Company Law

Indian company law is predominantly modeled around the English law. Companies Act, 1956 governs the incorporation, operation, governance and closure of companies in India. The administration of Company Law is under the Ministry of Company affairs through the Company Law Board (CLB) and ROC. A National Company Law Tribunal (NCLT) has been proposed to be set up which is to take over the functions of the CLB.

Types of companies
The Companies Act provides for incorporation of different types of companies, the most popular ones engaged in the commercial activities being the private limited and public limited companies (liability of members being limited to the extent of their shareholding).

Private company:

A private company is required to be incorporated with a minimum paid-up capital of INR 100,000 and two subscribers. Broadly, it:

  • Restricts the right to transfer its shares
  • Limits the number of its members (shareholders) to 50
  • Prohibits any invitation to the public to subscribe for any of its shares or debentures.
  • Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

The balance sheet and profit and loss account of the company has
to be filed with the ROC.

Public company:

A public company means a company which is not a private company. A public company is required to be incorporated with a minimum paid-up capital of INR 500,000 and 7 subscribers. A private company which is a subsidiary of another company which is not a private company shall be a public company. The profit and loss accounts, balance sheet, along with the reports of the directors and auditors, of a public company are required to be
filed with the ROC and are available for inspection to the public at large.

Listed public companies are additionally regulated by the SEBI and have listing agreements with the respective stock exchange on which they are listed. A private company is a more popular form as it is less cumbersome
to incorporate and also has comparatively less stringent reporting requirements. Usually, foreign corporations set up their subsidiary companies as a private company.

Share capital
The issue of shares symbolizes the payment of share capital in a company. The share capital is required to be stated in the company’s MOA.

Authorized share capital
The nominal or authorized share capital is the amount of capital stated in the MOA that the company is authorized to issue. The issued capital is that part of the nominal or authorized capital that the company offers for subscription. Enhancement of authorized capital necessitates passing of appropriate resolutions by the board and shareholders of the company and payment of additional fees to the ROC.

Paid-up share capital
The paid-up share capital is the amount of capital which is subscribed by the shareholders i.e. the shareholders have agreed to give consideration in cash or kind for the shares, unless those shares are fully paid up bonus shares issued by a company (generally out of the accumulated profits which are available for appropriation).

The Act lays down specific provisions with respect to managing the affairs of a company so as to protect the interest of its shareholders and investing public.

A public company is required to have a minimum of three directors and a private company a minimum of two directors. Directors are under a statutory duty to ensure that company’s funds are used for legitimate business purposes.
They have an obligation to:

  • Maintain a register and index of members/ debenture holder
  • Call general meetings including the AGM each year
  • Ensure proper maintenance of books of accounts
  • Prepare balance sheets, profit and loss accounts and to get them audited and place before Annual General Meeting (AGM)
  • Disclose shareholdings, etc.

Wholetime/Managing directors
Every public company or a private company which is a subsidiary of a public company having a paid up share capital of INR 50 Million must have a managing or whole time director or a manager. An approval from the Central Government (Department of Company Affairs) is required if the remuneration proposed to be paid to such wholetime/ managing director is more than what is prescribed in Schedule XIII of the Act.

Board meetings
Board meetings are required to be held every three months. The Board may delegate its powers to borrow, invest funds and make loans up to certain specified limits, to the committee of directors or managing directors.

Audit of accounts
Auditors of a company are appointed/ re-appointed in the AGM of a company. Their tenure lasts till the conclusion of the next AGM. The
company in a general meeting may remove auditors before the expiry of their term in office. Auditors are required to make a report to the members of the company in respect of the accounts (balance sheet, profit and loss account) examined by them at the end of each financial year.

The Act also provides for formation of an audit committee, consisting of qualified and independent directors, inter alia to have discussions with the auditors about the internal control systems and review half yearly and annual financial statements before submission to the CLB.

Director Identification Number (DIN)
DIN is a unique identification number allotted to an individual who is proposed as a director and is now a mandatory requirement for appointment as a director.

Companies Bill 2009:
Companies Bill 2009 is introduced in Lok Sabha on 15 September 2009. The main objectives of the Companies Bill, 2009 are as follows –

  • To revise and modify the Companies Act in consonance with the changes in the national and international economy;
  • To bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects;
  • To re-write various provisions of the Act to enable easy interpretation; and
  • To delink the procedural aspects from the substantive law and
    provide greater flexibility in rule making to enable adaptation to
    the changing economic and technical environment.

The Companies Bill, 2009 provides, inter alia, for:

  • The basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive, legal framework administered by the Central Government. In doing so, the Bill also harmonizes the Company law framework with the imperative of specialized sectoral regulation.
  • Articulation of shareholders democracy with protection of the
    rights of minority stakeholders, responsible self-regulation with
    disclosures and accountability, substitution of government control over internal corporate processes and decisions by shareholder control. It also provides for shares with differential voting rights to be done away with and valuation of non-cash considerations for allotment of shares through independent valuers.
  • Easy transition of companies operating under the Companies Act, 1956, to the new framework as also from one type of company to another.
  • A new entity in the form of One-Person Company (OPC) while empowering Government to provide a simpler compliance regime for small companies. Retains the concept of Producer Companies, while providing a more stringent regime for notfor– profit companies to check misuse. No restriction proposed on the number of subsidiary companies that a company may have, subject to disclosure in respect of their relationship and transactions/ dealings between them.
  • Application of the successful e-Governance initiative of the Ministry of Corporate Affairs (MCA-21) to all the processes involved in meeting compliance obligations. Company processes, also to be enabled to be carried out through electronic mode. The proposed e-Governance regime is intended to provide for ease of operation for filing and access to corporate data over the internet to all stakeholders, on round the clock basis.
  • Speedy incorporation process, with detailed declarations/disclosures about the promoters, directors etc. at the time of incorporation itself. Every company director would be required to acquire a unique Directors identification number.
  • Facilitates joint ventures and relaxes restrictions limiting the number of partners in entities such as partnership firms, banking companies etc. to a maximum 100 with no ceiling as to professions regulated by Special Acts.
  • Duties and liabilities of the directors and for every company to have at least one director resident in India. The Bill also provides for independent directors to be appointed on the Boards of such companies as may be prescribed, along with attributes determining independence. The requirement to appoint independent directors, where applicable, is a minimum of 33% of the total number of directors.
  • Statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the
    Company Secretary as Key Managerial Personnel (KMP).
  • Companies not to be allowed to raise deposits from the public except on the basis of permission available to them through other Special Acts. The Bill recognizes insider trading by company directors/KMPs as an offence with criminal liability
  • Recognition of both accounting and auditing standards. The role, rights and duties of the auditors defined as to maintain integrity and independence of the audit process. Consolidation of financial statements of subsidiaries with those of holding companies is proposed to be made mandatory.
  • A single forum for approval of mergers and acquisitions, along with concept of deemed approval in certain situations.
  • A separate framework for enabling fair valuations in companies for various purposes. Appointment of valuers is proposed to be made by audit committees.
  • Claim of an investor over a dividend or a security not claimed for more than a period of seven years not being extinguished, and Investor Education and Protection Fund (IEPF) to be administered by a statutory Authority.
  • Shareholders Associations/ Group of Shareholders to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and ‘Class Action Suits’.
  • A revised framework for regulation of insolvency, including rehabilitation, winding up and liquidation of companies with the process to be completed in a time bound manner. Incorporates international best practices based on the models suggested by the United Nations Commission on International Trade Law (UNCITRAL).
  • Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to entitlements to draw money in a situation of insolvency.
  • A more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum quantum of penalty for each offence with suitable deterrence for repeat offences. Company is identified as a separate entity for imposition of monetary penalties from the officers in default. In case of fraudulent activities/actions, provisions for recovery and  disgorgement have been included.
  • Levy of additional fee in a non-discretionary manner for procedural offences, such as late filing of statutory documents, to be enabled through rules. Defaults of procedural nature to be penalized by levy of monetary penalties by the Registrars of Companies. The appeals against such orders of Registrars of Companies to lie with suitably designated higher authorities.
  • Special Courts to deal with offences under the Bill. Company matters such as mergers and amalgamations, reduction of capital, insolvency including rehabilitation, liquidations and winding up are proposed to be addressed by the National Company Law Tribunal/ National Company Law Appellate Tribunal.

The Companies Bill is yet to become an Act
Winding up of companies:
Under the Companies Act, winding up can be done in two ways i.e. winding up by Tribunal and Voluntary winding-up.

  • Winding up by Tribunal

The company may be wound up by the Tribunal on –
– Passing a special resolution
– Failure to hold statutory meeting or delivering the statutory report to the registrar
– Failure to commence business within a year from its incorporation
– Reduction in number of members below required number
– Inability to pay its debts
– Winding up on just and equitable grounds
– Default in filing with the Registrar the financial statements or annual return for five consecutive years.
– Acting against the interest of the country
– If the company is a sick industrial company and is not likely to become viable in future

  • Voluntary winding-up

– A company may voluntary wind up its affairs if it is unable to carry on its business or to meet its financial obligation, etc. A company may voluntary wind up itself under any of the two modes i.e. members voluntary winding-up and creditors voluntary winding-up.

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