Section 123 to 172

Question 1

149

Answer 1

Company to have Board of Directors

Question 2

150

Answer 2

Manner of selection of independent directors and maintenance of databank of independent directors

Question 3

151

Answer 3

“Appointment of director elected by small shareholders
A listed company may have one director elected by such small shareholders insuch manner and with such terms and conditions as may be prescribed.Explanation.—For the purposes of this section “small shareholders” means ashareholder holding shares of nominal value of not more than twenty thousand rupees orsuch other sum as may be prescribed.”

Question 4

152

Answer 4

“Appointment of directors
(1) Where no provision is made in the articles of a company for the appointmentof the first director, the subscribers to the memorandum who are individuals shall be deemedto be the first directors of the company until the directors are duly appointed and in case ofa One Person Company an individual being member shall be deemed to be its first directoruntil the director or directors are duly appointed by the member in accordance with theprovisions of this section.(2) Save as otherwise expressly provided in this Act, every director shall be appointedby the company in general meeting.(3) No person shall be appointed as a director of a company unless he has beenallotted the Director Identification Number under section 154.(4) Every person proposed to be appointed as a director by the company in generalmeeting or otherwise, shall furnish his Director Identification Number and a declaration thathe is not disqualified to become a director under this Act.(5) A person appointed as a director shall not act as a director unless he gives hisconsent to hold the office as director and such consent has been filed with the Registrarwithin thirty days of his appointment in such manner as may be prescribed:Provided that in the case of appointment of an independent director in the generalmeeting, an explanatory statement for such appointment, annexed to the notice for thegeneral meeting, shall include a statement that in the opinion of the Board, he fulfils theconditions specified in this Act for such an appointment.(6) (a) Unless the articles provide for the retirement of all directors at every annualgeneral meeting, not less than two–thirds of the total number of directors of a public companyshall—(i) be persons whose period of office is liable to determination by retirement ofdirectors by rotation; and(ii) save as otherwise expressly provided in this Act, be appointed by thecompany in general meeting.(b) The remaining directors in the case of any such company shall, in default of, andsubject to any regulations in the articles of the company, also be appointed by the companyin general meeting.(c) At the first annual general meeting of a public company held next after the date ofthe general meeting at which the first directors are appointed in accordance with clauses (a)and (b) and at every subsequent annual general meeting, one–third of such of the directorsfor the time being as are liable to retire by rotation, or if their number is neither three nor amultiple of three, then, the number nearest to one–third, shall retire from office.(d) The directors to retire by rotation at every annual general meeting shall be thosewho have been longest in office since their last appointment, but as between persons whobecame directors on the same day, those who are to retire shall, in default of and subject toany agreement among themselves, be determined by lot.(e) At the annual general meeting at which a director retires as aforesaid, the companymay fill up the vacancy by appointing the retiring director or some other person thereto.Explanation.—For the purposes of this sub–section, “total number of directors” shallnot include independent directors, whether appointed under this Act or any other law for thetime being in force, on the Board of a company.(7) (a) If the vacancy of the retiring director is not so filled–up and the meeting has notexpressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same dayin the next week, at the same time and place, or if that day is a national holiday, till the nextsucceeding day which is not a holiday, at the same time and place.(b) If at the adjourned meeting also, the vacancy of the retiring director is not filled upand that meeting also has not expressly resolved not to fill the vacancy, the retiring directorshall be deemed to have been re–appointed at the adjourned meeting, unless—(i) at that meeting or at the previous meeting a resolution for the re–appointmentof such director has been put to the meeting and lost;(ii) the retiring director has, by a notice in writing addressed to the company orits Board of directors, expressed his unwillingness to be so re–appointed;(iii) he is not qualified or is disqualified for appointment;(iv) a resolution, whether special or ordinary, is required for his appointment orre–appointment by virtue of any provisions of this Act; or(v) section 162 is applicable to the case.Explanation.—For the purposes of this section and section 160, the expression “retiringdirector” means a director retiring by rotation.
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Question 5

153

Answer 5

“Application for allotment of Director Identification Number
Every individual intending to be appointed as director of a company shall makean application for allotment of Director Identification Number to the Central Government insuch form and manner and along with such fees as may be prescribed.
“

Question 6

154

Answer 6

“Allotment of Director Identification Number
The Central Government shall, within one month from the receipt of the applicationunder section 153, allot a Director Identification Number to an applicant in such manner asmay be prescribed.
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Question 7

155

Answer 7

“Prohibition to obtain more than one Director Identification Number
No individual, who has already been allotted a Director Identification Numberunder section 154, shall apply for, obtain or possess another Director Identification Number.
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Question 8

156

Answer 8

“Director to intimate Director Identification Number
Every existing director shall, within one month of the receipt of DirectorIdentification Number from the Central Government, intimate his Director Identification Numberto the company or all companies wherein he is a director.
“

Question 9

157

Answer 9

“Company to inform Director Identification Number to Registrar
(1) Every company shall, within fifteen days of the receipt of intimation undersection 156, furnish the Director Identification Number of all its directors to the Registrar orany other officer or authority as may be specified by the Central Government with such feesas may be prescribed or with such additional fees as may be prescribed within the timespecified under section 403 and every such intimation shall be furnished in such form andmanner as may be prescribed.(2) If a company fails to furnish Director Identification Number under sub–section (1),before the expiry of the period specified under section 403 with additional fee, the companyshall be punishable with fine which shall not be less than twenty–five thousand rupees butwhich may extend to one lakh rupees and every officer of the company who is in default shallbe punishable with fine which shall not be less than twenty–five thousand rupees but whichmay extend to one lakh rupees.
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Question 10

158

Answer 10

“Obligation to indicate Director Identification Number
Every person or company, while furnishing any return, information or particularsas are required to be furnished under this Act, shall mention the Director IdentificationNumber in such return, information or particulars in case such return, information or particularsrelate to the director or contain any reference of any director.
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Question 11

159

Answer 11

“Punishment for contravention
If any individual or director of a company, contravenes any of the provisions ofsection 152, section 155 and section 156, such individual or director of the company shall bepunishable with imprisonment for a term which may extend to six months or with fine whichmay extend to fifty thousand rupees and where the contravention is a continuing one, witha further fine which may extend to five hundred rupees for every day after the first duringwhich the contravention continues.
“

Question 12

160

Answer 12

“Right of persons other than retiring directors to stand for directorship
(1) A person who is not a retiring director in terms of section 152 shall, subject tothe provisions of this Act, be eligible for appointment to the office of a director at any generalmeeting, if he, or some member intending to propose him as a director, has, not less thanfourteen days before the meeting, left at the registered office of the company, a notice inwriting under his hand signifying his candidature as a director or, as the case may be, theintention of such member to propose him as a candidate for that office, along with thedeposit of one lakh rupees or such higher amount as may be prescribed which shall berefunded to such person or, as the case may be, to the member, if the person proposed getselected as a director or gets more than twenty–five per cent. of total valid votes cast either onshow of hands or on poll on such resolution.(2) The company shall inform its members of the candidature of a person for the officeof director under sub–section (1) in such manner as may be prescribed.
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Question 13

161

Answer 13

“Appointment of additional director, alternate director and nominee director
(1) The articles of a company may confer on its Board of Directors the power toappoint any person, other than a person who fails to get appointed as a director in a generalmeeting, as an additional director at any time who shall hold office up to the date of the nextannual general meeting or the last date on which the annual general meeting should havebeen held, whichever is earlier.(2) The Board of Directors of a company may, if so authorised by its articles or by aresolution passed by the company in general meeting, appoint a person, not being a personholding any alternate directorship for any other director in the company, to act as an alternatedirector for a director during his absence for a period of not less than three months fromIndia:Provided that no person shall be appointed as an alternate director for an independentdirector unless he is qualified to be appointed as an independent director under the provisionsof this Act:Provided further that an alternate director shall not hold office for a period longer thanthat permissible to the director in whose place he has been appointed and shall vacate theoffice if and when the director in whose place he has been appointed returns to India:Provided also that if the term of office of the original director is determined before he soreturns to India, any provision for the automatic re–appointment of retiring directors indefault of another appointment shall apply to the original, and not to the alternate director.(3) Subject to the articles of a company, the Board may appoint any person as adirector nominated by any institution in pursuance of the provisions of any law for the timebeing in force or of any agreement or by the Central Government or the State Government byvirtue of its shareholding in a Government company.(4) In the case of a public company, if the office of any director appointed by thecompany in general meeting is vacated before his term of office expires in the normal course,the resulting casual vacancy may, in default of and subject to any regulations in the articlesof the company, be filled by the Board of Directors at a meeting of the Board:Provided that any person so appointed shall hold office only up to the date up towhich the director in whose place he is appointed would have held office if it had not beenvacated.
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Question 14

162

Answer 14

“Appointment of directors to be voted individually
(1) At a general meeting of a company, a motion for the appointment of two ormore persons as directors of the company by a single resolution shall not be moved unlessa proposal to move such a motion has first been agreed to at the meeting without any votebeing cast against it.(2) A resolution moved in contravention of sub–section (1) shall be void, whether ornot any objection was taken when it was moved.(3) A motion for approving a person for appointment, or for nominating a person forappointment as a director, shall be treated as a motion for his appointment.”

Question 15

163

Answer 15

“Option to adopt principle of proportional representation for appointment of directors
Notwithstanding anything contained in this Act, the articles of a company mayprovide for the appointment of not less than two–thirds of the total number of the directorsof a company in accordance with the principle of proportional representation, whether by thesingle transferable vote or by a system of cumulative voting or otherwise and suchappointments may be made once in every three years and casual vacancies of such directorsshall be filled as provided in sub–section (4) of section 161.
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Question 16

164

Answer 16

“Disqualifications for appointment of director
(1) A person shall not be eligible for appointment as a director of a company, if —(a) he is of unsound mind and stands so declared by a competent court;(b) he is an undischarged insolvent;(c) he has applied to be adjudicated as an insolvent and his application is pending;(d) he has been convicted by a court of any offence, whether involving moralturpitude or otherwise, and sentenced in respect thereof to imprisonment for not lessthan six months and a period of five years has not elapsed from the date of expiry of thesentence:Provided that if a person has been convicted of any offence and sentenced inrespect thereof to imprisonment for a period of seven years or more, he shall not beeligible to be appointed as a director in any company;(e) an order disqualifying him for appointment as a director has been passed bya court or Tribunal and the order is in force;(f) he has not paid any calls in respect of any shares of the company held by him,whether alone or jointly with others, and six months have elapsed from the last dayfixed for the payment of the call;(g) he has been convicted of the offence dealing with related party transactionsunder section 188 at any time during the last preceding five years; or(h) he has not complied with sub–section (3) of section 152.(2) No person who is or has been a director of a company which—(a) has not filed financial statements or annual returns for any continuous periodof three financial years; or(b) has failed to repay the deposits accepted by it or pay interest thereon or toredeem any debentures on the due date or pay interest due thereon or pay any dividenddeclared and such failure to pay or redeem continues for one year or more,shall be eligible to be re–appointed as a director of that company or appointed in othercompany for a period of five years from the date on which the said company fails to do so.(3) A private company may by its articles provide for any disqualifications forappointment as a director in addition to those specified in sub–sections (1) and (2):Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub–section(1) shall not take effect—(i) for thirty days from the date of conviction or order of disqualification;(ii) where an appeal or petition is preferred within thirty days as aforesaid againstthe conviction resulting in sentence or order, until expiry of seven days from the dateon which such appeal or petition is disposed off; or(iii) where any further appeal or petition is preferred against order or sentencewithin seven days, until such further appeal or petition is disposed off.
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Question 17

165

Answer 17

“Number of directorships
(1) No person, after the commencement of this Act, shall hold office as a director,including any alternate directorship, in more than twenty companies at the same time:Provided that the maximum number of public companies in which a person can beappointed as a director shall not exceed ten.Explanation.— For reckoning the limit of public companies in which a person can beappointed as director, directorship in private companies that are either holding or subsidiarycompany of a public company shall be included.(2) Subject to the provisions of sub–section (1), the members of a company may, byspecial resolution, specify any lesser number of companies in which a director of thecompany may act as directors.(3) Any person holding office as director in companies more than the limits as specifiedin sub–section (1), immediately before the commencement of this Act shall, within a period ofone year from such commencement,—(a) choose not more than the specified limit of those companies, as companies inwhich he wishes to continue to hold the office of director;(b) resign his office as director in the other remaining companies; and(c) intimate the choice made by him under clause (a), to each of the companies inwhich he was holding the office of director before such commencement and to theRegistrar having jurisdiction in respect of each such company.(4) Any resignation made in pursuance of clause (b) of sub–section (3) shall becomeeffective immediately on the despatch thereof to the company concerned.(5) No such person shall act as director in more than the specified number ofcompanies,—(a) after despatching the resignation of his office as director or non–executivedirector thereof, in pursuance of clause (b) of sub–section (3); or(b) after the expiry of one year from the commencement of this Act,whichever is earlier.(6) If a person accepts an appointment as a director in contravention ofsub–section (1), he shall be punishable with fine which shall not be less than five thousandrupees but which may extend to twenty–five thousand rupees for every day after the firstduring which the contravention continues.
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Question 18

166

Answer 18

“Duties of directors
(1) Subject to the provisions of this Act, a director of a company shall act inaccordance with the articles of the company.(2) A director of a company shall act in good faith in order to promote the objects of thecompany for the benefit of its members as a whole, and in the best interests of the company,its employees, the shareholders, the community and for the protection of environment.(3) A director of a company shall exercise his duties with due and reasonable care, skilland diligence and shall exercise independent judgment.(4) A director of a company shall not involve in a situation in which he may have adirect or indirect interest that conflicts, or possibly may conflict, with the interest of thecompany.(5) A director of a company shall not achieve or attempt to achieve any undue gain oradvantage either to himself or to his relatives, partners, or associates and if such director isfound guilty of making any undue gain, he shall be liable to pay an amount equal to that gainto the company.(6) A director of a company shall not assign his office and any assignment so madeshall be void.(7) If a director of the company contravenes the provisions of this section suchdirector shall be punishable with fine which shall not be less than one lakh rupees but whichmay extend to five lakh rupees.
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Question 19

167

Answer 19

“Vacation of office of director
(1) The office of a director shall become vacant in case—(a) he incurs any of the disqualifications specified in section 164;(b) he absents himself from all the meetings of the Board of Directors heldduring a period of twelve months with or without seeking leave of absence of theBoard;(c) he acts in contravention of the provisions of section 184 relating to enteringinto contracts or arrangements in which he is directly or indirectly interested;(d) he fails to disclose his interest in any contract or arrangement in which he isdirectly or indirectly interested, in contravention of the provisions of section 184;(e) he becomes disqualified by an order of a court or the Tribunal;(f) he is convicted by a court of any offence, whether involving moral turpitudeor otherwise and sentenced in respect thereof to imprisonment for not less than sixmonths:Provided that the office shall be vacated by the director even if he has filed anappeal against the order of such court;(g) he is removed in pursuance of the provisions of this Act;(h) he, having been appointed a director by virtue of his holding any office orother employment in the holding, subsidiary or associate company, ceases to holdsuch office or other employment in that company.(2) If a person, functions as a director even when he knows that the office of directorheld by him has become vacant on account of any of the disqualifications specified in subsection(1), he shall be punishable with imprisonment for a term which may extend to oneyear or with fine which shall not be less than one lakh rupees but which may extend to fivelakh rupees, or with both.(3) Where all the directors of a company vacate their offices under any of thedisqualifications specified in sub–section (1), the promoter or, in his absence, the CentralGovernment shall appoint the required number of directors who shall hold office till thedirectors are appointed by the company in the general meeting.(4) A private company may, by its articles, provide any other ground for the vacationof the office of a director in addition to those specified in sub–section (1).
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Question 20

168

Answer 20

“Resignation of director
(1) A director may resign from his office by giving a notice in writing to thecompany and the Board shall on receipt of such notice take note of the same and thecompany shall intimate the Registrar in such manner, within such time and in such form asmay be prescribed and shall also place the fact of such resignation in the report of directorslaid in the immediately following general meeting by the company:Provided that a director shall also forward a copy of his resignation along withdetailed reasons for the resignation to the Registrar within thirty days of resignation in suchmanner as may be prescribed.(2) The resignation of a director shall take effect from the date on which the notice isreceived by the company or the date, if any, specified by the director in the notice, whicheveris later:Provided that the director who has resigned shall be liable even after his resignationfor the offences which occurred during his tenure.(3) Where all the directors of a company resign from their offices, or vacate theiroffices under section 167, the promoter or, in his absence, the Central Government shallappoint the required number of directors who shall hold office till the directors are appointedby the company in general meeting.
“

Question 21

169

Answer 21

“Removal of directors
(1) A company may, by ordinary resolution, remove a director, not being a directorappointed by the Tribunal under section 242, before the expiry of the period of his office aftergiving him a reasonable opportunity of being heard:Provided that nothing contained in this sub–section shall apply where the companyhas availed itself of the option given to it under section 163 to appoint not less than twothirdsof the total number of directors according to the principle of proportionalrepresentation.(2) A special notice shall be required of any resolution, to remove a director under thissection, or to appoint somebody in place of a director so removed, at the meeting at which heis removed.(3) On receipt of notice of a resolution to remove a director under this section, thecompany shall forthwith send a copy thereof to the director concerned, and the director,whether or not he is a member of the company, shall be entitled to be heard on the resolutionat the meeting.(4) Where notice has been given of a resolution to remove a director under this sectionand the director concerned makes with respect thereto representation in writing to thecompany and requests its notification to members of the company, the company shall, if thetime permits it to do so,—(a) in any notice of the resolution given to members of the company, state thefact of the representation having been made; and(b) send a copy of the representation to every member of the company to whomnotice of the meeting is sent (whether before or after receipt of the representation bythe company),and if a copy of the representation is not sent as aforesaid due to insufficient time or for thecompany’s default, the director may without prejudice to his right to be heard orally requirethat the representation shall be read out at the meeting:Provided that copy of the representation need not be sent out and the representationneed not be read out at the meeting if, on the application either of the company or of anyother person who claims to be aggrieved, the Tribunal is satisfied that the rights conferredby this sub–section are being abused to secure needless publicity for defamatory matter; andthe Tribunal may order the company’s costs on the application to be paid in whole or in partby the director notwithstanding that he is not a party to it.(5) A vacancy created by the removal of a director under this section may, if he hadbeen appointed by the company in general meeting or by the Board, be filled by theappointment of another director in his place at the meeting at which he is removed, providedspecial notice of the intended appointment has been given under sub–section (2).(6) A director so appointed shall hold office till the date up to which his predecessorwould have held office if he had not been removed.(7) If the vacancy is not filled under sub–section (5), it may be filled as a casualvacancy in accordance with the provisions of this Act:Provided that the director who was removed from office shall not be re–appointed as adirector by the Board of Directors.(8) Nothing in this section shall be taken—(a) as depriving a person removed under this section of any compensation ordamages payable to him in respect of the termination of his appointment as director asper the terms of contract or terms of his appointment as director, or of any otherappointment terminating with that as director; or(b) as derogating from any power to remove a director under other provisions ofthis Act.
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Question 22

170

Answer 22

“Register of directors and key managerial personnel and their shareholding
(1) Every company shall keep at its registered office a register containing suchparticulars of its directors and key managerial personnel as may be prescribed, which shallinclude the details of securities held by each of them in the company or its holding, subsidiary,subsidiary of company’s holding company or associate companies.(2) A return containing such particulars and documents as may be prescribed, of thedirectors and the key managerial personnel shall be filed with the Registrar within thirty daysfrom the appointment of every director and key managerial personnel, as the case may be,and within thirty days of any change taking place.
“

Question 23

171

Answer 23

“Members’ right to inspect
(1) The register kept under sub–section (1) of section 170,—(a) shall be open for inspection during business hours and the members shallhave a right to take extracts therefrom and copies thereof, on a request by the members,be provided to them free of cost within thirty days; and(b) shall also be kept open for inspection at every annual general meeting of thecompany and shall be made accessible to any person attending the meeting.(2) If any inspection as provided in clause (a) of sub–section (1) is refused, or if anycopy required under that clause is not sent within thirty days from the date of receipt of suchrequest, the Registrar shall on an application made to him order immediate inspection andsupply of copies required thereunder.
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Question 24

172

Answer 24

“Punishment
If a company contravenes any of the provisions of this Chapter and for which nospecific punishment is provided therein, the company and every officer of the company whois in default shall be punishable with fine which shall not be less than fifty thousand rupeesbut which may extend to five lakh rupees.
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Question 25

Section 101

Answer 25

Notice of meeting

Question 26

Section 128

Answer 26

ACCOUNTS OF COMPANIESBooks of Account, etc., to be kept by Company

Question 27

Section 129

Answer 27

Financial Statement

Question 28

Section 130

Answer 28

Re–opening of Accounts on Court’s or Tribunal’s Orders

Question 29

Section 131

Answer 29

Voluntary Revision of Financial Statements or Board’s Report

Question 30

Section 132

Answer 30

Constitution of National Financial Reporting Authority.

Question 31

Section 133

Answer 31

Central Government to Prescribe Accounting Standards.

Question 32

Section 134

Answer 32

Financial Statement, Board’s Report, etc.

Question 33

Section 135

Answer 33

Corporate Social Responsibility

Question 34

Section 136

Answer 34

Right of Member to Copies of Audited Financial Statement

Question 35

Section 137

Answer 35

Copy of Financial Statement to be Filed with Registrar

Question 36

Section 138

Answer 36

Internal Audit

Question 37

Section 139

Answer 37

“Appointment of Auditors

(1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed:Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting:Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made,shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141:
Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within fifteen daysof the meeting in which the auditor is appointed.Explanation.—For the purposes of this Chapter, “appointment” includes reappointment.
(2) No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re–appoint—(a) an individual as auditor for more than one term of five consecutive years;and(b) an audit firm as auditor for more than two terms of five consecutive years:Provided that—(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re–appointment as auditor in the same company for five years from the completion of his term;(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re–appointment as auditor in the same company for five years from the completion of such term:Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years:Provided also that every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub–section, shall comply with the requirements of this sub–section within three years from the date of commencement of this Act:Provided also that, nothing contained in this sub–section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.
(3) Subject to the provisions of this Act, members of a company may resolve to provide that—(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or(b) the audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub–section (2).Explanation.—For the purposes of this Chapter, the word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.
(5) Notwithstanding anything contained in sub–section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor–General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.
(6) Notwithstanding anything contained in sub–section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.
(7) Notwithstanding anything contained in sub–section (1) or sub–section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor–General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor–General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.(8) Any casual vacancy in the office of an auditor shall—(i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor–General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Boardand he shall hold the office till the conclusion of the next annual general meeting;(ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor–General of India, be filled by the Comptroller and Auditor–General of India within thirty days:Provided that in case the Comptroller and Auditor–General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty days.
(9) Subject to the provisions of sub–section (1) and the rules made there under, a retiring auditor may be re–appointed at an annual general meeting, if—(a) he is not disqualified for re–appointment;(b) he has not given the company a notice in writing of his unwillingness to be re–appointed; and(c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re–appointed.
(10) Where at any annual general meeting, no auditor is appointed or re–appointed, the existing auditor shall continue to be the auditor of the company.
(11) Where a company is required to constitute an Audit Committee under section 177,all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee."

Question 38

Section 140

Answer 38

“Removal, Resignation of Auditor and Giving of Special Notice

(1) The auditor appointed under section 139 may be removed from his officebefore the expiry of his term only by a special resolution of the company, after obtaining theprevious approval of the Central Government in that behalf in the prescribed manner:Provided that before taking any action under this sub–section, the auditor concernedshall be given a reasonable opportunity of being heard.
(2) The auditor who has resigned from the company shall file within a period of thirtydays from the date of resignation, a statement in the prescribed form with the company andthe Registrar, and in case of companies referred to in sub–section (5) of section 139,the auditor shall also file such statement with the Comptroller and Auditor–Generalof India, indicating the reasons and other facts as may be relevant with regard to hisresignation.
(3) If the auditor does not comply with sub–section (2), he or it shall be punishable withfine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.
(4) (i) Special notice shall be required for a resolution at an annual general meetingappointing as auditor a person other than a retiring auditor, or providing expressly that aretiring auditor shall not be re–appointed, except where the retiring auditor has completed aconsecutive tenure of five years or, as the case may be, ten years, as provided undersub–section (2) of section 139.(ii) On receipt of notice of such a resolution, the company shall forthwith send a copythereof to the retiring auditor.(iii) Where notice is given of such a resolution and the retiring auditor makes withrespect thereto representation in writing to the company (not exceeding a reasonable length)and requests its notification to members of the company, the company shall, unless therepresentation is received by it too late for it to do so,—(a) in any notice of the resolution given to members of the company, state thefact of the representation having been made; and(b) send a copy of the representation to every member of the company to whomnotice of the meeting is sent, whether before or after the receipt of the representationby the company,and if a copy of the representation is not sent as aforesaid because it was received too lateor because of the company’s default, the auditor may (without prejudice to his right to beheard orally) require that the representation shall be read out at the meeting:Provided that if a copy of representation is not sent as aforesaid, a copy thereof shallbe filed with the Registrar:Provided further that if the Tribunal is satisfied on an application either of the companyor of any other aggrieved person that the rights conferred by this sub–section are beingabused by the auditor, then, the copy of the representation may not be sent and therepresentation need not be read out at the meeting.
(5) Without prejudice to any action under the provisions of this Act or any other lawfor the time being in force, the Tribunal either suo motu or on an application made to it by theCentral Government or by any person concerned, if it is satisfied that the auditor of acompany has, whether directly or indirectly, acted in a fraudulent manner or abetted orcolluded in any fraud by, or in relation to, the company or its directors or officers, it may, byorder, direct the company to change its auditors:Provided that if the application is made by the Central Government and the Tribunal issatisfied that any change of the auditor is required, it shall within fifteen days of receipt ofsuch application, make an order that he shall not function as an auditor and the CentralGovernment may appoint another auditor in his place:Provided further that an auditor, whether individual or firm, against whom final orderhas been passed by the Tribunal under this section shall not be eligible to be appointed asan auditor of any company for a period of five years from the date of passing of the order andthe auditor shall also be liable for action under section 447.Explanation I.—It is hereby clarified that the case of a firm, the liability shall be of thefirm and that of every partner or partners who acted in a fraudulent manner or abetted orcolluded in any fraud by, or in relation to, the company or its director or officers.Explanation II.—For the purposes of this Chapter the word “auditor” includes a firmof auditors.”

Question 39

Section 141

Answer 39

“Eligibility, Qualifications and Disqualifications of Auditors
(1) A person shall be eligible for appointment as an auditor of a company only ifhe is a chartered accountant:Provided that a firm whereof majority of partners practising in India are qualified forappointment as aforesaid may be appointed by its firm name to be auditor of a company.
(2) Where a firm including a limited liability partnership is appointed as an auditor of acompany, only the partners who are chartered accountants shall be authorised to act andsign on behalf of the firm.
(3) The following persons shall not be eligible for appointment as an auditor of acompany, namely:—(a) a body corporate other than a limited liability partnership registered underthe Limited Liability Partnership Act, 2008;(b) an officer or employee of the company;(c) a person who is a partner, or who is in the employment, of an officer oremployee of the company;(d) a person who, or his relative or partner—(i) is holding any security of or interest in the company or its subsidiary, orof its holding or associate company or a subsidiary of such holding company:Provided that the relative may hold security or interest in the company offace value not exceeding one thousand rupees or such sum as may be prescribed;(ii) is indebted to the company, or its subsidiary, or its holding or associatecompany or a subsidiary of such holding company, in excess of such amount asmay be prescribed; or(iii) has given a guarantee or provided any security in connection with theindebtedness of any third person to the company, or its subsidiary, or its holdingor associate company or a subsidiary of such holding company, for such amountas may be prescribed;(e) a person or a firm who, whether directly or indirectly, has business relationshipwith the company, or its subsidiary, or its holding or associate company or subsidiaryof such holding company or associate company of such nature as may be prescribed;(f) a person whose relative is a director or is in the employment of the companyas a director or key managerial personnel;(g) a person who is in full time employment elsewhere or a person or a partner ofa firm holding appointment as its auditor, if such persons or partner is at the date ofsuch appointment or reappointment holding appointment as auditor of more thantwenty companies;(h) a person who has been convicted by a court of an offence involving fraudand a period of ten years has not elapsed from the date of such conviction;(i) any person whose subsidiary or associate company or any other form ofentity, is engaged as on the date of appointment in consulting and specialised servicesas provided in section 144.
(4) Where a person appointed as an auditor of a company incurs any of thedisqualifications mentioned in sub–section (3) after his appointment, he shall vacate hisoffice as such auditor and such vacation shall be deemed to be a casual vacancy in the officeof the auditor.
“

Question 40

Section 142

Answer 40

“Remuneration of Auditors
(1) The remuneration of the auditor of a company shall be fixed in its generalmeeting or in such manner as may be determined therein:Provided that the Board may fix remuneration of the first auditor appointed by it.
(2) The remuneration under sub–section (1) shall, in addition to the fee payable to anauditor, include the expenses, if any, incurred by the auditor in connection with the audit ofthe company and any facility extended to him but does not include any remuneration paid tohim for any other service rendered by him at the request of the company.
“

Question 41

Section 143

Answer 41

“Powers and Duties of Auditors and Auditing Standards
(1) Every auditor of a company shall have a right of access at all times to thebooks of account and vouchers of the company, whether kept at the registered office of thecompany or at any other place and shall be entitled to require from the officers of thecompany such information and explanation as he may consider necessary for the performanceof his duties as auditor and amongst other matters inquire into the following matters, namely:—(a) whether loans and advances made by the company on the basis of securityhave been properly secured and whether the terms on which they have been made areprejudicial to the interests of the company or its members;(b) whether transactions of the company which are represented merely by bookentries are prejudicial to the interests of the company;(c) where the company not being an investment company or a banking company,whether so much of the assets of the company as consist of shares, debentures andother securities have been sold at a price less than that at which they were purchasedby the company;(d) whether loans and advances made by the company have been shown asdeposits;(e) whether personal expenses have been charged to revenue account;(f) where it is stated in the books and documents of the company that any shareshave been allotted for cash, whether cash has actually been received in respect ofsuch allotment, and if no cash has actually been so received, whether the position asstated in the account books and the balance sheet is correct, regular and not misleading:Provided that the auditor of a company which is a holding company shall also havethe right of access to the records of all its subsidiaries in so far as it relates to the consolidationof its financial statements with that of its subsidiaries.
(2) The auditor shall make a report to the members of the company on the accountsexamined by him and on every financial statements which are required by or under this Actto be laid before the company in general meeting and the report shall after taking intoaccount the provisions of this Act, the accounting and auditing standards and matterswhich are required to be included in the audit report under the provisions of this Act or anyrules made thereunder or under any order made under sub–section (11) and to the best of hisinformation and knowledge, the said accounts, financial statements give a true and fair viewof the state of the company’s affairs as at the end of its financial year and profit or loss andcash flow for the year and such other matters as may be prescribed.
(3) The auditor’s report shall also state—(a) whether he has sought and obtained all the information and explanationswhich to the best of his knowledge and belief were necessary for the purpose of hisaudit and if not, the details thereof and the effect of such information on the financialstatements;(b) whether, in his opinion, proper books of account as required by law havebeen kept by the company so far as appears from his examination of those books andproper returns adequate for the purposes of his audit have been received from branchesnot visited by him;(c) whether the report on the accounts of any branch office of the companyaudited under sub–section (8) by a person other than the company’s auditor has beensent to him under the proviso to that sub–section and the manner in which he has dealtwith it in preparing his report;(d) whether the company’s balance sheet and profit and loss account dealt within the report are in agreement with the books of account and returns;(e) whether, in his opinion, the financial statements comply with the accountingstandards;(f) the observations or comments of the auditors on financial transactions ormatters which have any adverse effect on the functioning of the company;(g) whether any director is disqualified from being appointed as a director undersub–section (2) of section 164;(h) any qualification, reservation or adverse remark relating to the maintenanceof accounts and other matters connected therewith;(i) whether the company has adequate internal financial controls system inplace and the operating effectiveness of such controls;(j) such other matters as may be prescribed.
(4) Where any of the matters required to be included in the audit report under thissection is answered in the negative or with a qualification, the report shall state the reasonstherefor.
(5) In the case of a Government company, the Comptroller and Auditor–General of Indiashall appoint the auditor under sub–section (5) or sub–section (7) of section 139 and directsuch auditor the manner in which the accounts of the Government company are required tobe audited and thereupon the auditor so appointed shall submit a copy of the audit report tothe Comptroller and Auditor–General of India which, among other things, include thedirections, if any, issued by the Comptroller and Auditor–General of India, the action takenthereon and its impact on the accounts and financial statement of the company.
(6) The Comptroller and Auditor–General of India shall within sixty days from the dateof receipt of the audit report under sub–section (5) have a right to,—(a) conduct a supplementary audit of the financial statement of the company bysuch person or persons as he may authorise in this behalf; and for the purposes ofsuch audit, require information or additional information to be furnished to any personor persons, so authorised, on such matters, by such person or persons, and in suchform, as the Comptroller and Auditor–General of India may direct; and(b) comment upon or supplement such audit report:Provided that any comments given by the Comptroller and Auditor–General ofIndia upon, or supplement to, the audit report shall be sent by the company to everyperson entitled to copies of audited financial statements under sub section (1) ofsection 136 and also be placed before the annual general meeting of the company atthe same time and in the same manner as the audit report.
(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor–General of India may, in case of any company covered under sub–section (5) or sub–section(7) of section 139, if he considers necessary, by an order, cause test audit to be conducted ofthe accounts of such company and the provisions of section 19A of the Comptroller andAuditor–General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to thereport of such test audit.
(8) Where a company has a branch office, the accounts of that office shall be auditedeither by the auditor appointed for the company (herein referred to as the company’s auditor)under this Act or by any other person qualified for appointment as an auditor of the companyunder this Act and appointed as such under section 139, or where the branch office issituated in a country outside India, the accounts of the branch office shall be audited eitherby the company’s auditor or by an accountant or by any other person duly qualified to act asan auditor of the accounts of the branch office in accordance with the laws of that countryand the duties and powers of the company’s auditor with reference to the audit of the branchand the branch auditor, if any, shall be such as may be prescribed:Provided that the branch auditor shall prepare a report on the accounts of the branchexamined by him and send it to the auditor of the company who shall deal with it in his reportin such manner as he considers necessary.
(9) Every auditor shall comply with the auditing standards.
(10) The Central Government may prescribe the standards of auditing or any addendumthereto, as recommended by the Institute of Chartered Accountants of India, constitutedunder section 3 of the Chartered Accountants Act, 1949, in consultation with and afterexamination of the recommendations made by the National Financial Reporting Authority:Provided that until any auditing standards are notified, any standard or standards ofauditing specified by the Institute of Chartered Accountants of India shall be deemed to bethe auditing standards.
(11) The Central Government may, in consultation with the National Financial ReportingAuthority, by general or special order, direct, in respect of such class or description ofcompanies, as may be specified in the order, that the auditor’s report shall also include astatement on such matters as may be specified therein.
(12) Notwithstanding anything contained in this section, if an auditor of a company, inthe course of the performance of his duties as auditor, has reason to believe that an offenceinvolving fraud is being or has been committed against the company by officers or employeesof the company, he shall immediately report the matter to the Central Government within suchtime and in such manner as may be prescribed.
(13) No duty to which an auditor of a company may be subject to shall be regarded ashaving been contravened by reason of his reporting the matter referred to in sub–section (12)if it is done in good faith.
(14) The provisions of this section shall mutatis mutandis apply to—(a) the cost accountant in practice conducting cost audit under section 148; or(b) the company secretary in practice conducting secretarial audit undersection 204.(15) If any auditor, cost accountant or company secretary in practice do not complywith the provisions of sub–section (12), he shall be punishable with fine which shall not beless than one lakh rupees but which may extend to twenty–five lakh rupees.
“

Question 42

Section 144

Answer 42

“Auditor not to Render Certain Services

An auditor appointed under this Act shall provide to the company only suchother services as are approved by the Board of Directors or the audit committee, as the casemay be, but which shall not include any of the following services (whether such services arerendered directly or indirectly to the company or its holding company or subsidiary company,namely:—(a) accounting and book keeping services;(b) internal audit;(c) design and implementation of any financial information system;(d) actuarial services;(e) investment advisory services;(f) investment banking services;(g) rendering of outsourced financial services;(h) management services; and(i) any other kind of services as may be prescribed:Provided that an auditor or audit firm who or which has been performing any non–auditservices on or before the commencement of this Act shall comply with the provisions of thissection before the closure of the first financial year after the date of such commencement.Explanation.—For the purposes of this sub–section, the term “directly or indirectly”shall include rendering of services by the auditor,—(i) in case of auditor being an individual, either himself or through his relative orany other person connected or associated with such individual or through any otherentity, whatsoever, in which such individual has significant influence or control, orwhose name or trade mark or brand is used by such individual;(ii) in case of auditor being a firm, either itself or through any of its partners orthrough its parent, subsidiary or associate entity or through any other entity,whatsoever, in which the firm or any partner of the firm has significant influence orcontrol, or whose name or trade mark or brand is used by the firm or any of its partners.
“

Question 43

Section 145

Answer 43

“Auditor to Sign Audit Reports, etc.

The person appointed as an auditor of the company shall sign the auditor’s reportor sign or certify any other document of the company in accordance with the provisions ofsub–section (2) of section 141, and the qualifications, observations or comments on financialtransactions or matters, which have any adverse effect on the functioning of the companymentioned in the auditor’s report shall be read before the company in general meeting andshall be open to inspection by any member of the company.
“

Question 44

Section 146

Answer 44

“Auditors to Attend General Meeting
All notices of, and other communications relating to, any general meeting shall beforwarded to the auditor of the company, and the auditor shall, unless otherwise exemptedby the company, attend either by himself or through his authorised representative, who shallalso be qualified to be an auditor, any general meeting and shall have right to be heard atsuch meeting on any part of the business which concerns him as the auditor.
“

Question 45

Setion 147

Answer 45

“Punishment for Contravention
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened,the company shall be punishable with fine which shall not be less than twenty–five thousandrupees but which may extend to five lakh rupees and every officer of the company who is indefault shall be punishable with imprisonment for a term which may extend to one year orwith fine which shall not be less than ten thousand rupees but which may extend to one lakhrupees, or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139,section 143, section 144 or section 145, the auditor shall be punishable with fine which shallnot be less than twenty–five thousand rupees but which may extend to five lakh rupees:Provided that if an auditor has contravened such provisions knowingly or wilfullywith the intention to deceive the company or its shareholders or creditors or tax authorities,he shall be punishable with imprisonment for a term which may extend to one year and withfine which shall not be less than one lakh rupees but which may extend to twenty–five lakhrupees.
(3) Where an auditor has been convicted under sub–section (2), he shall be liable to—(i) refund the remuneration received by him to the company; and(ii) pay for damages to the company, statutory bodies or authorities or to anyother persons for loss arising out of incorrect or misleading statements of particularsmade in his audit report.
(4) The Central Government shall, by notification, specify any statutory body orauthority or an officer for ensuring prompt payment of damages to the company or thepersons under clause (ii) of sub–section (3) and such body, authority or officer shall afterpayment of damages to such company or persons file a report with the Central Governmentin respect of making such damages in such manner as may be specified in the said notification.
(5) Where, in case of audit of a company being conducted by an audit firm, it is provedthat the partner or partners of the audit firm has or have acted in a fraudulent manner orabetted or colluded in any fraud by, or in relation to or by, the company or its directors orofficers, the liability, whether civil or criminal as provided in this Act or in any other law forthe time being in force, for such act shall be of the partner or partners concerned of the auditfirm and of the firm jointly and severally.
“

Question 46

Section 148

Answer 46

“Central Government to Specify Audit of Items of Cost in Respect of Certain Companies

(1) Notwithstanding anything contained in this Chapter, the Central Governmentmay, by order, in respect of such class of companies engaged in the production of suchgoods or providing such services as may be prescribed, direct that particulars relating to theutilisation of material or labour or to other items of cost as may be prescribed shall also beincluded in the books of account kept by that class of companies:Provided that the Central Government shall, before issuing such order in respect ofany class of companies regulated under a special Act, consult the regulatory body constitutedor established under such special Act.
(2) If the Central Government is of the opinion, that it is necessary to do so, it may, byorder, direct that the audit of cost records of class of companies, which are covered undersub–section (1) and which have a net worth of such amount as may be prescribed or aturnover of such amount as may be prescribed, shall be conducted in the manner specifiedin the order.
(3) The audit under sub–section (2) shall be conducted by a Cost Accountant inpractice who shall be appointed by the Board on such remuneration as may be determined bythe members in such manner as may be prescribed:Provided that no person appointed under section 139 as an auditor of the companyshall be appointed for conducting the audit of cost records:Provided further that the auditor conducting the cost audit shall comply with the costauditing standards.Explanation.—For the purposes of this sub–section, the expression “cost auditingstandards” mean such standards as are issued by the Institute of Cost and Works Accountantsof India, constituted under the Cost and Works Accountants Act, 1959, with the approval ofthe Central Government.
(4) An audit conducted under this section shall be in addition to the audit conductedunder section 143.
(5) The qualifications, disqualifications, rights, duties and obligations applicable toauditors under this Chapter shall, so far as may be applicable, apply to a cost auditor appointedunder this section and it shall be the duty of the company to give all assistance and facilitiesto the cost auditor appointed under this section for auditing the cost records of the company:Provided that the report on the audit of cost records shall be submitted by the costaccountant in practice to the Board of Directors of the company.
(6) A company shall within thirty days from the date of receipt of a copy of the costaudit report prepared in pursuance of a direction under sub–section (2) furnish the CentralGovernment with such report along with full information and explanation on every reservationor qualification contained therein.(7) If, after considering the cost audit report referred to under this section and theinformation and explanation furnished by the company under sub–section (6), the CentralGovernment is of the opinion that any further information or explanation is necessary, it maycall for such further information and explanation and the company shall furnish the samewithin such time as may be specified by that Government.
(8) If any default is made in complying with the provisions of this section,—(a) the company and every officer of the company who is in default shall bepunishable in the manner as provided in sub–section (1) of section 147;(b) the cost auditor of the company who is in default shall be punishable in themanner as provided in sub–sections (2) to (4) of section 147.
“

Question 47

Section 123

Answer 47

“Declaration of Dividend
(1) No dividend shall be declared or paid by a company for any financial year except—
(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub–section (2), or out of the profits of the company for any previous financial year or years arrived at after providing fordepreciation in accordance with the provisions of that sub–section and remaining undistributed, or out of both; or
(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government:
Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:
Provided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves,such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf:
Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves.

(2) For the purposes of clause (a)of sub–section (1), depreciation shall be provided in accordance with the provisions of Schedule II.
(3) The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared:Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend,such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

(4) The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
(5) No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash:Provided that nothing in this sub–section shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid–up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company:Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.”

Question 48

Section 124

Answer 48

“UNPAID DIVIDEND ACCOUNT

(1) Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
(2) The company shall, within a period of ninety days of making any transfer of an amount under sub–section (1) to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed.
(3) If any default is made in transferring the total amount referred to in sub–section (1)or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent. per annum and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them.
(4) Any person claiming to be entitled to any money transferred under sub–section (1)to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed.
(5) Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any,thereon to the Fund established under sub–section (1) of section 125 and the company shall send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fund and that authority shall issue a receipt to the company as evidence of such transfer.
(6) All shares in respect of which unpaid or unclaimed dividend has been transferred under sub–section (5) shall also be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed:Provided that any claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed.

(7) If a company fails to comply with any of the requirements of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty–five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
“

Question 49

Section 125

Answer 49

“Investor Education and Protection Fund

(1) The Central Government shall establish a Fund to be called the Investor Education and Protection Fund (herein referred to as the Fund).
(2) There shall be credited to the Fund—(a) the amount given by the Central Government by way of grants after due appropriation made by Parliament by law in this behalf for being utilised for the purposes of the Fund;(b) donations given to the Fund by the Central Government, State Governments,companies or any other institution for the purposes of the Fund;(c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub–section (5) of section 124;(d) the amount in the general revenue account of the Central Government which had been transferred to that account under sub–section (5) of section 205A of the Companies Act, 1956, as it stood immediately before the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the commencement of this Act;(e) the amount lying in the Investor Education and Protection Fund under section 205C of the Companies Act, 1956;(f) the interest or other income received out of investments made from the Fund;(g) the amount received under sub–section (4) of section 38;(h) the application money received by companies for allotment of any securities and due for refund;(i) matured deposits with companies other than banking companies;(j) matured debentures with companies;(k) interest accrued on the amounts referred to in clauses (h) to (j);(l) sale proceeds of fractional shares arising out of issuance of bonus shares,merger and amalgamation for seven or more years;(m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and(n) such other amount as may be prescribed:Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount has remained unclaimed and unpaid for a period of seven years from the date it became due for payment.
(3) The Fund shall be utilised for—(a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon;(b) promotion of investors’ education, awareness and protection;(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture–holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement;(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by members, debenture–holders or depositors as may be sanctioned by the Tribunal; and(e) any other purpose incidental thereto,in accordance with such rules as may be prescribed:Provided that the person whose amounts referred to in clauses (a) to (d) of sub–section (2)of section 205C transferred to Investor Education and Protection Fund, after the expiry of the period of seven years as per provisions of the Companies Act, 1956, shall be entitled to get refund out of the Fund in respect of such claims in accordance with rules made under this section.Explanation.—The disgorged amount refers to the amount received through disgorgement or disposal of securities.
(4) Any person claiming to be entitled to the amount referred in sub–section (2) may apply to the authority constituted under sub–section (5) for the payment of the money claimed.
(5) The Central Government shall constitute, by notification, an authority for administration of the Fund consisting of a chairperson and such other members, not exceeding seven and a chief executive officer, as the Central Government may appoint.
(6) The manner of administration of the Fund, appointment of chairperson, members and chief executive officer, holding of meetings of the authority shall be in accordance with such rules as may be prescribed.
(7) The Central Government may provide to the authority such offices, officers,employees and other resources in accordance with such rules as may be prescribed.
(8) The authority shall administer the Fund and maintain separate accounts and other relevant records in relation to the Fund in such form as may be prescribed after consultation with the Comptroller and Auditor–General of India.
(9) It shall be competent for the authority constituted under sub–section (5) to spendmoney out of the Fund for carrying out the objects specified in sub–section (3).

(10) The accounts of the Fund shall be audited by the Comptroller and Auditor–General of India at such intervals as may be specified by him and such audited accounts together with the audit report thereon shall be forwarded annually by the authority to the Central Government.(11) The authority shall prepare in such form and at such time for each financial year as may be prescribed its annual report giving a full account of its activities during the financial year and forward a copy thereof to the Central Government and the Central Government shall cause the annual report and the audit report given by the Comptroller and Auditor–General of India to be laid before each House of Parliament.
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Question 50

Section 126

Answer 50

“Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares

Where any instrument of transfer of shares has been delivered to any companyfor registration and the transfer of such shares has not been registered by the company, itshall, notwithstanding anything contained in any other provision of this Act,—
(a) transfer the dividend in relation to such shares to the Unpaid DividendAccount referred to in section 124 unless the company is authorised by the registeredholder of such shares in writing to pay such dividend to the transferee specified insuch instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares underclause (a) of sub–section (1) of section 62 and any issue of fully paid–up bonus sharesin pursuance of first proviso to sub–section (5) of section 123.
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Question 51

Section 127

Answer 51

“Punishment for failure to distribute dividends

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for everyday during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent. per annum during the period for which such default continues:Provided that no offence under this section shall be deemed to have been committed:—
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.
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