by guarantee. 4) Transferable shares.:- The shares of the joint stock company are freely transferable and there are no restrictions on the right to transfer the shares except in the case of the private limited company.

2 Page 2 of 16 5) Separate property ;- As a corporate person, the company is entitled to own and hold a property in its own name. No member can claim ownership of any item of the company s assets. 6) Power to sue and be sued.;- The law recognises the existence of a company, quite independent of the motives, intentions, schemes or conduct of its individual shareholders and therefore can sue and be sued in its own name 7) Artificial person:- A company is an artificial person and functions through its board of directors, but not a citizen and cannot enjoy the rights under the Constitution of India or Citizenship Act. 8) Common Seal.:- The company has a separate, independent and legal existence under its own common seal. It can enter into the contracts with outsiders, directors or with its own members. Disadvantages 1) Lifting the corporate veil.:- A veil means a curtain. The corporate veil is sometimes required to be lifted to find out the real purpose of forming a company as it may be formed with the sole intention of committing a fraud upon the people, creditors or the government. At such times the court ignores the separate identity of the company and lifts the veil. The Corporate veil is lifted in the following circumstances. a) To investigate the relationship between the holding company and the subsidiary company. b) To investigate the number and names of the members of the company c) To investigate the true ownership of shares and controlling power over the company. d) To investigate lawful objects of the company. e) To investigate mismanagement and oppression by the majority. f) To investigate into the company s affairs where it is used for tax evasion or to circumvent tax obligation. g) To investigate if the company is acting as an agent for its shareholders. h) To investigate the affairs, where it is formed for fraudulent purpose. 2) Formalities and expenses. The formation procedure is very lengthy, complicated and time consuming involving lengthy procedure. 3) Company is not a Citizen:- Though a company is a legal person,it is not a citizen either under the Constitution of India or under the Citizenship Act.It,therefore, does not enjoy fundamental right, guaranteed by the constitution.

3 Page 3 of 16 Memorandum of Association :- Meaning :- Memorandum of Association is an essential document for registration of a company. It is the charter of the company. Memorandum sets out the constitution of the company and provides the foundation on which the company is built. It lays down the objects and scope of activities of the company and also defines the relationship of the company with outside world. Section 14 of the Act provides that the Memorandum of Association of a company shall be in such one of the Forms in Tables B,C,D and E, in schedule I of the Act. Table B is prescribed for a company limited by shares. Table C is prescribed for a company limited by guarantee and not having share capital, Table D for a company limited by guarantee and having share capital Table E for an unlimited liability company. Definitions :- 1) Under Section 2(28) of Indian Companies Act, 1956 "Memorandum means the Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous Companies Law or of this Act" The above definition does not clearly indicate what is meant by Memorandum nor does it prescribe as to the importance of this document in relation to the affairs of the company. 2) According to L.J. Bowen, "The Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. These conditions are introduced for the benefit of the creditor and outside public as well as of the shareholders" 3) According to Lord Justice Cairns, "The Memorandum of Association of a company is its charter and defines the limitations of company established under the Act." Characteristics of Memorandum :- 1. Memorandum is a fundamental document prescribing the constitution of the Company. 2. It is essential for all kinds of companies to make the Memorandum originally for its registration. 3. It lays down the objects of its incorporation. 4. It is the charter of the company and defines the limitations of powers of the company. 5. It is public document to be seen, read and understood by the public. 6. When the Memorandum is registered, it is the evidence that the company is registered. 7. It is the basis of contract entered into between the company and the third parties.

4 Page 4 of It contains the fundamental conditions upon which alone the company is allowed to be incorporated. 9. Its purpose is to enable the shareholders, creditors and whose who deal with it to know what are its range of activities. Objects of Memorandum :- 1. To protect the shareholders and creditors by insuring that the funds raised for the purpose, are not going to be risked in another. 2. It prevents diversification of company's activities not closely connected with the business for which the company is formed initially. 3. To inform the company's position to enter into any contract. 4. To get the company registered under the Act. No company can be formed without framing its Memorandum. 5. To show the liability of the person to be interested in becoming members of the company. 6. To identify a company whether it is a foreign company or an Indian company. 7. To form the very basis of the relationship between the company and its members and member's inter-se. Importance of Memorandum :- Its importance are clearly known from the following : 1. The Memorandum defines the limitations of powers of the company established under the Act. 2. It defines the fundamental conditions of company's incorporation. 3. It is the most important document with regard to its constitution. 4. "It is really the foundation on which the structure of the company is based." 5. It gives another opportunity to the prospective investor to know within what field his money is to be invested. 6. It gives another opportunity to the outsiders to know the nature of activities the company is authorized to carry on and accordingly their rights against the company is times of breach of contract. 7. The creditors are able to know the risk involved in giving loans to the company and thus protect their interests. 8. It reserves the national interest. No company can be formed for the object of which clashes with national interest. 9. The contents of Memorandum cannot be altered even by the unanimous consent of its members. They can be altered for specific proposes as given by the Act. Objects Clause: - A company is formed for some specified objects, which are stated in the Memorandum of Association. The objects of a company should be lawful and they must not offend against the provisions of the Companies Act, the general law, or be immoral or opposed to public policy. The objects should be clearly and definitely expressed. It should specifically state all the different kinds of business. The companies, which were formed prior

5 Page 5 of 16 to the Companies (Amendment) Act of 1965, the objects clause had simply to state the objects of the company. But after the amendment in 1965, it requires that the objects clause must be divided into three sub-clauses, namely [Sec 13(1)]: Main Object: The clauses has to state the main objects, to be pursued by the company on its incorporation, Other Objects: This clause must state other objects, which are not included in the main objects. [Sec. 13 (1) (d)] The objects clause in the Memorandum is the sense of the Memorandum. It has mainly the following importance: 1. It determines the scope and limitations of the activities of the company. 2. It protects the shareholders and the creditors as they may know the purpose to which their contribution can be lawfully applied.. 3. It restricts economic concentration as it suggests a uniform policy of allotment of shares by the Board of Directors. 4. It exercise control over Board of Directors in investing the funds of the Company. 5. It prevents diversification of a company's activities in directions not closely connected with the business, for which it was initially established (See D.L. Mazumdar, towards a philosophy of the modern Corporation, 1967) Doctrine of ultra-virus Definition: The Act has not defined this term anywhere. But the Indian and foreign judiciary have defined the term on many occasions, a few of them are given below: 1. According to Justice Cairns, "An ultra-vires contract is void and cannot be ratified even by the unanimous consent of the shareholders". 2. According to Supreme Court of India, " An Act beyond the objects mentioned in the Memorandum is ultra-vires, void and cannot be ratified". Doctrine of Ultra Vires.:- Ultra means beyond and vires means authority. Hence ultra vires means any act which is beyond authority or outside the scope of the authority. There are two terms, intra vires and ultra vires. Intra vires means any act within the scope of the authority and which is binding on the company.it is the function of the court to see that the company does not move in the wrong direction away from that field That is where the doctrine of ultra vires comes into play in relation to the company because the object clause in the memorandum prescribes the limits beyond which the company cannot act.thus any act of the company, or any contracts which are

6 Page 6 of 16 outside the object clause of the Memorandum, they become Ultra Vires (i.e beyond the powers of ) the company. Case :- Ashbury Railway Carriage and Iron Co Ltd. v.riche. (1875 ), decided by the Lordships of the House of the Lords. The memorandum laid down the objects for which the company is established are to make and sell, or lend on hire railway carriages and wagons and all kinds of railway plants etc; to carry on the business of mechanical engineers and general contractors. The company entered into the contract with M/S Riche, a firm of Railway Contractors, to finance the construction of a railway line in Belgium. The company, however repudiated the contract as one ultra vires and Riche brought an action for damages for breach of contract. His contentions were that the contract in question came well within the meaning of the words general contractors and therefore was within the powers of the company, and secondly that the contract was ratified by a majority of the shareholders. The House of the Lords held that the contract was ultra vires, that is beyond the powers of the company and therefore null and void. Effects of ultra-vires acts/transactions 1. Injunction by any member Wherever an ultra-vires act has been or is about to be committed by the company, any member can get an injunction to restrain from proceeding with it. 2. Personal liability of the directors It is one of the duties of directors to see that the funds of the company are used only for the legitimate business purposes. If any part of it has been diverted to beyond the objects laid down by memorandum, they are personality liable to replace the funds. 3. Breach of warranty of authority The directors of a company are its Agents. It is the duty of an Agent to act within the scope of his authority. If the agent acts beyond the scope of this authority, he will be personally liable to the third party for breach of warranty of authority. 4. In ultra-viresly acquired property the company's right secured. If a company purchases some property with its own money by ultra-viress act, its right over the property shall be held secure. This is because that, though the property was acquired wrongly, it represents the capital of the company. 5. Ultra-vires act cannot be ratified. "An ultra-vires contract, being void ab inito, cannot become intravires by reasons of estoppel, lapse of time, ratification, acquiescence or delay. This was stated by Lord Cairns in the same case: Ashbury Rly. Co. V/s Riche, No performance on either side may give the unlawful contract any validity. The company is not bound by such contract and there is no legal enforceability. 6. Ultra-vires contract is null and void An ultra-vires contract is null and void and cannot be ratified even by the unanimous consent of the shareholders.

7 Page 7 of Loan cannot be recovered Where there in an ultra-vires borrowing, the lender has not right of action in respect of the loan against the company. But he has certain rights in respect of the money under the transactions with a banking business. Exceptions Ultra-vires acts are null and void. However, under certain circumstances they may be made operative. Such circumstances are: If any act committed by the directors beyond their powers falls within the powers of the company, it may be ratified by passing a resolution in the company's meeting. The Directors may be exempted from their liabilities for acting beyond their powers, if it is proved that they acted in good faith and by keeping the interests of the company. Articles of Association The Articles of Association are the rules and regulations for carrying into effect the object of the company as defined in the Memorandum, and for the purpose of internal management of a company. It regulates the manner in which the company's affairs will be managed. Definition 1. Section 2(2) of the Companies Act defines, "Articles means the Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous Company Laws or of the Act." 2. According to Justice Charlesworth, "The Articles of Association is a document regulating the rights of members of the company among themselves and the manner in which the business of the company shall be conducted." Characteristics 1. The Articles of a company are subordinate to Memorandum. 2. Articles are controlled by Memorandum. 3. It defines the duties, the rights and the powers of the governing body as between themselves and the company at large. 4. Articles regulate the internal management of the company. 5. The members of the company have full control over the Articles and they may alter them, when they may think proper, within the provisions of Memorandum. 6. Articles are printed documents divided into various sections. 7. It is not obligatory for a public company to frame and register the Articles of Association along with the Memorandum. It may adopt Table "A" of Schedule I. 8. Articles are public documents that are subject to inspection by the public. 9. The Articles set out the rights and duties of the members of the company and constitute a contract between them.

8 Page 8 of The third parties or the outsiders are in no way bound by the provision of Articles. 11. The Articles may authorize the company to alter its Memorandum to provide for unlimited liability to its directors and officers. Subject-matter or Contents of Articles of Association 1. A statement to the effect whether Table "A" has fully or partly been adopted. 2. Definition of important words & phrases used. 3. Rules regarding allotment of shares, etc. 4. Fixation of minimum subscription. 5. Payment of under-writing commission. 6. Rules regarding transfer and transmission of shares. 7. Rules regarding calls on shares. 8. Rules regarding meetings, notices, voting, proxy, polls etc. 9. Dividends and reserves. Legal effects of Articles and Memorandum The Memorandum and Articles shall, when registered, bind the company and the members thereof, to the same extent as if they respectively had been signed by the company and each member, and contained covenants on its and his part to observe all the provisions of the Memorandum and Articles. Thus, after the registration of Memorandum and Articles, a special kind of contractual relationship is established between the company and its members in the following manner: 1. Binding on members in their relation to the company, or creation of liability of members to the company. On the registration of the Memorandum and Articles, each member is bound to the company by a statutory covenant. As such, he is bound to comply with the provisions of the Articles strictly. 2. Binding on company in relation to members, or creation of company's liability towards its members. Just as members are bound to the company, the company also is bound the members, to observe and follow the provisions of the Articles in respect of their rights. 3. Binding between members', or members' inter-se Each member is bound by the Articles to the other members although there exists no contract in terms between individual members of the company. The Articles constitute a binding contract between each member and the other members to observe the provisions of the Articles. 4. Not in relation to an outsider Here the expression outsider means a person who is not a member. The Articles bind the members to the company and vice-versa. But neither of them is bound to an outsider to give effect to the Articles. Doctrine of Constructive Notice The Memorandum and the Articles become public documents when they are registered with the Registrar. They are open and accessible to all (the right of inspection, etc. is expressly guaranteed by Section 610 of the Act).

9 Page 9 of 16 It is, therefore, the duty of an outsider dealing with the company to inspect its public documents first and make sure whether the contract is in conformity with the provisions of Memorandum and Articles. It is, thus, expected from every person dealing with the company to have read these documents but to have understood them according to their proper meaning, thus to have had constructive notice of their contents. This kind of presumed notice is called Constructive Notice. Doctrine of Indoor Management (exception to the Doctrine of Constructive Notice) Doctrine of Indoor Management lays down that outside parties dealing with the companies are not concerned with the internal management of the company. They are entitled to assume that, so for as the internal proceedings are concerned, everything has been regularly done. The details of internal proceedings are not open to public inspection also. "An outsider is presumed to know the constitution of a company; but not what may or may not have taken place within the doors that are closed to him" (Viscount Hadane in Pacific Court Coal Mines Ltd. V/s Arbuthnot, 1917). This means that a person dealing the company shall not be expected to know more about what is happening inside the company office. For example, where the directors of a company having power to allot shares only with the consent of the general meeting, allotted shares without due consent, the person who purchases the shares is not supposed to know, at the time of purchase, whether the directors have obtained the due consent of the general meeting or not. These are matters of internal management, which an outsider is not expected to know. This limitation's of the doctrine of constructive notice is known as the Doctrine of Indoor Management. The Articles empowered the directors to issue a bond provided its issue was authorized by a resolution passed at the general meeting of the company. The directors borrowed money from Turquand and issued a bond without the authority of resolution passed at the general meeting of the company. The shareholders claimed that there had been no such resolution authorizing the loan and, therefore, the bond was issued without their authority. It was held by the Court that the company was liable for the money to the Turquand because once the Articles authorized the directors to borrow money subject to a resolution passed at the general meeting. Turquand was entitled to assume that the directors were borrowing on the authority of a resolution passed in the general meeting. Exceptions There are, however, certain exceptions to this Doctrine. The rule will not apply in the following cases: 1. Where there is knowledge of irregularity. A person dealing with the company will not be entitled to protection under this rule if he had knowledge that the prescribed procedure was not followed by the company. 2. Where there is suspicion of irregularity This doctrine does not protect a person where suspicion of irregularity is involved. A company cannot be held liable for irregularity committed by its officers.

10 Page 10 of 16 Where the plaintiff accepted a transfer of a company's property from its Accountant, the transfer was held void. The plaintiff should not have been relied, in the absence of a power of attorney, that the Accountant had authority to transfer the company's property. 3. In case of forgery Where the acts done in the name of the company are ab initio i.e. instrument purporting to be executed on behalf of the company is a forgery, this doctrine does not protect a person who is subjected to forgery. 4. Where there is no knowledge of Articles The Articles of Association generally contain the "power of delegation". In order to claim protection under the provisions of "power of delegation", knowledge of articles is essential. A person who did not consult the company's Memorandum or Articles and consequently did not act in reliance on those documents, cannot be protected. 5. Where an enquiry is essential It is expected from a person dealing with a company to inquiring into the internal management of the company, where the contract involves higher amount or it related to the purchase or sale of permanent assets, etc. 6. Where the contract is not in consistent with the business of the company. Any contract entered into by a person, which was not in consistent with the business of the company, the company is not bound to execute the contract. The principle of indoor management does not operate in such matters. 7. In case of negligence on the part of outsider. On the basis of the judgment of the case: Underwood V/s Bank of Liverpool (1924), negligence on the p0art of a third party to enquire into irregularities in the internal proceedings of the company, cannot get protection under this doctrine. PROSPECTUS Introduction When a company is formed, and intends to raise capital from the public, it may offer the shares to the public by means of a prospectus or may offer shares for sale indirectly by Issuing Houses. Definition: Sec. 2(36) of the Companies Act defines "Prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from public for the subscription of purchase of any shares in or debenture of a body corporate". It is evident from the definition that a prospectus may be in any form of a notice, circular, advertisement or even in the form a booklet, but such document must be described or issued as a prospectus.

11 Page 11 of 16 Characteristics: 1. It is document issued by a public company. 2. It may be in any form of a notice, circular or advertisement. 3. It is an invitation extended by a public company with share capital to the general public to subscribe for its shares of debentures. 4. A private company is strictly prohibited from issuing prospectus. 5. An offer for sale is a deemed prospectus. 6. Each prospectus is dated by the Registrar to show its date of issue. 7. A prospectus cannot be issued to the public before it is registered with the Registrar. 8. It is essential for each director of the company who have consented the issue, to sign on the prospectus before its issue. Who may issue prospectus? A prospectus may be issued by any of the following: 1. By a public company. 2. By a person authorized by the company, or 3. On behalf of any person who is or has been engaged or interested in the formation of a company. [Sec/. 56(1)]. 4. By an offer for sale to the public by persons to whom the company has allotted shares or debentures. [Sec. 64(1)] 5. By any Issuing House, by person or institution. Legal provisions regarding issue of prospectus 1. A prospectus can only be issued after the incorporation of a company. 2. Every prospectus must be dated to ensure a prima facie evidence of the date of its application. 3. A copy of every issue of the prospectus must be registered with the Registrar of Companies before its issue. 4. It must be signed by every person, which is named in the prospectus as a director or a proposed director of the company. 5. The following documents must be accompanied by the copy of the prospectus sent for registration with the Registration. (i) A report of the expert, in case has consented to publish his report in the prospectus. (ii) A copy of the terms and conditions of every contract relating to the appointment and remuneration of the managerial personnel. (iii) Consent in writing of the persons named in the prospectus as auditor, legal advisor, attorney, solicitor, banker or broker of the company to act in the respective capacity. (iv) The prospectus must be issued within 90 days of the registration with the Registrar. (v) If a prospectus contains a statement made by an expert, his written consent must be obtained and this fact should be stated in the prospectus. (vi) Every prospectus must disclose the matters specified in Schedule II of the Act. Contents of prospectus:

12 Page 12 of The main object of the company including the details about the Subscribers to the Memorandum. 2. Qualification shares of directors, if any 3. (a) names, description and addresses of Directors, or proposed Directors, Managing Director or the Manager. 4. Contents of Articles or of any contract relating to managerial persons, their appointment, remuneration, etc. 5. The amount payable on application and allotment, etc. 6. Preliminary expenses. 7. The name and address of auditors, if any Omission and mis-statement in prospectus: A prospectus must give full, accurate and a fair picture of the state of affairs and prospects of the company. It should not omit any relevant facts which are likely to influence the mind of the prospective investor. If the prospectus is issued in breach of any of these two conditions, it shall deemed to be a misleading prospectus. The law allows the following remedies for misstatement in a prospectus: A. Rescission of the contract, and B. Damages for deceit. C. Rescission of the contract. A. Civil Liability (Sec. 62) Under this Section, the aggrieved shareholder is entitled to file a civil suit to recover damages from all or any of the persons responsible for the issue of the prospectus. B. Criminal Liability Section 63 of the Act provides that where a prospectus includes any untrue statement, every person who authorized the issue of the prospectus shall be liable for imprisonment for a term extending to two years, or with a fine of Rs. 5,000/- or with both. Statement in lieu of prospectus One of the major advantages of forming a public company is that the necessary capital for the business can be raised from the public. Sometimes a company, without approaching the public, may raise its capital. The promoters may be confident of obtaining the required capital through private contact and in such a situation; no prospectus needs to be issued to the public. In this connection Section 70 of the Act provides that where n o prospectus is issued, at least 3 days before the first allotment of shares or debentures, a statement called, "Statement in lieu of prospectus" must be filed with the Registrar for registration. Such a statement must be signed by every person who is named therein as a director or proposed director of the company.

13 Page 13 of 16 Private Company Definition: Section 3(1) (iii) of the Companies Act 1956 defines a private company as a company which by its articles: (a) restricts the right of transfer its shares, if any: (b) limits the number of its members to fifty (c) prohibits any invitation to the public to subscribe for any shares in or debentures of the company. The provisions of this Section further provide that where two or more persons hold one or more shares in a company jointly, they shall, for the purpose of this definition, be treated as a single member. Characteristics of a private company- 1. Restriction on the right to transfer the shares, if any. This restriction is made by the company in its articles. However, in the case of a private company with no share capital, no such restriction is necessary. The object of restriction is mainly to limit the maximum number of members to fifty. 2. A private company limits the number of its members to fifty, which shall be exclusive of members who are or were in the employment of the company. í director is not an employee for the purpose of this section. 3. A private company prohibits invitation to the public to subscribe for its shares or debentures. A private company is required to obtain its capital or loans privately on personal basis. 4. A private company is essentially required to have Articles of Association to embody the above restrictions. 5. A private company must add the words "Private Limited" at the end of its name. 6. A private company cannot appoint a person as a Managing Director for more than 5 years at a time. 7. Only a minimum of two members are enough to a form a private company. Privileges and exemptions of private companies The public as well as private companies are governed by the same rules of Indian Companies Act. But in order to differentiate the two, owing to the different nature of risks borne by each type, there are some specified matters which do not apply to private companies. These exemptions and privileges conferred on private companies by the Companies Act, 1956 are as follows: Privileges and exemptions to all private companies (including the subsidiary companies formed by public companies): A minimum of two members are enough to form a private company, whereas a public company needs at least seven members to register as a public company.

14 Page 14 of 16 A private company may proceed to allot shares without waiting for the receipt of minimum subscription. A private company can start its business immediately after registration and there is no need to obtain certificate of commencement of business from the Registrar of Companies. It is not required to hold statutory meeting and file the statutory report with the Registrar for registration. Conversion of private company into public company Conversion may take place in the following ways: I. Conversion by Default (Sec. 43). II. Conversion by Operation of Law (Sec. 43A). III. Conversion by Choice of Voluntary Conversion (Sec. 44). I. Conversion by Default The privileges and exemptions available to private companies can be enjoyed only when they comply with the requirements of Section 3(1) (iii) of the Act. When a default is made in complying with any of those provisions of Section 3(1) (iii), the company shall cease to be entitled to the privileges and exemptions conferred under the Act. The whole of the Act would then apply as if it were a public company. II. Conversion by Operation Law (Deemed Public Company) The Companies Act provides for three kinds of conversion under Section 43A (as per the Companies (Amendment) Act of 1960) 1. A private company would become a public company when 25% or more of its paid-up share capital is held by one or more bodies corporate. [Sec. 43A (i)] 2. In the event of average annual turnover of a private company comes to the tune of Rs. 10 crores or more, the company will become a public company. The annual turnover figure has been increased to Rs. 10 crore from the earlier provision of Rs. 5 crore by a Notification of Govt. of India in Sept [Sec. 43A (IA)] 3. Where a private company hold 25% or more of the paid up share capital of a public company, that private company shall deemed to be a public company, unless it reduces the percentage below 25% within three months from the commencement of the Amendment Act of 1974, which came into force from [Sec. 43A (IB)] III. Conversion by Choice or Voluntary Conversion Apart from the above provisions of the Companies Act, a private company may, be its own choice, convert into a public company. The steps of procedure of conversion are stated below: 1. A special resolution is required to be passed by the company for deleting from its Articles the requirements of Sec. 3(1) (iii). (Sec. 44)

15 Page 15 of Steps are to be taken to increase the minimum number of directors to three and the minimum membership to seven. 3. The following documents are required to be filed with the registrar, within thirty days of passing the special resolution for conversion: 4. Written consent of directors to be filed with the Registrar to take and pay for the qualification shares. Membership in Companies Meaning: Members of a company are those persons who collectively constitute the Company [Sec. 2(27)]. Generally the terms "Member" and "Shareholder" are synonymous terms apart from a few exceptional cases. The term "Members" is defined in Sec. 41 of the act, as follows: 1. "The subscribers to the Memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its Register of Members, and 2. every other person who agrees in writing to become a member of a company and whose name is entered in the Register of Members shall be a member of the company" Thus a person can become a "member" or "shareholder" of a company in any one of the following ways: 1) By being a subscriber to the Memorandum. 2) By agreeing in writing to become a member. 3) By taking a transfer from a member, and 4) A proposed director who has signed and filed an undertaking to take and pay for qualification shares. Who may become a member? 1. A person who is competent to contract: According to Section 11 of Indian Contract Act, 1872 a person who is not a minor, a person of unsound mind and person disqualified from contracting by any law to which he is a subject, are capable of contracting. 2. Foreign nationals: A foreigner may become a member of the company, but if, at any time, he becomes an alien enemy, his rights as a member are suspended. 3. A company: A company being a legal person, may, if authorized by its Articles, become member of the another company. But a company can invest in another company only if it is so authorized its Memorandum. 4. Joint Hindu Family: The Head of the Joint Hindu Family can purchase the shares of a company in his name and become a member. 5. Joint holders of shares: Where two or more person hold shares in a company in a joint name, they are known as joint shareholders. In the case of a public company, every joint holder of shares is a member of the company. 6. Registered Society: Any Society registered under Societies Act, 1860 can become a member of a company in its own name if its Articles and Memorandum so permit. 7. Minor through the natural guardian: A minor is not competent to enter into a legal contract and as such he cannot be a member of a company. The guardian of a minor, however,, can purchase shares on minor's behalf.

16 Page 16 of 16 But the name of the guardian will be entered in the Register of Members. In this case, the guardian will act as a trustee for the minor. 8. A partner of a firm: A partnership firm is not recognized by the law as person and as such, it cannot become a member of a public company, in its own name. A partner of a firm, however, is entitled to be a member of any company provided he is not a person disqualified under any law. 9. An insolvent: An insolvent person may continue to be a member of the company so long as his name has not been removed from the Register of Members. He maintains his right to attend and vote in the company's meetings. When his name is removed from the Register of Members, all his rights as a member comes to an end. Methods of acquiring membership A person may become a member of a company in any of the following ways: 1. By subscribing or signing the Memorandum. 2. By purchasing qualification shares 3. By application and allotment 4. By transfer of shares 5. By transmission of shares for consideration other than cash. 6. By allotment of shares for consideration other than cash. 7. By conversion of share warrants into share certificates. Termination or Cessation of Membership A person may cease to be a member of a company in any of the following ways: 1. By transfer of his shares to another person according to the procedure laid down by the Articles. 2. By forfeiture or he surrenders his shares to the company. 3. By death or becoming lunatic, bankrupt or insolvent. 4. By repudiation of contract on the ground of misrepresentation in prospectus. 5. By the liquidation of the company. 6. By the issue of share warrants in exchange of fully paid up shares. 7. By redemption of redeemable preference shares. 8. By acquisition of shares by order of a Court. 9. By commencement of a winding up process of the company.