Module No.

1: Indian Companies Act 2013

Introduction

Company law deals with the structure, management, administration, and conduct of affairs of
companies. A company is given legal entity status by incorporating under the company law. To improve the
status, rights, duties & obligations of companies, the law needs to be amended regularly. The Companies Act,
2013 as well as 2017 the amendment to it and the ordinance that was promulgated on November 2nd, 2018
had some significant changes to the corporate legal framework of India.

The need for regulating and providing safety guidelines for the functioning of a company made the legislators
enact the Companies Act, 1956. The said Act helps in regulating the basic aspects of company law, from its
incorporation to its dissolution. An Act or a law provides a proper legal framework for the said functions. The
companies Act, 2013 provides for all these.

Evolution

➢ Industrial revolution of Britain in 17th and 18th Century has led to the emergence of large-scale
business organizations.

➢ Limited resources and unlimited liability of partners are two important limitations of partnership in
undertaking big business.

➢ Joint Stock Company form of business organization has become extremely popular as it provides a
solution to overcome the limitations of partnership business like Tata and Reliance

➢ In terms of the Companies Act, 2013 (Act No. 18 of 2013) a "company" means a company incorporated
under this Act or under any previous company law [Section 2(20)].

➢ In common law, a company is a "legal person" or "legal entity" separate from, and capable of surviving
beyond the lives of its members. However, an association formed not for profit also acquires a
corporate character and falls within the meaning of a company by reason of a licence issued under
Section 8(1) of the Act.

➢ The companies act 1850

Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in India in 1850. The
Indian Companies Act, 1866, the Indian Companies Act, 1882, the Companies Act, 1913, and the
Companies Act, 1956 was earlier law passed in India. Every Companies Act introduced new concepts.
Like, before Amending Act of 1857 there was not concept of limited liability which is now a fundamental
concept of the companies law
 ➢ The companies act 1956

At the end of 1950, the Government of independent India appointed a Committee under the Chairmanship
of H.C. Bhaba to go into the entire question of the revision of the Indian Companies Act, 1913. Based
largely on the recommendations of the Company Law Committee, a Bill to enact the present legislation,
namely, the Companies Act, 1956 was introduced in Parliament.

➢ The companies act 2013

The Companies Act, 2013 received the assent of the President on August 29, 2013 and was notified in the
Gazette of India on 30.08.2013. The Companies Act, 2013 has undergone amendments four times so far.
The Companies (Amendment) Act, 2015, The Insolvency and Bankruptcy Code, 2016, The Companies
(Amendment) Act, 2017, and The Companies (Amendment) Act, 2019 amended The Companies Act,
2013. The Companies Act 2013 introduced new concepts like associate company, one person company,
small company, dormant company, independent director, women director, resident director, corporate
social responsibility, E-voting etc.

Features/Nature of Joint Stock Company

1. Voluntary association

A company is voluntary association formed by an individual or group of individuals. There is no compulsion

on any person to become member and also it does not compel any member to give up his membership. It is
purely a personal choice of members.

2. Incorporated association

The company is created only when it is registered under companies Act, it comes into existence from the date
mentioned in the certificate of incorporation. For forming a public company at least seven persons and for a
private company at least two persons are required.

3. Separate legal entity

A company is distinct entity from its members. The persons who contribute capital to the company, even
though treated as owners, do not enjoy the ownership rights. No member can either individually or jointly
claim any ownership rights in the assets of the company.

4. Limited liability

A company may be company limited by shares, the liability of members is limited to the unpaid value of the
shares and the members shall be liable to contribute up to the amount guaranteed by them.
5. Common seal

All the Acts of the company are authorized by its common seal. The common seal is the official signature of
the company, any document not bearing the common seal is not binding on the company.

6. Transferable shares

In a public company, the shares are freely transferable that is can buy and sell in stock market. The rights to
transfer shares is a statutory right and it cannot be taken away.

7. Separation of ownership and management

In a company, the shareholders are the owners but the management is done by the board of directors who are
separate from shareholders.

8. Perpetual existence

A company is a stable from of business organization. Its life does not depend upon the death, insolvency or
retirement of any or all shareholders or directors. Law creates it and law aloe can dissolve it. Members may
come and go but the company can go on forever.

9. Artificial legal person

A company is a creation of law and is called an artificial person. It exists only in the eyes of the law and cannot
act on its own. It is not a natural person.
Objectives of companies act 2013

❑ To promote the development of the economy by encouraging entrepreneurship.

❑ To promote enterprise efficiency and creating flexibility and simplicity in the formation and
maintenance of companies.

❑ To encourage transparency, accountability and high standards of corporate governance.

❑ To recognize new concepts and procedures facilitating ease of doing business while protecting interests
of all the stakeholders.

❑ To enforce stricter action against fraud and gross noncompliance with company law provisions.

❑ To set up institutional structure in the form of various authorities, bodies and panels as well as by
including recognition of various roles for professionals and other experts.

❑ To cater to the need for more effective and time bound approvals and compliance requirements relevant
in the present context.

Significance of Companies Act 2013

1. Maximum members of Private companies and association or firm: have been increased from 50
to 200 and in case of association firm increased to 100 members.

2. New concept of one-person companies has been introduced: one person can also form the company
One-person company need not hold any AGM (Annual General meeting) for each year.

3. A person cannot become director in more than 20 companies: out of this, he cannot be director of
more than 10 public companies.

4. Appointment of company secretary: Appointment of company secretary is not mandatory for private
company.

5. The financial year: The financial year of any company can be only from April-march: Existing
companies has to align within 2 years of the commencement of the act.

6. Concept of CSR introduced: For companies having net worth Rs.5 billion or more or turnover of
Rs.10 billion or more or net profit of 50 million or more. Above specified company need to spend at
least 2 % of average net profit of last 3 years as on CSR activities.

7. Women Director: Every listed company with paid up capital of Rs.100 crores or more/ public
company with turnover of Rs.300 crores or more shall have at least one-woman Director.
 8. Loans to Director: The Company CANNOT advance any kind of loan, guarantee security to any
director, director of holding company, his relative and his partner.

9. Disqualification of director: All existing director must have director’s identification number (DIN)
allotted by Central Government. Directors who already have DIN no need to act. Directors not having
DIN should initiate the process of getting DIN.

10. Immediate changes in letterhead: Bills or other official communications, as if full name, address of
its registered office, corporate identity number (21 Digits), telephone number, fax number, and Email
id, website address.

11. Article of association: In the next General Meeting, it is desirable to adopt Table F as standard set of
Article of association.

12. Attending of Annual General meeting: Auditors are compulsorily required to attend the Annual
General meeting.

13. Provisions for compulsory rotation of individual auditors: Every listed company can appoint an
individual auditor for 5 years and a firm of auditors for 10 years. Therefore, those companies have re-
appointed their statutory auditors for more than 5/10 years: have to appoint another auditor in Annual
General Meeting for year 2014.

14. A director who has resigned need to intimate the Registrar of Company about his resignation.

15. Extra- ordinary general meeting shall be held at place within India.

16. Valuation of share is mandatory, if issued at a premium.

17. Resident director: every company shall have at least one director who has stayed in India for a total
period of not less than 182 days in previous calendar year.

Body Corporate

A body corporate is defined under Section 2 (11) of the Companies Act, 2013 as "body corporate" or
"corporation" includes a company incorporated outside India, but does not include-

(i) A co-operative society registered under any law relating to co-operative societies; and

(ii) Any other body corporate (not being a company as defined in this Act), which the Central Government
may, by notification, specify in this behalf; Body corporate is a wider term than a company as Body Corporate
or Corporates include all the entities registered in India or Outside India whereas a company is narrower than
body corporates because it includes only entities registered in India.
Types/kinds/categories/classification of company

1. On the basis of incorporation

2. Based On the liability of the member

3. On the basis of ownership

4. On the basis of control

5. On the basis of other companies

1. On the basis of incorporation

a) Chartered company

If a company is incorporated under a special Monarch (king or queen) it is called a chartered company.
Such companies were generally started in the 17th and 18th centuries.

For eg: East Indian company, the chartered bank of Australia, china and India were

Incorporated by the grant of a special royal charter. These companies are not there in India at present.

b) Statutory Company

A company which is created by a special act of the legislature is called a statutory company. The state
bank of India, industrial finance corporation, life Insurance, corporation of India etc. are the examples of this
kind.

c) Registered Company [Section 2]

A company brought into existence by registration with the Registrar of the companies under the
Companies Act of 2013 is called registered company.

2. Based On the liability of the members

a) An unlimited company

The company in which the liability of the members is Unlimited is called unlimited company. The
liability of members is unlimited i.e. members are liable for the debts of the company to an unlimited extent
in the event of its winding up. But this type of company has become rare.

b) Companies limited by guarantee [Section2(21)]

In these companies, each member gives a guarantee for the debts of a company up to a certain extent. Eg: -
Trade associations, clubs and societies which formed to promote social and cultural activities.
c) Companies limited by share [Section2(22)]

In these companies, liability being limited by shares, the member is called upon to pay only the unpaid
amount on the shares held by him. Most of the companies formed today are of this type & in the following
discussion we will deal mainly with this of type of company.

3. On the Basis of Ownership

On the basis of Ownership, the Companies can be classified as Government Companies and Non -
Government Companies.

a). Government Companies - [Section 2(45)]:

A Government Company is a Company in which not less than 51% of the paid Capital is held by

➢ The Central Government or

➢ The State Government(s) or
➢ Partly by the Central Government and partly by one or more State Governments and includes a
company which is a subsidiary company of such a Government Company.

b) Non-Government Companies:

They are Companies other than Government Companies. They are further classified as:

i) Private Company [Section 2(68)]

A "Private Company" means a company having a minimum paid-up share capital of one lakh rupees (1,00,000)
or such higher paid-up share capital as may be prescribed, and which by its articles.

i. Restricts the right to transfer its shares;

ii. Except in case of One Person Company, limits the number of its members to 200 (excluding the past and
present employees)

iii. Prohibits any invitation to the public to subscribe for any securities of the company;

The words 'Private Limited' must be added at the end of its name by a private limited company

(ii) One Person Company - [Section 2(62)]:

"One Person Company" means a company which has only one person as its member.

The Act provides that the words "One Person Company" or "OPC" shall be mentioned in brackets below the
name of such company, wherever its name is printed, affixed or engraved.
Provisions applicable to the formation of One Person Company [Rule 3]

1. Only a natural person who is an Indian citizen and resident of India-

➢ Shall be eligible to incorporate a One Person Company;

➢ Shall be a nominee for the sole member of a One Person Company.
➢ Resident in India means a person who has stayed in India for a period of 182 days or more during the
immediately preceding one calendar year.

2. No person shall be eligible to incorporate more than a 'One Person Company' or become nominee in more
than one such company. (One person cannot incorporate more than one OPC or become nominee in more than
one OPC)

3. If a member of OPC becomes a member in another OPC by virtue of his being nominee in that OPC then
within 180 days he shall have to meet the eligibility criteria of being Member in one OPC.

➢ Nominee' name should be mentioned in the Memorandum.

➢ Written Consent of nominee is necessary.
➢ Nominee's name along with his consent is to be filed with the ROC.
➢ Minor shall not be made as nominee of such company or can hold share with beneficial interest
➢ Nominee may withdraw his consent by giving notice to the Sole Member of the Company. In such a case,
the sole member shall give another nomination in the same way and shall file the withdrawal and fresh
inclusion to the ROC within 30 days.
➢ When the sole member of the OPC dies or becomes incapacitated from contracting and the nominee
becomes the sole member, he has to nominate another natural person as his nominee.

4. Such Company cannot be incorporated or converted into a company under section 8 of the Act.

5. Such Company cannot carry out Non-Banking Financial Investment activities including investment in
securities of anybody corporates.

6. No such company can convert voluntarily into any kind of company unless two years have expired from
the date of incorporation of One Person Company.

7. One Person Company shall get itself compulsorily converted into a private company or Public co., in the
following circumstances within 6 months (exception for two years period)

i. Where the paid-up capital exceeds to ₹50 Lakhs or

ii. Where the average annual turnover for the past three financial years exceeds Two crores.
iii. Where the Balance Sheet total exceeds 1 Crore within 30 days, the OPC shall give notice of its conversion
to the ROC.
iii) Small Company [Section 2(85)]:

A "Small Company" means a company other than a public company

1. Whose paid-up capital does not exceed 50 lakhs
2. Whose turnover as per the latest accounts does not exceed 2 Crores.
3. This will not include
• Holding or subsidiary company
• Section 8 Company (i.e., Charitable Company)
• Company or body corporate government by Special Acts.

iv) Public Company: [Section 2(71)]

Section 2(71) of the companies Act, 2013, defines a public company to mean a company which:

a. Is not a private company;

b. Has a minimum paid-up share capital, as may be prescribed,

Further, a company which is a subsidiary of a company, not being a private company, shall be deemed to be
public company for the purpose of this Act even where such subsidiary company continues to be a private
company in its articles.

Difference between Public and Private Company

Basis Public Company Private Company

Minimum No: 7 Member 2 Members/ 1 for OPC
Maximum No: No restriction 200 Members
Minimum No: of Three Two Member (one for OPC)
Directors
Restriction on No restriction Prohibited
Invitation to
subscribe to shares
Transferability of It is freely transferable Restricted
Shares
Quorum Varying between 5 to 30 depending on Two members personally present
the number of members
Managerial Yes Not applicable
Remuneration
Ceiling
Retirement of Two thirds (2/3) Not applicable
Directors by
rotation
Minimum paid up 5 lakhs 1 lakh
capital
Commencement of It shall commence after the grant of It can commence immediately after
Business certificate of commencement of incorporation.
business.
Statutory meeting A public company must hold a statutory For Private company, there are no such
meeting and file with the register a obligations.
statutory report.
Managerial The total managerial remuneration in These restrictions do not apply to a
remuneration case of public company cannot exceed private company
11% of net profits and in case of
inadequacy of profit a minimum of
50,000 per month can be paid.
Suffix used A public company has to use only the A private Company has to use words
word 'Limited' or Ltd. at the end of its 'Private Limited' or Pvt. Ltd. at the end
name. of its name.
Consent of the The Directors of a Public Company The Directors of a private company need
Directors must file with the Registrar a consent to not give their consent.
act as Director of the company.
Qualification The directors of a Public Company are The directors of a Private company need
Shares required to sign an undertaking to not sign an undertaking to acquire the
acquire the qualification shares of the qualification shares.
Public Company.

4. On the Basis of Control

a) Holding Companies - [Section 2(46)]: Holding Company means a Company of which such other
company (or Companies) is its subsidiary.
b) Subsidiary Company [Section 2(87)]: A company shall be deemed to be subsidiary of another
company, if and only if.
➢ That other company controls the compositions of its Board of Directors. The control of the
composition of the Board of directors of a company means that the holding company has power,
 at its discretion, to appoint or remove all or majority of the directors of the subsidiary company
without the consent of the other persons.
➢ That other Company, exercises or controls more than half of the total share capital either on its
own or together with one or more subsidiaries; or "Total Share Capital' means the aggregate of the
Paid-up equity share capital and convertible preference share capital.

5. Other Types of Companies

a) Foreign Company: [Section 2(42)]: Foreign company means any company or body corporate
incorporated outside India which
➢ Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
➢ Conducts any business activity in India in any other manner

Sections 379 to 393 of the Act deal with such companies

b) Association Not for Profit/ Non-Profit Companies/ Charitable Association [Section 8]: When a
person or an Association of Persons proposes to be registered as a Limited Company and it
i. Has in its objects the promotion of Commerce, Arts, Science, Sports, Education, Research,
Social Welfare Religion, Charity, Protection of environment or such other object.
ii. Intends to apply its profit or other income in promoting its objects
iii. Intends to prohibit the payment of any dividend to its members.

c) Global Company: Global corporations operate in two or more countries and face many challenges in
their quest to capture value in the global market.

d) Associate Company [Section 2(6)]: Associate Company, in relation to another company, means a
company in which that other company has a significant influence, but which is not a subsidiary
company of the company having such influence and includes a joint venture company.
➢ A company is considered to be an associate company of the other, if the other company has
significant influence over such company (not being a subsidiary) or is a joint venture company.
Significant influence means control of at least 20 percent of total share capital of a company or of
business decisions under an agreement.
➢ To add more governance and transparency in the working of the company, the concept of associate
company has been introduced. It will provide a more rational and objective framework of associate
relationship between the companies.
 ➢ Further, as per section 2 (76), Related party includes Associate Company. Hence, contract with
Associate Company will require disclosure/approval/entry in statutory register as is applicable to
contract with a related party.
e) Listed Company/ Quoted Company: Company whose shares are traded on an official stock
exchange. It must adhere to the listing requirements of that exchange, which may include how many
shares are listed and a minimum earnings level.
➢ Company whose shares are listed (quoted) on a stock exchange for public trading are also called
quoted company.
➢ Listing means admission of securities to dealings on a recognized stock exchange. The securities
may be of any public limited company, Central or State Government, quasi-governmental and
other financial institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:

• Provide liquidity to securities;

• Mobilize savings for economic development;
• Protect interest of investors by ensuring full disclosures.

f) Dormant Company: Where a company is formed and registered under this Act for a future project or
to hold an asset or intellectual property and has no significant accounting transaction for the last 2
years. Such a company or an inactive company can make an application to ROC for obtaining the
Status of a dormant company.

Significant accounting transaction mentioned above means transaction other than the following:

i. Payment of fees by the company to ROC.

ii. Payment made by it to fulfill the requirements of this Act or any other law.
iii. Allotment of shares
iv. Payment for maintenance of its office and records.

Doctrine of Lifting the Veil of Corporate Entity

Meaning:

A corporate veil is a legal concept that separates the acts done by the companies and organizations
from the actions of the shareholders. It protects the shareholders from being liable for the actions done by the
company. This is not an absolute right the court depending on the facts of the case can take the decision
whether the shareholder is liable or not
Definition:

According to the Cambridge Dictionary, "shareholders may hide behind the corporate veil, assured
that their liability does not extend beyond the value of their shares".

Grounds for Lifting the Doctrine of the Corporate Veil

➢ Non-compliance of the Requirement of Incorporation The purpose of Sec. 464 of the Companies Act,
2013 is to withdraw the advantages of the company when the incorporation is not maintained.
➢ Fraudulent Conduct - If the act is done to defraud the creditors of the company during winding up, the
members who done such act are personally liable whoever knowingly parties to such fraudulent
activities.
➢ Tax Evasion - It is the duty of every earning person to pay taxes. The company is no way exempted
from this liability. If the company unlawfully avoided the tax duty, it is an offence.
➢ To Prevent Fraud or Improper Conduct - The company cannot commit fraud or misconduct on its own
as it needs human agency the court can uplift the doctrine of corporate veil in cases of fraud,
misrepresentation, diversion of funds.
➢ Government Companies - A company may sometime be considered as a trustee or agent of its members
and the company lost its individuality in favour of its principle.
➢ Sham Companies - The court may lift the corporate veil against the sham companies. Sham companies
are mere cloaks and their personalities can be ignored to identify the true nature of the members.
➢ Ultra-Vires Acts - Any act done outside the scope of the Memorandum of Understanding and Article
of Association and companies Act, 2013 is said to be ultra vires, the court shall invoke the doctrine.
➢ To Protect Public Policy When the person is guilty of contravening the public polity or public interest
the court can lift the doctrine of the corporate veil.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) implies a concept, whereby companies decide voluntarily to contribute
to a better society and a cleaner environment a concept, whereby the companies integrate social and other
useful concerns in their business operations for the betterment of their stakeholders and society in general in
a voluntary way.

Applicability of CSR Provisions:

On every Company including its holding or subsidiary having:

➢ Net worth of 500 Crore or more, or

➢ Turnover of 1000 crore or more, or
➢ Net Profit of 5 crore or more
Company to spend at least 2% of its average net profit of the company during the three immediately preceding
years.

Provisions for CSR Activities under Schedule VII of the Companies Act 2013

The Board shall ensure that the activities included by a company in its CSR Policy fall within the
purview of the activities included is schedule VII. Some activities are specified in Schedule VII as the activities
which may be included by companies in their Corporate Social Responsibility Policies. These activities are
related to:

1. Eradicating hunger, poverty & malnutrition.

2. Promoting preventive health care & sanitation & making available safe drinking water.
3. Promoting livelihood enhancement projects as well as education & employment among children,
women & the differently abled.
4. Promoting gender equality and empowerment of women, setting up orphanages, old age homes, day
care centers and other facilities for senior citizens.
5. Providing proper hospital facilities and medicines at a subsidized rate and to improve maternal health
to reduce child mortality.
6. Ensuring sustainability and an ecological balance in the environment, safeguarding flora & fauna,
animal welfare, Agro forestry, conservation of natural resources & maintaining quality of soil, air &
water.
7. Enhancement of vocational skills by employment.
8. Protection of national heritage, art & culture by working towards restoration of historically important
buildings & sites & works of art.
9. Promotion & development of traditional Indian arts & handicrafts.
10. Contribution to PM's National Relief Fund or any other Central Government for development of socio-
economic issue and SCs, STS, OBCs and minorities.
11. Development of slum and rural areas.