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 = Promise

Promise * Promise = Agreement
Agreement + 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 relationship
2. Offer and Acceptance
3. Two or more persons
Section 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 consideration
6. 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 Object
8. Certainty of performance
9. Not ambiguous / vague(the agreement must be certain)
10. Legal Formalities
11. Not declared to be void
Q2. Offer and Acceptance
Ans.
Rules for a valid offer:-
1. Offer should be capable of creating legally binding relationships
2. Offer should be backed by willingness to perform. Mere intention is not an offer
3. 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 offeree
5. Offer should be differentiated from
Intention
Invitation to offer for e.g.
a) Super Bazaar
b) Prospectus
c) Tender
d) Auction Notice
6. Offer may be conditional
7. 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 unconditional
2. Acceptor must be willing to perform his obligation
3. Acceptance must be communicated to the offeror
4. Acceptance must be communicated within a reasonable time
5. Acceptance must be in the manner prescribed
6. 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 revocation
b) 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 08-08-2005 Communication of
on acceptance is complete as
against proposal
Letter of acceptance received 10-08-2005 Communication of
on acceptance is complete
against acceptance

Competence of Parties to contract:-

(Legal Competence)

Whether a person has

o Power In Law
o Authority

Every person is competent to contract open letter dated 01-08-2005 if

1. he has the age of majority according to the law to which he is subject
2. he is of sound mind
3. 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 majority
Validity:- 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 risk

2. 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 contract
A & 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 insolvent
9. No degree of specific performance against minor
10. 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 dont contract under influence of intoxication

Lawful Consideration:-

Basis
Price
Something 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 Baldeo
2. Consideration may move from promisee or any other person. E.g. Chinnaya v/s Ramaiya
3. 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 consideration
5. 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 commit
2. Offense punishable under Indian Penal Code
3. Detaining or threatening to detain unlawfully property of a person

Features of Coercion:-
1. Use of physical force
2. Violent in nature
3. Even a threat is enough
4. Offense may be committed or threatened is punishable under Indian Penal Code
5. Threat to commit suicide is punishable & it can result in coercion. E.g. Amiraju v/s
Shesamma

Consequences of Coercion:-
1. Consent is not free
2. 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 &
disciple
3. Where mental capacity is temporarily affected on account of age & disease e.g. doctor &
patient

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

Coercion Undue Influence

Meaning Use of physical force Use of dominant force
Nature Violent May not be violent
Relationship Not required There must be relationship
Only by parties under
Who can exercise Third parties can exercise relationship

Misrepresentation:-
1. False statement by a person who believes it to be true
2. Breach of duty without intention to deceive, giving unfair advantage
3. 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 free
2. Contract is voidable
3. 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 deceive
1. False statement by a person who does not believe it to be true
2. Active concealment of facts
3. Promise without intention to perform
4. Anything fitted to deceive
5. 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 Fraud
Intention No intention to cheat There is intention to cheat
Knowledge of false statement Person making false statement Person making false statement
 does not know statement is does know statement is false
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 at
not excused) of fact) at mistake Void mistake Contract
Contract) isnt void)
two exceptions

Identity of person contracted with Nature of contract signed

Contract becomes void

e.g. Cundy v/s Lindsay

Agreements expressly declared to be void:-

1. Agreement with parties incompetent to contract
2. Contract without consideration
3. Contract with unlawful consideration
4. Contract with unlawful object
5. Contract with mutual mistake of fact
6. Contracts in restraint of marriage
 7. 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 Proceedings

o Right to seek legal remedy if refused Void
o Agreement where period of limitation is reduced
o Exception Reference to arbitration

9. Contracts the meaning of which is uncertain

10. Contracts by way of Wager
11. Contracts contingent on uncertain event when event becomes impossible
12. Contracts to do impossible things

Agreement by way of Wager:-

Betting / Expenditure Agreement:- Promise to pay or moneys 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 perform
5. 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 Anticipatory (Before the actual due date intention not to perform is
performance) communicated)
The other party can The other party can wait till actual due date
treat this
communication as
breach of contract on
the date of receipt of
communication
We can perform on due If we fail it will be
date (alternative breach of contract on
arrangement) actual due date
Consequences of Breach of Contract:-

Suit for Damages Suit for Specific Injunction Quantum Meruit

(Estimate of monetary Performance Court order restricting - As much as is
loss suffered on the parties merited
account of non - Where contract
performance) is abandoned or
Normal Arising out cancelled
of normal course of - Contract
business becomes void
Special Parties had - When contract
estimated or is voidable &
convisaged party decides to
Exemplary Puritive cancel
by way of - In the mean
punishment time part of the
Nominal Taken but contract is
in recognition of rights already
of the party 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 shares
3. 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 quit
4. Perpetual Existence Company never dies except through due process of law
5. Common Seal Seal is signature of a company
6. Property can be purchased in the company name. Company can own, posses / dispose of the
property
7. 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 CIT

2. Company assuming enemy character e.g. Daimler & Company Ltd vs Continental Tyres &
Rubbers Company
3. Improper Conduct e.g. Gil Ford Motor Company vs Harne
4. Fraud
5. 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 Companies
On the basis of Statute(act)
Companies formed under
special charter East India
Company
Co-formed under special
statute act RBI
Co-Registered under Liability Company with limited Liability
companies act Reliance Ltd. Company with unlimited liability
Kotak Mahindra Capital
Company
Capital Contribution With Share Capital
May not have share capital
Liability limited by
guarantee(Indian Institute of
Bankers)
Number of Members Public Ltd Marketability
Company of shares
Min 7 & Max Unlisted Listed
(no upper (Closely
limit) Held)
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 Company
Basis of Government - Audited by
involvement Government CAG(Comptroller &
Company Auditor General of India)
- Annual report is placed
before the parliament
- 51% of capital is held by
government(Central,
State, Other Govt. Co.
PSUs if registered under
companies act)
Geographic Parameter Foreign Companies (All MNCs)
(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 CAPITAL
If Coporation 5 crores
International / Globe / Global / Asia / Asiatic / 1 crore
Intercontinental
Above words used in between name 50 lacs
Hidustan / Bharat / India as first name 50 lacs
Above words used in between name 5 lacs
Industry / Udyog 1 crore
Enterprise / Products / Manufacturing 10 lacs

Documents to be submitted for Registration

1. Memorandum Of Association To be stamped according to the value of authorized
2. Articles Of Association capital
3. 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 18
7. 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 Company
ii. 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 business
Minimum Subscription Is the amount which in the opinion of Directors of the Company
sufficient to commence the business
In 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--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
Creditors
Anything 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 Association

1. Change of Name
Compulsory Voluntary
Where existing company object the name to When the members of the company want
similar / identical to change
ROC to issue order - availability of new name to be checked
- First show cause notice up
 - Hearing - approval of members to change name at
- Order 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 (3/4 th 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 (3/4 th 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 / Amalgamation
Gujarat Ambuja ACC with majority shareholding Indian Rayon, Indo Gulf Fertilizer & Birla
of ACC 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 amended
5. Capital Clause can be changed / amended
Procedure for change in capital clause
i. Decision by Board of Directors
ii. 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 fee
6. 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 AOA
1. 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 Long Term

- Working Capital facility from bank Capital Equity & Preference
- Sundry Creditors Debentures (Bonds)
- Outstanding Expenses Term Loans
- Public Deposit maturing within one year Public Deposit maturing after 1 year (Max. 3
- Commercial Papers years)
- Inter-corporate Loans
- Factoring Limit

GDR Global Depository Receipt Shares not issued, only certificate issued in other than dollar,
listed on foreign exchanges
ADR American Depository Receipt
FCCB Foreign Currency Convertible Bonds
ECB 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 Prospectus

Legal Aspects
1. Companies Act Provisions relating to prospectus
2. SEBI Act 1992 Disclosure for SEBI guidelines
3. 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 - Newly incorporated company / in
out of 5 preceding financial years Greenfield project
- Net worth of the company should be not - Project has to approved by Financial
be less than 1 crore in last five financial Institution / Banks
years - Approving Authority must have
- IPO cannot exceed an amount more than participated to the extent of 10%
5 times its net worth - There should be compulsory market
making for 2 years

Draft Prospectus
Primary 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 parts
Part 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 QIBs (Qualified Institutional
Bankers) called Road shows. QIBs 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

Shares
Equity (3) Preference (1)
Those shares which are not preference shares Which can enjoy preferential rights
(risk capital) Dividend
No assurance as to return of investment Redemption
No certainty as to return on investment

Equity
Voting 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 Shares issued at Buy Back Shares
Discount Par
- shares issued at value - Rs. 10 shares issued Shares issued at Market price is related
higher than the face at Rs .9 per share face value price multiples of EPS
value - company when (Earnings / No. of
- share premium can be issues shares at a shares)
utilized for price less than the - company can buy
writing off face value back 25% of its
preliminary Not more than paid up capital
expenses 10% unless - buy back from
Bonus issue of approved by accumulated
shares central govt. profits
Expansion Approved by reserves
- Rs. 10 share issued at Rs. members by proceeds of
120 (Share Capital special previous issues
Rs.10 & Share Premium resolution of shares
Rs. 110) Shares - there must be
forfeited are provision in AOA
issued at - buy back can be by
discount 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. - Can be held by Public / Pvt.
Ltd company Ltd company
- Held every year - Can be held any time when
- With 6 months from end of the matter is urgent
accounting year - It cannot wait till next AGM
- One meeting per calendar - Any meetings of members
year other than AGM are EOGM
- 1st meeting to be held within
18 months from the date of
incorporation
- between 2 AGMs gap not
more than 15 months
 - Obtain approval of ROC if
gap exceeds 15 months

Agenda

Statutory Meeting AGM EOGM

Consideration of Statutory Consideration of Statutory Consideration of Statutory
Report Report Report
- Report explaining the - P&L a/c
progress made since - Balance sheet
incorporation of the - Auditors report
company - Directors reports
- Receipts & payment a/c - Corporate governance
- Shares issued & allotted report
- Important contracts signed
by management
- To be filed with ROC

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 parts
1. 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 meeting
a. As per provisions in the article
 b. If articles are silent, in case of Public ltd company 5 persons, in case of Pvt ltd
company 2 persons shall form quorum
c. Quorum must be present within half an hour from the scheduled time of
commencement of meeting
d. If quorum is not present within half an hour, meeting is adjourned to next week, same
time, same place
e. If at the adjourned meeting quorum is not present, persons present shall form the
quorum
3. Proxy a member is entitled to attend the meeting or depute a person to attend on his behalf
by executing instrument of proxy
a. Proxy need not be a member
b. Proxy form should be lodged with the company 48 hours before the scheduled time of
commencement of meeting
c. Proxy may be open or with specific direction to vote or against the resolution
d. Proxy is cancelled if member attends the meeting
e. Proxy cannot speak, but vote at the meeting
4. Movement of Resolution
a. Resolution is proposed by 1 of the members
b. It is seconded by another member
c. Decision on the resolution members can raise questions chairman to answer
d. 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 majority
b. By show of hands - Special resolution requires 3/4th majority
c. By division
d. By ballot
e. 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

Resolutions
Ordinary Special Resolution requiring special
notice
- Simple majority - Requires 3/4th majority - Removal of a Director
- Ordinary business of rule is - Amendment in MOA - Removal of an Auditor
passed by simple majority - Amendment in AOA
- Appointment of MD
- Remuneration of MD
- Appointment of sole selling
agent
- Can be done by postal
ballot for listed companies
 Appoint Auditors to check
Power to manage the & control performance of
company given to Board company which is
of Directors who are managed by directors
responsible for day to day
management
Report to members
Members Contribute to
the capital of the company
& control the company by
executing voting rights at
meeting

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 called
1. Agent of the Company Director functions as an agent of the company acting on behalf of
the company
2. Trustees
a. of the members for the property owned by the company
b. 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 / functions
4. Professional Employees Director has to be an individual & not an incorporated body

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. 1/3 rd 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 Directors
a. 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 vacancies
i. On account if vacancy arises, BOD can appoint a director to fill up the
vacancies
ii. Death, resignation or Disqualification
iii. Such director to hold office till next AGM
 c. Alternate directors - When the director leaves the state in which registered office of a
company is located
i. 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 director
4. Appointment of directors by outsiders There can be an agreement by the company with
a. Its lenders or
b. Creditors
Whereby its nominee of lenders / creditors may be appointed in the Board
c. 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 out
c. 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 mind
2. undischarged insolvent
3. 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 company
a. company has defaulted to file annual return & balance sheet for a consecutive period
of 3 years with ROC
b. Company defaults in payout of interest / principal of deposits from public
Max. no. of companies - a person can be director in max. 15 companies excluding Pvt, ltd
Companies

Vacation of office of Directors

1. on attracting disqualification
2. if a director fails to attend 3 consecutive Board meetings without leave of absence
3. if director fails to take qualification shares within 2 months
4. if he fails to pay call money on shares within 6 months

Removal of a Director
1. Removal by the member at AGM
a. By not reappointing retired Director
b. By appointing someone else in place of retiring director
c. By passing a resolution removing a director
 2. Removal of Director by NCLT

Powers of a Director
1. General Power General Powers to be exercised keeping in view
a. Provisions of companies act
b. AOA
c. 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 shares
b. Power to issue debentures
c. Power to borrow
d. Power to make investment
e. Power to make political donations total Rs. 50000/- or 5% of net profit whichever is
higher
3. Powers which can be exercised with consent of members
a. To sell any undertaking (division) of the company
b. To borrow in excess of paid up capital & reserves
c. To amalgamate / merge other company / with other company
d. To appoint sole selling agent
e. To amend MOA / AOA
f. 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 material
o Labor
o Utilities
o Other expenditure

P&L & B/S as per schedule VI

Dividend to be paid to be paid only out of current profits

1. provided for depreciation
2. rules relating to transfer of profits to reserve
Profit Transfer to Reserve
10% - 12.5% 2.5%
12.5% - 15% 5%
15% - 17.5% 7.5%
 Above 17.5% 10%
3. a/cs 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 Auditor
1. Power to have access to all documents agreements / contracts / minutes
2. 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 company
4. To report to the members
a. Whether the company has maintained the required books of a/c or registers
b. Whether the company has been complying with accounting standards
c. 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 year
2. Balance sheet gives true & fair view of financial position of the company as on a particular
date
a. Auditors to qualify the report where there are irregularities
b. 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

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

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

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

Cheque
Bill of exchange drawn on a specified banker

Bank of Baroda 25/11/2005

Pay Rupesh Pandey
In Words Figures_________
Signed by maker / promissor

Promissory Note Bill of Exchange Cheque

1. Parties Involved 2 parties maker who 3 parties 3 parties
promises to pay & Drawer / maker Drawer
payee (promise) who who draws maker of a
collects payment the bill cheque
Drawee on Drawee Bank
whom the bill Payee - Who
is drawn or to collects the
whom direction payment
to pay is given
Payee - Who
collects the
payment
2. Nature of Maker Debtor Drawer Creditor vis-
Drawer Creditor vis-
relationship Payee - Creditor -vis Drawee but
-vis Bank but Debtor
Debtor vis--vis Payee
vis--vis Payee
Drawee Debtor Drawee Bank -
Payee Creditor Debtor
Payee Creditor
3. Nature of liability Maker of promissory Drawee Primary Bank Primary Liable
note is primararily Liable Drawer Secondary
liable Drawer Secondary Liable
 Liable
4. Acceptance Not Required Acceptance by drawee Not Required
required
5. Crossing N.A. N.A. Only cheque are
required to be crossed
6. Stamp Duty Attracted Attracted Not Required
7. Notice of dishonor Not Required Required Bank issues non
Payment memo
8. Special Provisions
a. Drawee in case of N.A. N.A.
need
b. Acceptance for N.A. N.A.
Honor

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 negotiable
Cheque is said to be crossed

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

Types of Crossing
General Crossing Special 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
bank
Significance Banker to whom
the cheque is specially crossed
Is the only authorized banker to
collect the payment
Restrictive Crossing
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 crossed
Significance 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 person
By mere delivery Endorsement & delivery
If negotiable instrument is drawn payable to Negotiable instrument drawn payable to order
bearer

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 person

Person who gives the instrument Endorser
Person in whose favor endorsement is given Endorsee

First Endorser Payee

Allonge Additional slip attached to check for endorsement

Types of Endorsements
1. 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 him
Bill of Exchange drawn by Ramesh Sinha
Drawee Amit
Payee Angad
1st Endorsee Abbas
2nd Endorsee Shardul
3rd 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 F
Drawer 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 course

1. All the previous parties are liable to HIDC
2. HIDC can file suit for recovery in his own name against all the previous persons
3. Drawee cannot refuse payment to HIDC on the grounds that the bill was accommodation bill
Bill drawn without consideration
4. 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 instrument
7. Drawee cannot refuse payment on the ground that bill is unconditional / escrow where bill
has been drawn & accepted subject to certain conditions
8. Once the Negotiable Instrument passes through the hands of HIDC it gets cleansed of all its
defects
9. Capacities of previous parties cannot be questioned
10. Every holder is pressured to be holder in due course