Books:-

1. Business law for management2. Elements of mercantile law by N.D. Kapoor ( Reference )3. Business law for management by Bulchandani ( Reference )

Business Law

Business:- All those activities which are aimed at transfer of goods & services from the production centre to consumption centre carried out by an entrepreneur by optimally utilizing resources at his command i.e. money, man, material & machine with a view to maximize profit.

Law:- Rules & Regulations which has a force of authority, passed by legislative bodies.

LAWS

Constitutional Law Criminal Law Civil Law International Law(Relating to rights, (Crime & Punishment) (Business & Property (Dealing betweenduties of citizen’s matters) citizens of twotowards the state countries)& administration)

Contract Act

Contract:- Agreement enforceable by Law.

Agreement:- It is every promise or a set of promises forming consideration for each other. It is a result of intention to create legally binding relationship.

Promise:- Proposal when accepted becomes promise.

Proposal:- When a person signifies to another his willingness to do or not to do something with a view to obtain assent of that other person, the person is said to have made a proposal.

Proposal + Acceptance = PromisePromise * Promise = AgreementAgreement + Enforceability = Contract

Q1. Discuss essential ingredients of a valid contract? Or All contracts are agreements but all agreements are not contracts.Ans.1. Intention to create legally binding relationship2. Offer and Acceptance3. Two or more personsSection 10 – All agreements are contracts if they are made by

Free consent Parties competent to contract For lawful consideration And lawful object And not expressly declared to be void

4. Competence of parties to the contract – Every person is competent to contract if He attends the age of majority according to which he is subject of He is of sound mind Not disqualified under law

5. Lawful consideration6. Free consent of parties – Consent is free if it is not caused by

Coercion (Force) – use of physical force Undue Influence – use of dominant position Misrepresentation – false statement Fraud – cheating Mistake – erroneous state of affairs

7. Lawful Object8. Certainty of performance9. Not ambiguous / vague(the agreement must be certain)10. Legal Formalities11. Not declared to be void

Q2. Offer and AcceptanceAns.Rules for a valid offer:-

1. Offer should be capable of creating legally binding relationships2. Offer should be backed by willingness to perform. Mere intention is not an offer3. Offer should be communicated – e.g. Lalman Shukla (Civil – Plaintiff, Criminal –

Complainant) v/s Gauri Datt (Civil – Defendant, Criminal – Accused if guilty is called convict if not guilty then is called acquit)(PPS Gogna Pg no.20)

4. Objective of the offer is to obtain approval / acceptance of offeree5. Offer should be differentiated from

Intention Invitation to offer for e.g.

a) Super Bazaarb) Prospectusc) Tenderd) Auction Notice

6. Offer may be conditional7. Offeror cannot dictate terms

Acceptance:- When a person to whom offer is made signifies his assent there to he is said to have accepted the offer/proposal.

Rules for valid Acceptance:-1. Acceptance to be valid must be absolute and unconditional2. Acceptor must be willing to perform his obligation3. Acceptance must be communicated to the offeror4. Acceptance must be communicated within a reasonable time5. Acceptance must be in the manner prescribed6. Acceptance must be communicated before offer lapses / withdrawn

Lapse of offer – offer no longer valid Expiry / Lapse of time Revocation – Cancellation of offer by offeror

a) Notice of revocationb) Communication in same channel

Conditional acceptance / qualified acceptance / counter offer Non compliance of terms and conditions Death – in respect of contracts of personal skill Rejection

Rules as to communication of offer & acceptance :-( better in PPSG Pg. no.27)1. Offer:- Communication of offer is complete when it comes to the knowledge of the person to

whom it is made.2. Acceptance:- Communication of acceptance is complete

o To against offeror – when communication of acceptance is put into transmission so as to be beyond the control of acceptor

o As against acceptor – when it comes to the knowledge of offeror.

Open letter dated 01-08-2005

Letter received by offeree 05-08-2005 Communication of offer is complete

Letter of acceptance dropped on

08-08-2005 Communication of acceptance is complete as against proposal

Letter of acceptance received on

10-08-2005 Communication of acceptance is complete against acceptance

Competence of Parties to contract:-(Legal Competence)

Whether a person haso Power In Lawo Authority

Every person is competent to contract open letter dated 01-08-2005 if1. he has the age of majority according to the law to which he is subject2. he is of sound mind3. he is not disqualified under the law

- a person has attained the age of majority incase where guardians have been appointed under guardianship law.

Legal Position of Contracts with Minor:-Who is Minor:- A person who has not attained the age of majorityValidity:- Contracts with minor are void-ab-initio (from the very beginning)e.g. Mohori Bibi v/s Dharmodas Ghose

1. Anyone who contracts with minor does it on his own risk2. No ratification (no regulation)3. Contracts with minor cannot be rectified even after he has attained the age of majority. What

is required is to sign a fresh contractA & B (jointly contract with) C (Major)- Contract is void between B & C. The manager i.e. A has to take full responsibility of minor

B and his actions.4. Minor deliberately misleading his age

Contract remains void Court may take cognigence & award compensation

5. Minor cannot become a partner in partnership firm. However if all the partners agree minors may be admitted to benefit of the firm

6. Minor cannot become member of a company unless Articles of Association of the company permit Shares are fully paid

7. Minor can act as an agent Minor will have no personal liability

8. Minor cannot be declared insolvent9. No degree of specific performance against minor10. Anyone who provides necessaries to minor can recover the amount from minor even by

attaching his property

Sound Mind:-

Every person is of sound mind (for the purpose of entering into contract) if at the time of making contract he understands

Terms & conditions of the contract Impact of terms & conditions on his personal interest

If he can understand this then he is said of sound mind.

Idiot Person:- Person whose mental capacity is permanently affected. Such person can never enter a contract.Schizophrenia Epetopsey:- Mental capacity is temporarily under an attack of a disease. Such a person can contract during the period of normalcy

Drunk Person:- Such a person don’t contract under influence of intoxication

Lawful Consideration:-

BasisPriceSomething in return – Quid Pro Quo

Right, interest, benefit, or profit accruing to someone as against responsibility, detriment, sacrifice or loss suffered or incurred by someone else.

Q3. No Consideration, No Contract – Discuss giving Exceptions.

Definition of Consideration:- When at the desire of promisor, promise or other person has done or abstained, does or abstained, promises to do or abstained from doing something. Such an act or abstinence is called consideration & contract without consideration is void.

Essential Features of Consideration:-1. Consideration must move at the request of promisor – desire of promisor cannot be ignored.

E.g. Durga Prasad v/s Baldeo2. Consideration may move from promisee or any other person. E.g. Chinnaya v/s Ramaiya3. Consideration can be past, present & future.4. Absence of act, forbearance or sacrifice may also be a good Consideration.5. Consideration need be real & not imaginary/illusory.6. Consideration need not be adequate.7. Consideration must be lawful

If it does not violate the provisions of the law If it is not forbidden by law If it does not result into injury to person or property If it is not against public policy

Circumstances where contract without Consideration may not be void:-1. Contracts made under natural love & affection provided agreement is in writing, registered &

between parties in near relation. E.g. Raj lukhee Debee v/s Bhootnath

2. Promise to compensate for past voluntary service rendered – service must be voluntary & not a legal duty

3. Promise to pay time barred debt Must be in writing Must be signed by debtor

4. Gift – Donation without consideration5. Charitable contribution – e.g. Kedarnath v/s Gauri Mohammed

Coercion:- Consent is obtained by coercion when it is obtained by:-1. Committing or threatening to commit2. Offense punishable under Indian Penal Code3. Detaining or threatening to detain unlawfully property of a person

Features of Coercion:-1. Use of physical force2. Violent in nature3. Even a threat is enough4. Offense may be committed or threatened is punishable under Indian Penal Code5. Threat to commit suicide is punishable & it can result in coercion. E.g. Amiraju v/s

Shesamma

Consequences of Coercion:-1. Consent is not free2. Contract is voidable

Person who gave consent under coercion can avoid or cancel the contract

Undue Influence:- Consent is induced by undue influence when relationship subsisting between the parties are such that one is in a position to dominate the will of another & uses that position to obtain unfair advantage over the other.

Relationship where undue influence may be presumed:-1. Where there is real or apparent authority e.g. master & slave, father & son.2. When the parties stand in fiduciary relationship. E.g. CA & client, lawyer & client, guru &

disciple3. Where mental capacity is temporarily affected on account of age & disease e.g. doctor &

patient

Consequences of Coercion:-1. Consent is not free2. Contract is voidable

Coercion Undue InfluenceMeaning Use of physical force Use of dominant forceNature Violent May not be violentRelationship Not required There must be relationshipWho can exercise Third parties can exercise Only by parties under

relationship

Misrepresentation:-1. False statement by a person who believes it to be true2. Breach of duty without intention to deceive, giving unfair advantage3. Causing however innocently, party to make a mistake regarding subject matter of contract

e.g. Rex v/s Kylsant

Effects of Misrepresentation:-1. Consent is not free2. Contract is voidable3. Person who gave consent can cancel the right of cancellation / rescission

Person must have depended Cancellation must be within a reasonable time Person should not have affound the contract or taken benefit of the contract

Fraud:- Means & includes any of the following with intention to deceive1. False statement by a person who does not believe it to be true2. Active concealment of facts3. Promise without intention to perform4. Anything fitted to deceive5. Anything which law may declare to be fraudulent

- Mere silence is not fraud, unless there is duty to speak- Negligence is no fraud e.g. Derry v/s Peek

Misrepresentation FraudIntention No intention to cheat There is intention to cheatKnowledge of false statement Person making false statement

does not know statement is false

Person making false statement does know statement is false

Claim for damages No claim for damages available Claim for damages available

Mistake:- Error or erroneous state of affair. When a party intending to do one thing, by error, does something else.

LAWS

Mistake of Law Mistake of Fact

Indian Law Foreign Law Bilateral Unilateral(Ignorence of law (Treated as mistake (Both parties are (Only one party atnot excused) of fact) at mistake – Void mistake – Contract

Contract) isn’t void)two exceptions

Identity of person contracted with Nature of contract signed

Contract becomes voide.g. Cundy v/s Lindsay

Agreements expressly declared to be void:-1. Agreement with parties incompetent to contract2. Contract without consideration3. Contract with unlawful consideration4. Contract with unlawful object5. Contract with mutual mistake of fact6. Contracts in restraint of marriage7. Contracts in restraint of trade:- Any agreement which takes away the freedom it would

amount to restraint of trade/void.Reasonable Restrictions

Sale of Goodwill Partnership agreements Trade/Business Consideration Service Contract

8. Contracts in restraint Legal Proceedingso Right to seek legal remedy – if refused Voido Agreement where period of limitation is reducedo Exception – Reference to arbitration

9. Contracts the meaning of which is uncertain10. Contracts by way of Wager11. Contracts contingent on uncertain event when event becomes impossible12. Contracts to do impossible things

Agreement by way of Wager:-

Betting / Expenditure Agreement:- Promise to pay or money’s worth if an uncertain event turns one way & if the event turns otherwise, person will receive instead of paying.

Uncertain Transactions which are not wagers:- Lottery Cross word puzzles – games Horse racing – Sports event Stock exchange trading – Investment Science Insurance – socially beneficial

Agreement to impossible acts (void):-

Contingent Contracts:- Contract to perform or not to perform if an uncertain future event collateral to the contract does or does not happen.

Q. Rules relating to enforceability of contingent contract

1. Contract contingent on happening of an event – Such contract cannot be enforced until the event takes place If the event becomes impossible contract is void

2. Contract contingent on non-happening of an event – such contract cannot be enforced until it is clear that the event shall never take place

3. Contract contingent on future behavior of an individual – event shall be considered impossible if a person behaves in such a way that he cannot come back to the original position

4. Contract contingent on happening of an event within a specified time – Such contract cannot be enforced until the event takes place within a specified time

5. Contract contingent on non-happening of an event - such contract cannot be enforced until it is clear that the event shall never take place within a specified time

6. Contract contingent on impossible events

Quasi Contracts:- Circumstances in which there is no offer, no acceptance or no formal contract but law enforces duty. This duty is as good as contract (as if contract was signed)

Based on Principles of Equity & Justice No one shall be permitted to be unjustly enriched at the expense of another

Q. Why should law impose duty?

Circumstances in which law imposes duty:-

Reimbursement of amount spent towards necessaries supplied to a person incompetent to contract

Reimbursement of payment due from someone else but person paying is interested in such payment

Reimbursement of act done or service rendered non gratuitously, not out of charity & on commercial terms

Responsibility of finder of goods – a person who finds goods belonging to another and takes them into his custody is placed with responsibility of a bailee

The article delivered price paid under coercion or mistake

Discharge of Contract:- Contractual relationship comes to an end & nothing remains the same

1. By Performance Actual Attempted

2. By Agreement Novation – New agreement is substituted in place of old Alteration – Existing agreement is modified Rescission – Right to cancel agreement Remission – Accepting less than in agreement in final settlement Merger – Right to receive & right to pay both come in the same hands Waiver – Withdrawal of contractual terms

3. By Operation of Law Death Insolvency Merger

4. By Impossibility of Performance At the Time of Contract – Void Subsequent

i. Permitted as excuse Distribution of subject matter Outbreak of war Change of law Change of state of affairs

ii. Not Excused – Difficult to perform5. Breach of Contract

Actual Breach of Contract Anticipatory Breach of Contract

Breach of Contract:- Contractual obligations not carried out in agreed manner.

Actual (On due date of performance)

Anticipatory (Before the actual due date intention not to perform is communicated)The other party can treat this communication as breach of contract on the date of receipt of communication

The other party can wait till actual due date

We can perform on due date (alternative arrangement)

If we fail it will be breach of contract on actual due date

Consequences of Breach of Contract:-

Suit for Damages (Estimate of monetary loss suffered on account of non performance)Normal – Arising out of normal course of businessSpecial – Parties had estimated or convisagedExemplary – Puritive – by way of punishmentNominal – Taken but in recognition of rights of the party

Suit for Specific Performance

InjunctionCourt order restricting the parties

Quantum Meruit - As much as is

merited- Where contract

is abandoned or cancelled

- Contract becomes void

- When contract is voidable & party decides to cancel

- In the mean time part of the contract is already performed payment is required to be made to the extent of performance

Guidelines for determining damages:-- Damages to be on account of proximate cause & not remote cause e.g. Headley vs

Baxandle- Damages must arise out of & during the normal course of business- Person claiming damages must show his sincerity in mitigating the losses- Amount of damages claimed can never exceed the actual loss suffered

Companies Act

Company:- Association of person Registered under the companies act 1956 By contributing to capital which is divided into shares which are transferable & with limited liability having perpetual existence common seal & being an independent / artificial juridical person can own, posses, dispose of property can sue & be sued

Essential features of Companies Act:-1. Association of person registered under the act having separate legal entity – the

company has separate legal entity different from members e.g. Solomon vs. Solomon & Company Ltd.

2. Limited Liability – Liability is limited to extent of uncalled / unpaid amount of shares3. Transferability of Shares – Shares of the company are transferable & members can sell them any

time when they want. A person can cease to be a member whenever he desires to quit4. Perpetual Existence – Company never dies except through due process of law5. Common Seal – Seal is signature of a company6. Property can be purchased in the company name. Company can own, posses / dispose of the

property7. Can Sue – Company can file suit against own name & can be sued against

All 7 points together is termed as Corporate Entity / Veil which acts as a curtain

Q. What do you understand by corporate veil & under what circumstances the corporate veil can be pierced?

Circumstances under which corporate veil can be pierced:-

1. Loss Of Revenue to the State – e.g. Dinshaw Maneckji Petit vs CIT2. Company assuming enemy character – e.g. Daimler & Company Ltd vs Continental Tyres &

Rubbers Company3. Improper Conduct – e.g. Gil Ford Motor Company vs Harne4. Fraud5. Statutory provisions:-

Membership is reduced below minimum & business is carried on for 6 months or more then all the members are personally liable

Misdescription of Name Misfeasance Proceedings – Criminal breach of trust

Types Of Companies:-

Types of CompaniesOn the basis of Statute(act)Companies formed under special charter – East India CompanyCo-formed under special statute act – RBICo-Registered under companies act – Reliance Ltd.

Liability Company with limited LiabilityCompany with unlimited liability – Kotak Mahindra Capital Company

Capital Contribution With Share CapitalMay not have share capital – Liability limited by guarantee(Indian Institute of Bankers)

Number of Members Public Ltd Company – Min 7 & Max ∞ (no upper limit)

Marketability of sharesUnlisted (Closely Held)

Listed

Private Ltd Company – Min 2 & Max 50 (Excluding present/past employees who are shareholders)

Basis of Control Holding Company- which controls

appointment of majority of directors in other company

- which holds majority of shares of other companies

- Subsidiary of Subsidiary is subsidiary of holdings

Subsidiary CompanyBasis of Government involvement – Government Company

- Audited by CAG(Comptroller & Auditor General of India)

- Annual report is placed before the parliament

- 51% of capital is held by government(Central, State, Other Govt. Co. – PSU’s if registered under companies act)

Geographic Parameter Foreign Companies (All MNC’s)

(Place of Incorporation)

Face Value – As may be issued by the company as Re. 1, 5, 10, 100. Book Value – (Paid up Capital + Reserves & Surplus – Accumulated Losses) / No. of shares

issued Market Value – As quoted in the Market

Incorporation of a Company

Promoter:- One who promotes the company. One who conceives the idea of setting up business in the form of a company.

Name:- Application for availability of name Form No. I A Payment fee of Rs. 500/- Suggest the name by which he would like his company to be incorporated with 3 other

alternative names

Names which are not Available / not Desirable Names of existing companies Phonetic Similarity e.g. J.K. Industries LTD. & Jay Kay Industries Cannot use international bodies / national bodies Relevance of business name & business should be maintained Relevance between name & size of authorized capital

NAME AUTHORISED CAPITALIf Coporation 5 croresInternational / Globe / Global / Asia / Asiatic / Intercontinental

1 crore

Above words used in between name 50 lacsHidustan / Bharat / India as first name 50 lacsAbove words used in between name 5 lacsIndustry / Udyog 1 croreEnterprise / Products / Manufacturing 10 lacs

Documents to be submitted for Registration1. Memorandum Of Association To be stamped according to the value of authorized2. Articles Of Association capital3. List of Directors on Form 32 (In Duplicate)4. Consent of persons who have agreed to become Director on Form 29 (only in respect of

Public LTD Companies)5. Declaration that provisions of Company Law have been complied with Form I (signed by

Director / Advocate / CA / PCS)6. Particulars of registered office on From 187. Registration Fee

Certificate of Incorporation Issued by Registrar of Companies (ROC) on satisfying that requirements of company law have been complied with Conclusive evidence as regards

i. Registration of Companyii. Compliance to Company Law

Birth certificate of Company – Corporate features become operative from this date If the company is Private LTD Company then it can commence its business immediately on

incorporation If company is Public LTD Company then it has to obtain additional certificate – Certificate

of Commencement of Business

Certificate of Commencement of Business Company must have to raised minimum subscription to commence its businessMinimum Subscription – Is the amount which in the opinion of Directors of the Company

sufficient to commence the businessIn respect of IPO / Subsequent public offer – Minimum subscription is 90% of the amount of

public offer of an issue of shares (if minimum subscription is not raised entire application amount is to be refunded)

Approval from the stock exchanges at which the shares of the company are proposed to be listed must be obtained (If stock exchanges refuse listing, the application amount will have to be refunded)

Directors should have taken & paid qualification shares if any Audited receipt & expenditure account since incorporation Declaration by Director that Company Law has been complied with

Memorandum Of Association (MOA) Character / Constitution of the Company Fundamental Document

Contents of MOA

Q. Discuss significance of object clause in MOA & Doctrine of ultra vires vis-à-vis the object clause

1. Name Clause – Name of the Company is ____________________2. Registered Office Clause – The registered office of the company is located in the state of

_____________________3. Object Clause –

Main objectives the company will pursue on its incorporation Objects ancillary to main objects Other objects

* Need for Object Clause – Positively Speaking – Object Clause specifies the areas of operations in which the company

will deploy its funds

Negatively Speaking – Company will not deploy its funds in the areas beyond what is stated in the object clause

Comfort of investors / members CreditorsAnything beyond the object clause is ultra vires

Ultra Vires contract is invalid Company is not bound Directors may incur personal liability

4. Liability Clause – e.g. Asbury Railway Carriage & Iron Company vs Riche. Liability of members of the company is limited

5. Capital Clause – Specifies the maximum amount company is authorized to raise e.g. Authorized Capital of the company is Rs. 50 crore divided in 5 crore equity shares of Rs .10 each

6. Subscription / Association Clause – Names, Addresses, Undertaking to the shares, Signature duly witnessed

Alteration of Memorandum Of Association1. Change of Name –

Compulsory Voluntary Where existing company object the name to

similar / identical ROC to issue order

- First show cause notice- Hearing- Order

When the members of the company want to change

- availability of new name to be checked up

- approval of members to change name at AGM / EOGM

- File copy of Resolution with ROC- ROC to issue fresh certificate of

Incorporation with new name- Newspaper Advertisement

2. Change of Registered Office –- Change of office from one area to another within same town

First decision at meeting of Board of Directors Board resolution / record of decision to be filed with ROC Form 18 for change of address to be filed with ROC Advertisement

- Change of office from one town to another within same state First decision at meeting of Board of Directors Approval of members with special resolution (3/4th of members present &

voting) at AGM / EOGM Form 18 for change of address to be filed with ROC Advertisement

- Change of office from one state to another First decision at meeting of Board of Directors Approval of members with special resolution (3/4th of members present &

voting) at AGM / EOGM

Form 18 for change of address to be filed with ROC Application to CLB at the Regional Director of Zone for approval Publication of hearing before CLB Inviting objections (from state government, workers or creditors) Order will be issued approving change of registered office Filing of CLB order with ROC Advertisement

3. Change of Object Clause – Why Change of Object Clause

- New Technology- New Products / Services which could be simultaneously undertaken- Amalgamation / Merger of different companies with objectives

Take Over / Acquisition Merger / AmalgamationGujarat Ambuja ACC with majority shareholding of ACC

Indian Rayon, Indo Gulf Fertilizer & Birla Finance became Birla Nuo

- Cancellation of any objects Procedure –

- Decision by Board Of Directors- Approval of Members at AGM / EOGM – by passing special resolution for amending

object clause- Approval to be obtained from ROC

Advertisement inviting objections if any Hearing if required ROC will give approval ROC to give certificate approving change in object clause

4. Liability Clause – never amended5. Capital Clause – can be changed / amendedProcedure for change in capital clause

i. Decision by Board of Directorsii. Approval of members at AGM / EOGM

a. By passing ordinary resolution – simple majority if there is power to amend capital clause in the AOA

b. By passing special resolution – if there is no provision of alteration of capital clause in the AOA, 75% majority in favor of change

iii. Filing with ROC Form no. 5 duly stamped & additional registration fee6. Association / Subscription Clause – Not Ammended

Articles of Association (AOA)

Q. What do you understand by Doctrine of Indoor Management? Discuss significance & relevance of AOA

Bye Laws / Rules & Regulations for company law requirements Internal Procedure to be followed by a company

While MOA is compulsory for all the companies, AOA is optional for public LTD companies. In case of Public Ltd company does not prepare AOA, Table A (Model Bye Laws / AOA for Public Ltd Companies) of Schedule II of Companies Act will apply

Contents of AOA1. Procedure relating to

Share Capital Issue of share certificate Issue of duplicate share certificate Transfer Shares Transmission Forfeiture of shares

2. Matters relating to Meetings of the members Types of meetings Procedure at meetings

Issue of notice Quorum requirement Proxy Voting Resolution

3. Provisions relating to Directors Meeting of Directors Powers of Directors Powers of Chairman / Managing Director Borrowing Powers of the company Accounts & Audit Seal

4. Significance of AOA Bye Laws / Rules governing internal company law requirement Doctrine of Indoor Management

Doctrine of Constructive Notice Office of ROC is Public office Whatever is filed with ROC can be inspected by the public by paying inspection fee Information filed with ROC is deemed to have been given to public Every person who deals with company is presumed to know whatever is filed with ROC but

nothing beyond this. Therefore a person can presume that company has complied with all the procedural requirements

He is not required to investigate whether the company has in fact complied with such requirements e.g. Royal British Bank vs. Turquand

Limitations to the Doctrine of Indoor Management

Knowledge of Irregularity Forgery Circumstances giving rise to Suspicion

Raising The Resource for the Company

Short Term- Working Capital facility from bank- Sundry Creditors- Outstanding Expenses- Public Deposit maturing within one year- Commercial Papers- Inter-corporate Loans- Factoring Limit

Long Term Capital – Equity & Preference Debentures (Bonds) Term Loans Public Deposit maturing after 1 year (Max. 3

years)

GDR – Global Depository Receipt – Shares not issued, only certificate issued in other than dollar, listed on foreign exchangesADR – American Depository ReceiptFCCB – Foreign Currency Convertible BondsECB – External Commercial Borrowing

Raising Long Term Funds through Equity How much / what amount of Equity Size of Project

Detailed Financial plan with focus on its predetermined activity with specified investment ensuring desired monetary return

- Detailed Project Report – Details of investment on land, building, plant & machinery, furniture & fixtures, installation, contingency provision, margin for working capital

- Means of Finance – Capital 30 crores (Equity – 10 crores; IPO through prospectus & Debt – 20 crores)

IPO – Through issue of ProspectusLegal Aspects

1. Companies Act – Provisions relating to prospectus2. SEBI Act 1992 – Disclosure for SEBI guidelines3. Securities Contract Regulation Act – Listing guidelines of exchange

Coordination can be done by Merchant Bankers (Tie up Means of Finance)

Entry Norms Of SEBI

Only Public Ltd companies have access to capital market- Track record of dividend payment in 3

out of 5 preceding financial years- Net worth of the company should be not

be less than 1 crore in last five financial years

- IPO cannot exceed an amount more than 5 times its net worth

- Newly incorporated company / in Greenfield project

- Project has to approved by Financial Institution / Banks

- Approving Authority must have participated to the extent of 10%

- There should be compulsory market making for 2 years

Draft ProspectusPrimary Responsibility – Merchant Banker companies Secretarial / Finance Department to provide necessary output

Contents of Prospectus – Companies Act (Section 62) It should also follow disclosure norm of SEBI – for investors to take informed decisions Also keep in mind listing guidelines of the stock exchanges where the shares are prepared to

be traded in 2 partsPart 1 (General Information)

Name Registered office Main objectives of the company Authority for the issue Terms of issue (no. of shares, Price – Fixed price or Market price to be discovered

through book building process). Payment to be made on application or allotment. Issue Program – Issue Opens on, Issue Closes on, Earliest Closing

Lead Managers or Co-Managers Bankers to the issue Brokers to the issue Registrars for the issue Underwriters for the issue (optional)All these agencies have to give their written consent to be enclosed & filed with prospectus when it is filed with ROC

Part 2 Background of the Company & the management Board of Directors – Names, Addresses, educational qualification & experience as well

as details of other directorship Other group companies under the same management Objectives of the issue Details of the project – cost of project, means of finance, availability of raw material Utilities Marketing / Selling Arrangements Schedule of implementation Outstanding litigation Stock exchange data Risk factors affecting the business

Management perception in respect of risk factors Audited financial performance for last 5 years

Draft prospectus to be filed with SEBI Stock exchange where shares are proposed to be listed

After SEBI clearance prospectus is filed with ROC

Red Herring Prospectus Where price / no. of shares issued by the company is not mentioned in the prospectus Price is discovered through book building

Lead managers – lead book runners Other members – syndicate members

Price band – (floor price – max. price are mentioned) Lead Merchant Banker prepares a research report on the company. Presentations are made before QIB’s (Qualified Institutional Bankers) called Road shows. QIB’s indicate their interest in the issue. Bids are invited. Cut off price is decided

The prospectus is filed with ROC Basis of allotment prepared by registrar to issue Return of allotment to be filed with ROC

Self Prospectus:- Only for Banks & Financial Institution Filing of issue of prospectus which will be issued for 1 year Details of shares subscribed & allotted are filed with ROC

Authorized Capital:- Maximum amount the company is authorized to raise as per capital clause of MOA

Issued Capital:- Number & amount of share capital issued to the public

Subscribed Capital (90%) & Paid Up Share Capital:- Shares subscribed by the investors (which may not be less than 98% of issue amount)Paid Up = Subscribed Capital less calls in arrears

SharesEquity (3)Those shares which are not preference shares (risk capital)

No assurance as to return of investment No certainty as to return on investment

Preference (1)Which can enjoy preferential rights

Dividend Redemption

EquityVoting Rights Without Voting Rights (not more than 25% of

paid up share capital)

Equity shares with differential voting rights

Preferential Rights:-

1. Cumulative / Non Cumulative – Preference shares where the right to dividend is allowed to be accumulated even if company has not declared dividend & the dividend will be payable in the year when the company has adequate profit are called cumulative preference shares & preference shares where dividend is not allowed to be accumulated are called non cumulative preference shares.

2. Participative / Non Participative – Participative Preference shares are those which are allowed to participate in share of profit after payment of dividend on equity from out of surplus profit left. Non Participative Preference shares are not entitled to any participation in surplus profit. They are entitled to agreed dividend

3. Convertible / Non Convertible – Convertible Preference shares are those which are converted into equity. Non Convertible Preference Shares are those which are not converted into equity

4. Redeemable / Irredeemable – Redeemable Preference shares are those which will be redeemed / repaid within max period of 10 years. Irredeemable Preference shares cannot be issued

5. Cumulative Convertible Preference shares – Right to dividend is accumulated. Preference shares are converted into equity

Shares issued at Premium Shares issued at Discount

Shares issued at Par

Buy Back Shares

- shares issued at value higher than the face value

- share premium can be utilized for

writing off preliminary expenses

Bonus issue of shares

Expansion- Rs. 10 share issued at Rs.

120 (Share Capital – Rs.10 & Share Premium Rs. 110)

- Rs. 10 shares issued at Rs .9 per share

- company when issues shares at a price less than the face value Not more than

10% unless approved by central govt.

Approved by members by special resolution

Shares forfeited are issued at discount

Shares issued at face value

Market price is related price multiples of EPS (Earnings / No. of shares)- company can buy

back 25% of its paid up capital

- buy back from accumulated

profits reserves proceeds of

previous issues of shares

- there must be provision in AOA

- buy back can be by purchase of odd

lots open market

purchases reverse book

building

shares tendered under buy back must be cancelled within 7 days

Meetings of Members:-

Statutory Meeting AGM EOGM- held once under the act

hence statutory- To be held only by Public

Ltd Company. Pvt. Ltd Company not to hold this meeting

- held once in life time- it is held between 1 – 6

months from the date of obtaining certificate of commencement of business

- Can be held by Public / Pvt. Ltd company

- Held every year- With 6 months from end of

accounting year- One meeting per calendar

year- 1st meeting to be held within

18 months from the date of incorporation

- between 2 AGM’s gap not more than 15 months

- Obtain approval of ROC if gap exceeds 15 months

- Can be held by Public / Pvt. Ltd company

- Can be held any time when the matter is urgent

- It cannot wait till next AGM

- Any meetings of members other than AGM are EOGM

Agenda

Statutory Meeting AGM EOGMConsideration of Statutory Report- Report explaining the

progress made since incorporation of the company

- Receipts & payment a/c- Shares issued & allotted- Important contracts signed

by management- To be filed with ROC

Consideration of Statutory Report- P&L a/c- Balance sheet- Auditors report- Directors reports- Corporate governance

report

Consideration of Statutory Report

Procedure to Conduct meetings of members Authority to convene a meeting – Board of Directors – Every general body meeting must be

presided by Board meeting Notice – Specify time (working time), Day (Working Day – not a Sunday or public holiday –

Negotiable Instrument Act), Date & place of meeting (registered office or other place in the town in which registered office is located, 21 day clear notice – date of posting & date of receipt to be excluded under certificate of posting)

Agenda for Meeting – For AGM agenda is divided in 2 parts1. Ordinary Business

Approval of P&L, B/s Passed by ordinary resolution Declaration of dividend Appointment of auditor Appointment of Directors

2. Special Business anything other than ordinary business explanatory statement should be given in the notice reason why business is taken up disclosure of interest of any director

At EOGM – all business matters are special business requiring explanatory stand

Procedure to conduct meetings of members on the date of meeting

1. Chairman – the designated chairman to preside over the meeting. If there is no designated chairman, the members to choose one of them as chairman of the meeting

2. Quorum – Minimum no. of members required to be present at the meetinga. As per provisions in the articleb. If articles are silent, in case of Public ltd company 5 persons, in case of Pvt ltd

company 2 persons shall form quorumc. Quorum must be present within half an hour from the scheduled time of

commencement of meetingd. If quorum is not present within half an hour, meeting is adjourned to next week, same

time, same placee. If at the adjourned meeting quorum is not present, persons present shall form the

quorum3. Proxy – a member is entitled to attend the meeting or depute a person to attend on his behalf

by executing instrument of proxya. Proxy need not be a memberb. Proxy form should be lodged with the company 48 hours before the scheduled time

of commencement of meetingc. Proxy may be open or with specific direction to vote or against the resolutiond. Proxy is cancelled if member attends the meetinge. Proxy cannot speak, but vote at the meeting

4. Movement of Resolutiona. Resolution is proposed by 1 of the membersb. It is seconded by another memberc. Decision on the resolution – members can raise questions – chairman to answerd. Report of auditor is read at the meeting

5. Chairman to ascertain the sense of the meeting (whether the resolution has been passed or not)

a. Voice vote - Ordinary resolution requires simple majorityb. By show of hands - Special resolution requires 3/4th majorityc. By division

d. By ballote. By poll

6. Minutes – record of resolution passed is written in minute book to be signed by chairman of the meeting

7. Special resolution are passed to be filed with ROC

ResolutionsOrdinary Special Resolution requiring special

notice- Simple majority- Ordinary business of rule is

passed by simple majority

- Requires 3/4th majority- Amendment in MOA- Amendment in AOA- Appointment of MD- Remuneration of MD- Appointment of sole selling

agent- Can be done by postal

ballot for listed companies

- Removal of a Director- Removal of an Auditor

Q. Discuss the provisions relating to qualifications, appointment, powers & removal of directors of the company under companies act?

Director – Director means a person who holds position of a Director by whatever name called1. Agent of the Company – Director functions as an agent of the company acting on behalf of

the company2. Trustees

a. of the members for the property owned by the companyb. must observe at most good faith (trust & confidence)c. act in the benefit of the company & not for personal profit

3. Managing Organ – Through which the company operates / functions4. Professional Employees – Director has to be an individual & not an incorporated body

Members – Contribute to the capital of the company & control the company by executing voting rights at meeting

Appoint Auditors to check & control performance of company which is managed by directors

Report to members

Power to manage the company given to Board of Directors – who are responsible for day to day management

Appointment of Directors No. of Directors – minimum in case of Public ltd company – 3 & Pvt. Ltd Company – 2. Maximum no. as may be permissible in AOA

1. First Directors – Names in AOA. In case articles are silent all the subscribers to MOA / AOA shall be deemed to be the first director. These directors shall held office till AGM

2. Subsequent Directors – by the members at AGM. 1/3rd of the directors can be non repairable & 2/3rd of the directors will be liable to retirement. Of this 2/3 rd ,1/3rd will retire every year. Retiring directors can offer themselves for re-appointment. Reappointment by members at AGM

3. Directors appointed by Board of Directorsa. Appointment of additional director

i. BOD can appoint additional director (not exceeding the max. no. provision in AOA) to take benefit of expertise as well as experience of any individual

ii. Such director will hold position till next AGM. At next AGM he may be re-appointed

b. To fill up casual vacanciesi. On account if vacancy arises, BOD can appoint a director to fill up the

vacanciesii. Death, resignation or Disqualification

iii. Such director to hold office till next AGMc. Alternate directors - When the director leaves the state in which registered office of a

company is locatedi. For a period more than 3 months

ii. Board may appoint alternate director to attend the Board meeting in absence of original director

iii. The alternate director attends Board meetings in absence of original director4. Appointment of directors by outsiders – There can be an agreement by the company with

a. Its lenders orb. CreditorsWhereby its nominee of lenders / creditors may be appointed in the Boardc. Such directors are not liable to retirement

5. Power of Government / NCLT (National Company Law Tribunal) to appoint director on the Board of the Company

a. Where there are complaints about mismanagement of the company &b. Investigation have been carried outc. Or complaints before NCLT about the affair of the company being conducted against

the interest of the members. NCLT / Government can appoint Director on the Board of the Company

d. These directors are not liable to retirement

Qualifications – Qualifications if provided in AOA the director will have to take up qualification shares within 2 months of appointment. For shares upto face value of Rs. 5000/-Disqualifications – Person is disqualified

1. if he is of unsound mind2. undischarged insolvent3. he applies for declaring himself insolvent

4. he has been sentenced to imprisonment for a period not excluding 6 months, for offence involving moral turpitude & a period of 5 years has not expired

5. he is director in a companya. company has defaulted to file annual return & balance sheet for a consecutive period

of 3 years with ROCb. Company defaults in payout of interest / principal of deposits from publicMax. no. of companies - a person can be director in max. 15 companies excluding Pvt, ltd Companies

Vacation of office of Directors1. on attracting disqualification2. if a director fails to attend 3 consecutive Board meetings without leave of absence3. if director fails to take qualification shares within 2 months4. if he fails to pay call money on shares within 6 months

Removal of a Director1. Removal by the member at AGM

a. By not reappointing retired Directorb. By appointing someone else in place of retiring directorc. By passing a resolution removing a director

2. Removal of Director by NCLT

Powers of a Director1. General Power – General Powers to be exercised keeping in view

a. Provisions of companies actb. AOAc. Contract with the company

i. Directors have general power to do all those things which a company is empowered to do

2. Powers which can be exercised at Board Meeting – there has to be board meetings (min. 4 meetings in a year, 1 every quarter)

a. Power to make calls on sharesb. Power to issue debenturesc. Power to borrowd. Power to make investmente. Power to make political donations – total Rs. 50000/- or 5% of net profit whichever is

higher3. Powers which can be exercised with consent of members

a. To sell any undertaking (division) of the companyb. To borrow in excess of paid up capital & reservesc. To amalgamate / merge other company / with other companyd. To appoint sole selling agente. To amend MOA / AOAf. To fix remuneration of MD

Account & Audit – Books of a/c / registers to be maintained by the company

Assets of the company Liabilities of the company Register of sales Register of purchases for manufacturing operations Registers for

o Raw materialo Laboro Utilitieso Other expenditure

P&L & B/S as per schedule VI

Dividend to be paid – to be paid only out of current profits1. provided for depreciation2. rules relating to transfer of profits to reserve

Profit Transfer to Reserve10% - 12.5% 2.5%12.5% - 15% 5%

15% - 17.5% 7.5%Above 17.5% 10%

3. a/c’s to be audited by the auditors

Q. Discuss provisions relating to appointment, qualification & powers of auditors of the company under the companies act 1956?

Audit under the companies act is statutory audit. Every company under the companies act is required to have its accounts audited by the auditor

Auditor CA – member of ICAI having certificate of practice & He is not in the full time employment Not indebted to the company for amount exceeding Rs. 1000/- Should not be related to Directors

Powers of Auditor1. Power to have access to all documents – agreements / contracts / minutes2. Power to visit / verify / check – properties / assets of the company at all locations (plant,

branch. HR)3. Power to obtain information / explanation from the employees of the company4. To report to the members

a. Whether the company has maintained the required books of a/c or registersb. Whether the company has been complying with accounting standardsc. In case of variation point out the impact on P&L of the company

Certify That

1. P&L a/c gives true & fair view of profit & loss for the year2. Balance sheet gives true & fair view of financial position of the company as on a particular

datea. Auditors to qualify the report where there are irregularitiesb. Directors to reply to qualifying remarks of auditors

NEGOTIABLE INSTRUMENTS ACT 1881

Transferable documents which are used for transfer of movable property. Negotiable instrument means Promissory Note, bill of exchange & Cheque

Q. Define promissory note & differentiate it from bill of exchange & a cheque

Promissory Note Instrument in writing Not being a bank note or currency note Signed by the maker Containing an unconditional undertaking Ta pay certain sum of money only To a certain person on his order

Bill of exchange Instrument in writing Signed by the maker Containing an unconditional order Directing a certain To pay a certain sum of money only To certain person or his order

ChequeBill of exchange drawn on a specified banker

Promissory Note Bill of Exchange Cheque

25/11/2005On demand I promise to pay Rupesh Pandey sum of Rs. 50000/- for value receivedTo Rupesh Pandey Signed by maker / promissor

25/11/2005On demand pay Rupesh Pandey sum of Rs. 50000/- for value received

To Drawee (who has been directed to pay) Signed by maker / promissor

Bank of Baroda 25/11/2005Pay Rupesh Pandey In Words Figures_________

Signed by maker / promissor

1. Parties Involved 2 parties – maker who promises to pay & payee (promise) who collects payment

3 parties Drawer / maker

– who draws the bill

Drawee – on whom the bill is drawn or to whom direction to pay is given

Payee - Who collects the payment

3 parties Drawer –

maker of a cheque

Drawee – Bank Payee - Who

collects the payment

2. Nature of relationship

Maker – DebtorPayee - Creditor

Drawer – Creditor vis-à-vis Drawee but Debtor vis-à-vis PayeeDrawee – DebtorPayee – Creditor

Drawer – Creditor vis-à-vis Bank but Debtor vis-à-vis PayeeDrawee – Bank - DebtorPayee – Creditor

3. Nature of liability Maker of promissory note is primararily liable

Drawee – Primary LiableDrawer – Secondary Liable

Bank – Primary LiableDrawer – Secondary Liable

4. Acceptance Not Required Acceptance by drawee required

Not Required

5. Crossing N.A. N.A. Only cheque are required to be crossed

6. Stamp Duty Attracted Attracted Not Required7. Notice of dishonor Not Required Required Bank issues non

Payment memo8. Special Provisionsa. Drawee in case of need

N.A. N.A.

b. Acceptance for Honor

N.A. N.A.

Q. What do you mean by crossing of cheques? Discuss various types of crossings & their significance?

Meaning – When a cheque bears across in face two parallel transverse lines with or without the word And company & company not negotiableCheque is said to be crossed

Significance – crossing is an instruction to the bank not to pay cash across the counter

Types of CrossingGeneral Crossing Special Crossing Restrictive Crossing

When the cheque bears across its face two parallel lines with the name of a particular banker then the cheque is said to have been specially crossed to that bankSignificance – Banker to whom the cheque is specially crossed Is the only authorized banker to collect the payment

When the cheque bears across its face two parallel lines with the words “a/c payee only” or “payees a/c only” cheque is said to be restrictively crossedSignificance – Cheque cannot be deposited in any other a/c of payee

Significance of cheques crossed with the words not negotiable – words not negotiable do not prohibit the transferability of the amount of a cheque but it is a warning that the title of the person receiving the cheque will not get better than that of the person from whom he gets it

Negotiations – Process whereby the amount mentioned in Negotiable Instrument is transferred to another personBy mere delivery Endorsement & deliveryIf negotiable instrument is drawn payable to bearer

Negotiable instrument drawn payable to order

Q. What do you understand by endorsement? Discuss various types of endorsements & effect thereby by giving suitable examples?

Endorsement – Instruction to transfer the amount of negotiable instrument to another personPerson who gives the instrument – EndorserPerson in whose favor endorsement is given – Endorsee

First Endorser – PayeeAllonge – Additional slip attached to check for endorsement

Types of Endorsements1. Endorsement in Blank – where payee or endorser merely signs the instruments at the back

for the purpose of transfer amount of Negotiable Instrument. Effect – order instrument becomes bearer instrument & amount can be paid by mere delivery

2. Endorsement in Full – when payee or endorser gives full instructions as to whom the amount of Negotiable Instrument is to be transferred. Effect - The person in whose favor endorsement is made is entitled to collect the amount of Negotiable Instrument or further endorse

3. Restrictive Endorsement – when payee or endorser restricts further endorsements are restricted. Effect – Endorsee will have collect the amount by depositing the Negotiable Instrument in his a/c

4. Conditional Endorsement – when payee or endorser attaches conditions to transfer of amount of Negotiable Instrument. Effect – Endorsee will have to comply with terms of endorsement

5. Partial Endorsement – when payee or endorser transfers part of the amount of Negotiable Instrument. Partial Endorsement is invalid. Exception – Incase where Bill of Exchange contains a note that part amount is already paid Negotiable Instrument will stand reduced to that amount

6. Facultative Endorsement – when payee or endorser forgoes his right or increases his responsibility. Effect – Endorser continues to be held responsible even if notice of dishonor was not served on himBill of Exchange drawn by Ramesh SinhaDrawee – AmitPayee – Angad1st Endorsee – Abbas2nd Endorsee – Shardul3rd Endorsee - Asif

7. Endorsement Sans-resource – when payee or endorser makes further endorsement without having any reference to himself. Effect – The endorser is not available for any reference / remedy

8. Endorsement sans frais – when payee or endorser transfers without his availability to contribute towards expenses. Effect – Endorsee cannot depend on contribution on endorser

Q. Define Holder in due course & discuss privileges of holder in due course

Holder in Due Course

A B C D E FDrawer Drawee Payee Endorsee1 Endorsee2 Endorsee3

Holder – A person in possession of Negotiable Instrument in his own name. entitles to receive the amount

Holder in due course – A person who became Possessor of Negotiable Instrument payable to bearer Payee or endorsee of Negotiable Instrument payable to order For consideration Before maturity Without having sufficient cause to believe that Defect existed in the of the person from whom he derived it

Privileges of the Holder in due course1. All the previous parties are liable to HIDC2. HIDC can file suit for recovery in his own name against all the previous persons3. Drawee cannot refuse payment to HIDC on the grounds that the bill was accommodation bill

– Bill drawn without consideration4. Drawee cannot refuse payment on the ground that bill is fictitious – where either drawer or

payee are not existing

5. Drawee cannot refuse payment on the ground that bill is inchoate – Bill which is stamped & signed but incomplete / blank in respect of other details

6. Holder in due course is entitled / authorized to fill up / complete inchoate stamped instrument7. Drawee cannot refuse payment on the ground that bill is unconditional / escrow – where bill

has been drawn & accepted subject to certain conditions8. Once the Negotiable Instrument passes through the hands of HIDC it gets cleansed of all its

defects9. Capacities of previous parties cannot be questioned10. Every holder is pressured to be holder in due course