1 companies act, 1956

8/8/2019 1 Companies Act, 1956

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Definition of Company & its CharacteristicsDefinition of Company & its Characteristics

SecSec 33((11)(i))(i) andand (ii)(ii) ofof thethe CompaniesCompanies ActAct definedefine aacompanycompany asas aa companycompany formedformed andand registeredregisteredunderunder thisthis ActAct oror anan existingexisting companycompany..

AA companycompany may,may, however,however, bebe defineddefined asas ananincorporatedincorporated association,association, whichwhich isis anan artificialartificial legallegalperson,person, havinghaving aa separateseparate legallegal entity,entity, withwith aaperpetualperpetual succession,succession, aa commoncommon seal,seal, aa commoncommoncapitalcapital comprisedcomprised ofof transferabletransferable sharesshares andandcarryingcarrying limitedlimited liabilityliability..


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Characteristics of a CompanyCharacteristics of a Company

(i)(i) Incorporated AssociationIncorporated Association

(ii)(ii) Artificial Legal PersonArtificial Legal Person

(iii)(iii) Separate Legal EntitySeparate Legal Entity

-- Salomon V Salomon & Co. Ltd (1897)Salomon V Salomon & Co. Ltd (1897)-- SalomonSalomon soldsold hishis businessbusiness asas leatherleather merchantmerchant forfor

3030,,000000 BritishBritish PoundPound (BP)(BP) toto SalomonSalomon && CoCo.. LtdLtd whichwhichconsistedconsisted ofof SalomonSalomon himself,himself, hishis wife,wife, hishis daughterdaughter andandfourfour sonssons.. TheThe purchasepurchase considerationconsideration waswas paidpaid byby

companycompany byby allotmentallotment ofof 2020,,000000 fullyfully paidpaid 11 BPBP sharessharesandand 1010,,000000 BPBP inin debenturesdebentures conferringconferring aa floatingfloatingchargecharge overover allall thethe companyscompanys assetsassets toto SalomonSalomon..


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OneOne shareshare ofof 11 BPBP eacheach waswas subscribedsubscribed byby thethe

remainingremaining sixsix membersmembers of of hishis familyfamily..

SalomonSalomon waswas thethe MDMD of of thethe companycompany andand asas hehevirtuallyvirtually hadhad wholewhole of of thethe stockstock andand hehe hadhad

absoluteabsolute controlcontrol overover thethe companycompany..

OnlyOnly aa yearyear later,later, thethe companycompany becamebecame insolventinsolventandand windingwinding upup commencedcommenced.. OnOn windingwinding upup thethestatementstatement ofof affairsaffairs ofof thethe companycompany waswas assetsassets60006000 BP,BP, LiabilitiesLiabilities SalomonSalomon asas debenturedebenture holderholder1010,,000000 BPBP andand unsecuredunsecured creditorscreditors 70007000 BPBP..


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(iv) Perpetual Succession(iv) Perpetual Succession

(v) Common Seal(v) Common Seal

(vi) Limited Liability(vi) Limited Liability-- The liability of the members forThe liability of the members forthe debts of the company is limited to the amountthe debts of the company is limited to the amountunpaid on their shares.unpaid on their shares.

(vii) Transferability of the shares(vii) Transferability of the shares


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Illegal AssociationsIllegal Associations

AccordingAccording toto thethe SecSec 1111,, CompaniesCompanies Act,Act, 19561956 inincasecase ofof aa partnershippartnership firmfirm doingdoing bankingbanking businessbusinessitit isis mandatorymandatory toto get get it it incorporatedincorporated underunder thethe

companiescompanies actact wheneverwhenever totaltotal numbernumber ofof partnerspartnersareare moremore thanthan 1010 andand inin otherother casescases aa partnershippartnershipfirmfirm wheneverwhenever hashas moremore thanthan 2020 partnerspartners itit shouldshouldmandatorilymandatorily bebe registeredregistered underunder thethe CompaniesCompanies

Act,Act, 19561956 otherwiseotherwise itit shallshall bebe treatedtreated asas anan illegalillegalassociationassociation..


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Consequences of NonConsequences of Non--registration as per Secregistration as per Sec11, Companies Act, 195611, Companies Act, 1956

No legal existenceNo legal existence

Unlimited Personal LiabilityUnlimited Personal Liability

FineFine-- SubSub sectionsection 55 ofof sectionsection 1111 providesprovides thatthateveryevery membermember ofof suchsuch illegalillegal associationassociation willwill bebepunishablepunishable withwith finefine whichwhich maymay extendextend toto RsRs1010,,000000//--


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Incorporation of CompanyIncorporation of Company

AA companycompany isis boughtbought intointo existenceexistence byby aa legallegal processprocess calledcalledincorporationincorporation.. ThisThis isis effectedeffected byby registrationregistration withwith thetheRegistrarRegistrar ofof CompaniesCompanies (ROC)(ROC) .. ROCROC areare generallygenerally appointedappointedforfor eacheach statestate byby thethe CentralCentral GovernmentGovernment..

ForFor incorporationincorporation ofof aa companycompany thethe followingfollowing stepssteps areare takentakenbyby promoterspromoters--

(i)(i) AvailabilityAvailability ofof NameName withwith thethe ROCROC;;

(ii)(ii) ToTo get get aa letterletter ofof intent,intent, ifif companyscompanys businessbusiness comescomes

underunderIndustriesIndustries (Development(Development && Regulation)Regulation) Act,Act, 19511951(iii)(iii) ToTo fixfix underwriters,underwriters, brokers,brokers, bankers,bankers, solicitors,solicitors, auditorsauditors

andand signatoriessignatories toto thethe memorandummemorandum..

(iv)(iv) ToTo getget MemorandumMemorandum andand ArticlesArticles ofof AssociationAssociation preparedpreparedandand printedprinted..


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Kinds of CompaniesKinds of Companies

Kinds of Companies according to the mode ofKinds of Companies according to the mode ofincorporation:incorporation:

(i) Statutory Company(i) Statutory Company RBI, SBI,LIC FCI etcRBI, SBI,LIC FCI etc

(ii) Incorporated or Registered Company(ii) Incorporated or Registered Company


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Kinds of Registered Companies on the basis ofKinds of Registered Companies on the basis ofnumber of membersnumber of members

Private Companies; &Private Companies; &

Public CompaniesPublic Companies

1.1. PrivatePrivate CompanyCompany AccordingAccording toto SectionSection 33((11)(iii),)(iii), aaprivateprivate companycompany meansmeans aa companycompany whichwhich hashas aaminimumminimum paidpaid upup capitalcapital ofof RsRs 11 lakhlakh oror suchsuchhigherhigher paidpaid upup capitalcapital asas maymay bebe prescribedprescribed andand

byby itsits articlearticle ofof associationassociation::(i)(i) restrictsrestricts thethe rightright ofof thethe membersmembers toto transfertransfershare,share, ifif anyany..


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(ii)(ii) LimitsLimits thethe numbernumber ofof itsits membersmembers toto fifty,fifty,excludingexcluding employeesemployees ofof suchsuch companycompany(iii)(iii) prohibitsprohibits anyany invitationinvitation toto thethe publicpublic toto

subscribesubscribe forfor anyany shareshare in,in, oror debenturedebenture ofofthethe companycompany;; andand

(iv)(iv) prohibitsprohibits anyany invitationinvitation oror acceptanceacceptance ofofdepositsdeposits fromfrom personspersons otherother thanthan itsits

members,members, directorsdirectors oror theirtheir relativesrelatives..


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Public Company (Sec 3(1)(iv)Public Company (Sec 3(1)(iv)

According to Sec 3(1)(iv) a public company means aAccording to Sec 3(1)(iv) a public company means acompany which:company which:

(i)(i) is not a private company;is not a private company;

(ii)(ii) has a minimum paid up capital of 5 lakh or suchhas a minimum paid up capital of 5 lakh or suchhigher paid up capital as may be prescribed;higher paid up capital as may be prescribed;

(iii)(iii) is a private company subsidiary of a publicis a private company subsidiary of a publiccompany;company;

(iv)(iv) does not have any restriction on the transfer ofdoes not have any restriction on the transfer ofshare;share;

(v)(v) does not limit the maximum number ofdoes not limit the maximum number ofmembers;members;


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(vi)(vi) CanCan inviteinvite publicpublic forfor thethe subscriptionsubscription ofof itsits

shareshareandand debenturesdebentures;;&&(vii)(vii) cancan inviteinvite oror acceptaccept depositsdeposits fromfrom publicpublic..


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Kinds of Registered Companies on the Basis ofKinds of Registered Companies on the Basis ofLiability of MembersLiability of Members

OnOn thethe basisbasis of of liabilityliability ofof members,members, thetheCompaniesCompanies Act Act makesmakes provisionprovision forfor thetheregistrationregistration ofof threethree typestypes ofof companies,companies, namelynamely::

(i)(i) CompaniesCompanies LimitedLimited byby SharesShares;; oror

(ii)(ii) CompaniesCompanies LimitedLimited byby GuaranteeGuarantee;; oror

(iii)(iii) UnlimitedUnlimited CompaniesCompanies..EachEach ofof thesethese typestypes maymay bebe aa publicpublic companycompany ororprivateprivate companycompany (Sec(Sec 1212))


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Companies Limited by SharesCompanies Limited by Shares

AA companycompany havinghaving thethe liabilityliability ofof itsits membersmemberslimitedlimited byby thethe memorandum,memorandum, toto thethe amount,amount, ififany,any, unpaidunpaid onon sharesshares respectivelyrespectively heldheld byby themthem isis

termedtermed asas aa coco.. limitedlimited byby sharesshares [Sec[Sec 1212((22)(a)])(a)]..SuchSuch aa companycompany isis generallygenerally calledcalled aa limitedlimitedliabilityliability companycompany.. TheThe liabilityliability cancan bebe enforcedenforced atatanyany timetime duringduring thethe existenceexistence andand alsoalso duringduring thethewindingwinding upup ofof thethe companycompany.. SuchSuch aa companycompany mustmusthavehave shareshare capitalcapital asas extent extent of of liabilityliability isisdetermineddetermined byby faceface valuevalue ofof sharesshares.. Most Most ofof thethecompaniescompanies inin IndiaIndia areare ofof thisthis typetype..


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Companies Limited by GuaranteeCompanies Limited by Guarantee

AA companycompany limitedlimited byby guaranteeguarantee maymay bebe defineddefinedasas aa companycompany havinghaving thethe liabilityliability ofof itsits membersmemberslimitedlimited byby itsits memorandummemorandum toto suchsuch amountamount asas thethe

membersmembers maymay respectivelyrespectively therebythereby undertakeundertake totocontributecontribute toto thethe assetsassets ofof thethe companycompany inin thetheeventevent ofof itsits beingbeing woundwound upup.. [Sec[Sec 1212((22)(b)])(b)].. TheTheamountamount guaranteedguaranteed byby eacheach membermember cannotcannot bebe

demandeddemanded untiluntil thethe companycompany isis woundwound up,up,therefore,therefore, itit isis likelike reservereserve capitalcapital..


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SuchSuch companycompany maymay oror maymay notnot havehave shareshare capitalcapital..TheseThese typestypes ofof companiescompanies areare normallynormally formedformedwithoutwithout shareshare capitalcapital forfor nonnon tradingtrading purposespurposes

suchsuch asas promotionpromotion ofof commerce,commerce, art,art, science,science,sportssports etcetc suchsuch asas ChambersChambers ofof Commerce,Commerce, TradeTrade

AssociationsAssociations andand SportsSports ClubsClubs etcetc areare guaranteeguaranteecompaniescompanies becausebecause theythey neitherneither requirerequire hugehuge

capitalcapital nornor aimaim profitprofit makingmaking..


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Unlimited CompaniesUnlimited Companies

AA companycompany havinghaving nono limitlimit onon thethe liabilityliability ofof itsitsmembersmembers isis anan unlimitedunlimited companycompany.. [Sec[Sec1212((22)(c)])(c)].. TheThe liabilityliability ofof membersmembers ofof suchsuch

companycompany isis unlimitedunlimited.. LikeLike aa partnership,partnership, everyeverymembermember isis liableliable toto contribute,contribute, inin proportionproportion totohishis interestinterest inin thethe company,company, towardstowards thethe amountamountrequiredrequired forfor paymentpayment ofof thethe totaltotal liabilityliability ofof thethecompanycompany.. IfIf oneone isis unableunable toto contributecontributeanything,anything, otherother membersmembers havehave toto sharesharedeficiencydeficiency inin proportionproportion toto theirtheir capitalcapital inin thethecompanycompany..

--PartnershipPartnership andand UnlimitedUnlimited CompaniesCompanies


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Other Kinds of CompaniesOther Kinds of Companies

Licensed CompaniesLicensed Companies

One Man Company or Family CompanyOne Man Company or Family Company

Such as Salomon & Company Ltd.Such as Salomon & Company Ltd.

Foreign CompanyForeign Company is a company incorporatedis a company incorporatedoutside Indiaoutside India

Government CompanyGovernment Company such co. in which not lesssuch co. in which not less

than 51% of paid up capital share capital is heldthan 51% of paid up capital share capital is heldby the central or state government.by the central or state government.

Holding Company & Subsidiary CompanyHolding Company & Subsidiary Company


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Licensed Company or Not for Profit CompanyLicensed Company or Not for Profit Company

SecSec 2525 of of thethe Act Act providesprovides forfor suchsuch companycompany..BeforeBefore registrationregistration aa licensedlicensed isis obtainedobtained fromfromcentralcentral governmentgovernment.. AnyAny associationassociation formedformed forfor

promotionpromotion ofof art,art, science,science, religion,religion, charitycharity oror anyanyotherother usefuluseful objectobject whichwhich doesdoes notnot intendintend toto applyapplyitsits profitprofit forfor paymentpayment ofof anyany dividenddividend toto itsitsmembersmembers butbut insteadinstead toto applyapply itsits incomeincome forfor

promotingpromoting itsits objectsobjects cancan obtainobtain aa licenselicense fromfrom thethegovernmentgovernment andand cancan get get registeredregistered itselfitself asas aacompanycompany withwith limitedlimited liabilityliability..


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On registration such company enjoys followingOn registration such company enjoys followingexemptionsexemptions andand privileges:privileges:

(i) such co. may exclude the word limited or(i) such co. may exclude the word limited orprivate limited from their names.private limited from their names.(ii) They are registered without payment of stamp(ii) They are registered without payment of stampduty on their memorandum and articles.duty on their memorandum and articles.(iii) They are exempted from minimum paid up(iii) They are exempted from minimum paid upcapital.capital.

The government may revoke the license at anyThe government may revoke the license at anytime of such companies, if fundamental conditionstime of such companies, if fundamental conditionsof the license are violated.of the license are violated.


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Exemptions & Privileges of Private CompaniesExemptions & Privileges of Private Companies

(i)(i) OnlyOnly twotwo personperson (seven(seven inin publicpublic coco.. maymay makemakeaa companycompany [Sec[Sec 1212]]

(ii)(ii) It can commence business immediately onIt can commence business immediately on

incorporation as it has not to wait to obtain aincorporation as it has not to wait to obtain acertificate for the commencement of businesscertificate for the commencement of business[Sec 149(7)][Sec 149(7)]

(iii)(iii) It is allowed to work with only two directorsIt is allowed to work with only two directorswhereas at least three are required in a publicwhereas at least three are required in a publiccompany.company.

(iv)(iv) At the time of getting the company incorporatedAt the time of getting the company incorporated


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WithWith thethe ROC,ROC, directorsdirectors areare notnot requiredrequired toto filefile withwithRegistrarRegistrar theirtheir consentconsent inin writingwriting toto act act inin that that

capacitycapacity andand theirtheir undertakingundertaking toto taketake upupqualificationqualification shares,shares, if if anyany [Sec[Sec 266266((55)])](v)(v) ItIt needneed notnot prepareprepare andand filefile prospectusprospectus oror

statementstatement inin lieulieu ofof prospectusprospectus withwith thethe RegistrarRegistrar..

[Sec[Sec 7070((33)])](vi)(vi) ItIt cancan proceedproceed toto allotallot sharesshares withoutwithout havinghaving totowaitwait forfor anyany suchsuch thingthing asas minimumminimum subscriptionsubscription

[Sec[Sec 6969]]

(vii)(vii) ItIt isis exemptedexempted fromfrom thethe requirementrequirement ofof holdingholdingstatutorystatutory meetingmeeting andand filingfiling statutorystatutory reportreport.. AApublicpublic companycompany mustmust holdhold suchsuch aa meetingmeeting afterafter oneonemonthmonth andand beforebefore sixsix monthsmonths fromfrom thethe obtainingobtaining


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certificatecertificate toto commencecommence businessbusiness inin orderorder toto

acquaintacquaint thethe shareholders,shareholders, aboutabout thethe detailsdetails ofofcompanyscompanys workingworking tilltill that that dayday [Sec[Sec 165165]]

(viii)(viii) RightRight ofof prepre--emptionemption doesdoes notnot applyapply toto suchsuch aa

privateprivate companycompany.. AccordingAccording toto SecSec 8181,, aa publicpubliccompany,company, inin certaincertain cases,cases, proposingproposing toto increaseincreaseitsits subscribedsubscribed capitalcapital byby allotmentallotment ofof furtherfurthershares,shares, mustmust offeroffer themthem toto existingexisting equityequity

shareholdersshareholders prorataprorata inin thethe first first instanceinstance..AA privateprivate companycompany isis freefree toto allotallot newnew issuesissues totooutsidersoutsiders [Sec[Sec 8181((33)])]


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(ix)(ix) ItIt enjoysenjoys considerableconsiderable freedomfreedom withwith regardregard toto itsitsdirectors,directors, MDMD oror managermanager.. ItIt isis not not requiredrequired totocomplycomply withwith restrictionsrestrictions relatingrelating toto thethe agenciesagencies ofofmanagementmanagement whichwhich areare applicableapplicable toto publicpublic

companiescompanies..EgEg::

(a)(a) AllAll itsits directorsdirectors cancan bebe permanentpermanent lifelifedirectorsdirectors andand thethe requirementrequirement ofof rotationrotationdoesdoes not not applyapply [Sec[Sec 255255]](b)(b) AllAll itsits directorsdirectors cancan bebe appointedappointed enen blocbloc

byby aa singlesingle resolutionresolution [Sec[Sec.. 255255]](c)(c) NumberNumber of of DirectorsDirectors cancan bebe increasedincreasedbeyondbeyond thethe limit limit fixedfixed inin thethe articlesarticles ofofassociationassociation withoutwithout CentralCentral GovtGovt sanctionsanction

[Sec[Sec 259259]]


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(d) Directors are not required to file with the(d) Directors are not required to file with the

Registrar, within 30 days of their firstRegistrar, within 30 days of their firstappointment, their consent in writing to actappointment, their consent in writing to actas such director [Sec 264(3)]as such director [Sec 264(3)](d) An interested director may participate in(d) An interested director may participate in

the board meeting and exercise his vote.the board meeting and exercise his vote.[Sec[Sec 300]300](e) Central Govts approval is not requred(e) Central Govts approval is not requredeither for appointment or reappointment of aeither for appointment or reappointment of a

MD or wholetime directors [Sec 268]MD or wholetime directors [Sec 268](f) It may provide by AOA, a special(f) It may provide by AOA, a specialdisqualification for appointment of directorsdisqualification for appointment of directors


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Public & Private CompanyPublic & Private Company

Public Co.Public Co.

(i) Min Paid up Capital 5 L(i) Min Paid up Capital 5 L

(ii) No of members(ii) No of members

77 no maximum limitno maximum limit(iii) Min no of Directors 3(iii) Min no of Directors 3

(iv) Transfer of Share(iv) Transfer of Share

a shareholder cana shareholder cantransfer his shares freelytransfer his shares freelywithout restriction.without restriction.

Private Co.Private Co.

(i) 1 lakh(i) 1 lakh

(ii) 2(ii) 2--5050(iii) 2(iii) 2

(iv)(iv) TheThe rightright isis restrictedrestrictedbyby articlesarticles of ofassociation,association, requiresrequirespriorprior permissionpermission ofofBoardBoard ofof DirectorsDirectors


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Public Co.Public Co.

(v) Public subscription(v) Public subscription

A public co. can inviteA public co. can invite

public for the subscriptionpublic for the subscriptionof its share andof its share anddebenturesdebentures

(vi) Commencement of(vi) Commencement of

BusinessBusiness only afteronly aftergetting the Certificate ofgetting the Certificate ofCommencement ofCommencement ofBusinessBusiness


(v) A private co. by its(v) A private co. by itsArticles of AssociationArticles of Association

prohibits any invitationprohibits any invitationto the public for anyto the public for anyshareshare

(vi) Immediately(vi) Immediately


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Public CompanyPublic Company

(vii) Issue of Prospectus(vii) Issue of Prospectus

Must file with ROC aMust file with ROC aprospectus orprospectus or

Statement in lieu ofStatement in lieu ofprospectusprospectus

(viii) Allotment of share(viii) Allotment of shareminimum subscriptionminimum subscriptionis necessaryis necessary


(vii) Need not prepare(vii) Need not prepare

(viii) Can proceed to(viii) Can proceed to

allot share withoutallot share withoutminimum subscriptionminimum subscription


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Public CoPublic Co

(ix) Statutory Meeting(ix) Statutory Meeting

Must hold suchMust hold such

meeting after onemeeting after onemonth and before 6month and before 6months from the datemonths from the dateof obtaining theof obtaining the

certificate ofcertificate ofcommencement ofcommencement ofbusinessbusiness

Private CoPrivate Co

(ix) Is not required to(ix) Is not required tohold such meetinghold such meeting


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Public CompanyPublic Company

(x) Provision regarding(x) Provision regardingDirectorsDirectors

Permission of CentralPermission of CentralGovt is required forGovt is required forappointment orappointment orreappointment of MDreappointment of MDor whole time directorsor whole time directors

Private CompanyPrivate Company

(x) no such approval is(x) no such approval isrequiredrequired


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Public CoPublic Co

(xi) Managerial(xi) ManagerialRemunerationRemuneration

Maximum managerialMaximum managerialremuneration is fixedremuneration is fixedat 11% of annual netat 11% of annual netprofitprofit

(xii) Index of members(xii) Index of membersmust keep in casemust keep in casemore than 50more than 50

Private CoPrivate Co

(xi) No such restriction(xi) No such restriction

(xii) Not required to keep(xii) Not required to keepan index of membersan index of members


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Conversion of CompaniesConversion of Companies

Automatic Conversion by defaultAutomatic Conversion by defaultInIn casecase ofof aa PrivatePrivate co,co, if if membershipmembership exceedsexceeds 5050,,itit permitspermits freefree transfertransfer ofof shares,shares, invitesinvites publicpublic totosubscribesubscribe toto itsits sharesshares oror debenturesdebentures itit becomesbecomes aa

publicpublic coco automaticallyautomatically..Deliberate ConversionDeliberate Conversion

AA privateprivate companycompany may,may, atat anytimeanytime byby aa specialspecialresolutionresolution deletedelete fromfrom thethe itsits articlesarticles thethe fourfourcompulsorycompulsory restrictionsrestrictions asas toto (i)(i) membership,membership, (ii)(ii)transfertransfer of of shares,shares, (iii)(iii) publicpublic shareshare && (iv)(iv)acceptanceacceptance ofof publicpublic depositsdeposits--toto thethe ROC,ROC, AlteredAltered Articles,Articles, ProspectusProspectus ororStatementStatement inin lieulieu ofof ProspectusProspectus inin 3030 daysdays

1 companies act, 1956

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