Members and Shareholders: formula sheet

Key formulas

Member (Section 2(55))

Member = (i) subscriber to memorandum, entered in register on registration + (ii) person who agrees in writing and is entered in register + (iii) holder of shares entered as beneficial owner in depository records

Learn the three limbs in order. Entry in the register or depository record is the common thread.

Share (Section 2(84))

Share = a share in the share capital of a company, and includes stock

Stock is covered by the definition.

Member vs shareholder

Every shareholder (entered in register) is a member; not every member is a shareholder

Members of guarantee and unlimited companies may hold no shares.

Modes of becoming a member

Subscription to memorandum | Allotment | Transfer | Transmission | Agreement in writing and entry in register

Subscribers become members on registration. Others need entry in the register, or depository record for dematerialised shares.

Company limited by shares (Section 2(22))

Liability of members = amount, if any, unpaid on their shares

Useful to link membership with liability.

Registers to be kept (section 88(1))

Register of members + register of debenture-holders + register of other security holders

The register of members shows each class of equity and preference shares separately, for members in India and abroad.

Index (section 88(2))

Every register under section 88(1) must include an index of the names in it

The index is part of the register requirement, not optional.

Foreign register (section 88(4))

Allowed only if authorised by the articles; for members, debenture-holders, other security holders or beneficial owners residing outside India

Kept in a country outside India, in the prescribed manner.

Penalty for default (section 88(5))

Company ₹3,00,000; every officer in default ₹50,000

Applies if the registers are not maintained, or not maintained as required by section 88(1) or (2).

Place of keeping (section 94(1))

Registered office; or another place in India where more than one-tenth of the members reside, if approved by special resolution at a general meeting

The proviso covers the registers and copies of the annual return.

Inspection (section 94(2) and (3))

Members, debenture-holders, other security holders and beneficial owners: free inspection in business hours and free extracts. Any other person: prescribed fee. Copies: prescribed fee

Not available while the register is closed. Prescribed particulars are excluded from inspection and copies.

Penalty for refusing inspection (section 94(4))

₹1,000 per day of default, maximum ₹1,00,000, on the company and every officer in default

The Central Government can also order immediate inspection (section 94(5)).

Closure of register (section 91)

Not more than 30 days at one time; not more than 45 days in aggregate in a year; previous notice of at least 7 days

For listed companies or those intending to list, SEBI may specify a shorter notice. Penalty for breach: ₹5,000 per day, maximum ₹1,00,000.

Rectification (section 59)

Apply to the Tribunal; Tribunal may dismiss, direct registration of transfer or transmission within 10 days of receiving the order, or direct rectification and damages

Applicants: the aggrieved person, any member or the company.

Liability of a member in a company limited by shares

Maximum liability = amount unpaid on the shares held

Face value or issue price less the amount already paid or credited as paid. Calls on partly paid shares are the main source of liability.

Liability in a company limited by guarantee

Maximum liability = amount undertaken in the memorandum

It arises only on winding up. It does not arise during the life of the company as a going concern.

Voting in a Producer Company, individual members only (section 378D(1)(a))

One member = one vote, irrespective of shareholding or patronage

If the membership is individuals and Producer Institutions together, section 378D(1)(c) also gives a single vote for every member.

Voting in a Producer Company, Producer Institutions only (section 378D(1)(b))

Votes = participation in the business in the previous year, as specified by the articles

In the first year of registration, votes are based on the shareholding of the Producer Institutions.

Conflict of business interest in a Producer Company (section 378D(4) and (5))

Conflicting business interest = cannot become a member; if acquired later, ceases to be a member and is removed under the articles

Section 378D(3) allows the articles to restrict voting to active members in any special or general meeting.

Mode of cessation

Cessation = transfer registered, forfeiture, surrender, death, insolvency, winding up, removal under the articles

Name the mode and the effect on liability in your answer.

Consent needed for variation

Written consent of holders of ≥ 3/4 of the issued shares of the class, OR special resolution at a separate meeting of that class

Three-fourths is counted on issued shares of that class when consent is in writing.

Pre-condition for variation

Provision in memorandum or articles, OR (if none) variation not prohibited by terms of issue

Check this before counting votes.

Affected other class

If another class is affected, ≥ 3/4 consent of that class is also needed

Section 48 then applies to that variation as well.

Dissenters' right to apply

Holders of ≥ 10% of issued shares of the class who did not consent or vote in favour may apply to the Tribunal

Variation has no effect until the Tribunal confirms it.

Time limit for application

Within 21 days after the consent was given or the resolution was passed

Application may be made by one or more persons appointed in writing by the dissenters.

Filing of Tribunal order

Company files a copy of the order with the Registrar within 30 days of the date of the order

This is the 30-day period in Section 48. It is not the time to apply.

Who may have the director

Listed company → may have one director elected by small shareholders

The wording is "may", and the number is one.

Small shareholder test

Nominal value of shares held ≤ ₹20,000 (or such other sum as may be prescribed)

Test on nominal value, not market value. Exactly ₹20,000 qualifies.

Nominal value of holding

Number of shares × face value per share

Use this to check whether a given holding qualifies.

Manner and terms

Election as prescribed

The Act leaves the manner, terms and conditions to the rules.

Quick revision

• A member is a person whose name is in the register of members; a shareholder holds shares. They are usually the same, but not always.
• Section 88 requires a register of members, a register of debenture-holders and a register of other security holders, each with an index of names.
• The register of members shows separately each class of equity and preference shares held by each member, resident in India or outside.
• A company may keep a foreign register only if its articles authorise it.
• Section 94: registers are kept at the registered office; another place in India is allowed if more than one-tenth of members live there and a special resolution approves.
• Refusing inspection or copies attracts a penalty of ₹1,000 per day, up to ₹1,00,000 maximum, on the company and each officer in default.
• Section 59: a person aggrieved, any member or the company can apply to the Tribunal to rectify the register.
• Section 48: class rights can be varied with written consent of holders of at least three-fourths of the issued shares of that class, or a special resolution at a separate class meeting.
• Variation needs a provision in the memorandum or articles, or, if there is none, no prohibition in the terms of issue.
• If the variation affects another class, three-fourths of that class must consent too.
• Holders of at least ten per cent who did not consent can apply to the Tribunal within twenty-one days; the variation has no effect until the Tribunal confirms it.
• The company files a copy of the Tribunal's order with the Registrar within thirty days. Section 151: a listed company may have one small shareholders' director; small shareholder means nominal value of not more than ₹20,000.

Common mistakes

• Saying member and shareholder always mean the same thing. Fix: State that they overlap in share companies but differ in guarantee and unlimited companies, where members may hold no shares.
• Treating a person who has bought shares as a member immediately. Fix: Say that membership needs the name entered in the register of members, or as beneficial owner in depository records.
• Forgetting the index, or treating it as a separate optional record. Fix: Write that every register under section 88(1) must include an index of names, and failure is also penalised under section 88(5).
• Saying the register can be kept at any place the company chooses. Fix: The default place is the registered office. Another place in India is allowed only if more than one-tenth of members reside there and a special resolution is passed at a general meeting.
• Treating every shareholder as a member, or every member as a shareholder. Fix: Remember that a member is the person on the register. A holder of a share warrant may be a shareholder without being a member. State this distinction briefly if the question touches it.
• Saying a member is liable for the company's debts. Fix: Write that liability is limited to the unpaid amount on shares or the guarantee amount. Add that creditors sue the company, not the member.
• Counting three-fourths of all shares of the company instead of the affected class. Fix: Section 48 speaks of the issued shares of that class. Use only that class's figure.
• Ignoring the pre-condition in the memorandum, articles or terms of issue. Fix: Always state the gate first. A prohibited variation fails even with 100% consent.
• Testing the small shareholder limit on market value of shares. Fix: The Explanation uses nominal value of shares held. Multiply shares by face value.
• Saying the section applies to every company. Fix: Start every answer with: the section applies to a listed company.

Exam tips

• Write all three limbs of Section 2(55) in every answer. Examiners look for completeness.
• For a 'distinguish' question, give at least three clear points: legal basis, overlap in share companies and members without shares.
• Cite Section 2(55) for member and Section 2(84) for share. This earns marks for provision.
• On fact-based questions, apply each limb to each person and then give a conclusion.
• When listing modes of becoming a member, link each mode back to the register entry or depository record.
• Learn the numbers in a small list: ₹3,00,000 and ₹50,000 (section 88), one-tenth (section 94), 7, 30 and 45 days (section 91), 10 days (section 59).
• In a facts question, write the section, the rule, the application and then a one-line conclusion. Do not skip the conclusion.
• For a short note on section 88, include the three registers, the index, the foreign register and the deemed register of beneficial owners.