1.1 - Introduction, Definition, Silent Features of Company, Act 2013
Introduction:
The Indian Companies Act 1956 has been
replaced by the Indian Companies Act, 2013. The Companies Act 2013 makes
complete provisions to govern all listed and unlisted companies in the country.
The Companies Act 2013 introduced several new Sections and repealed the
Relevant Corresponding Sections of the Companies Act 1956. This Act is considered
a Landmark Legislation.
Key Highlights of the Indian Companies Act 2013
Maximum Number of Members (Shareholders)
for a Private Limited Company is increased from 50 to 200.
One-Person Company
Section 135 of the Act deals with
Corporate Social Responsibility
Company Law Tribunal and Company Law
Appellate Tribunal.
Salient
Features of the Companies Act 2013
It has introduced the concept
of ‘Dormant Companies’. Dormant companies are those that have not engaged in
business for two years consecutively.
It introduced the National Company Law Tribunal. It is a quasi-judicial body in India adjudicating
issues concerning companies. It replaced the Company Law Board.
It provides for
self-regulation with respect to disclosures and transparency rather than having
a government-approval based regime.
Documents have to be
maintained in electronic form.
Official liquidators have
adjudicatory powers for companies having net assets of up to Rs.1 crore.
The procedure for mergers and
amalgamations have been made faster and simpler.
Cross-border mergers are
allowed by this Act (foreign company merging with an Indian company and reverse)
but with the permission of the Reserve Bank of India.
The concept of a one-person
company has been introduced. This is a new type of private company that may
have only one director and one shareholder. The 1956 Act required at least two
directors and two shareholders for a private company.
Having independent directors
has been made a statutory requirement for public companies.
For a prescribed class of
companies, women directors are mandatory.
All companies should have at
least one director who has been a resident of India for not less than 182 years
in the last calendar year.
The Act provides for
entrenchment (apply extra-legal safeguards) of the articles of association.
The Act mandates at least 7
days of notice for calling board meetings.
In this Act, the duties of a
Director has been defined. It has also defined the duties of ‘Key Managerial
Personnel’ and ‘Promoter’.
For public companies, there
should be a rotation of audit firms and auditors. The Act also prevents auditors
from performing non-audit services to the company. In case of non-compliance,
there is substantial criminal and civil liability for an auditor.
The whole process of
rehabilitation and liquidation of the companies in the case of the financial crisis
has been made time-bound.
The Act makes it mandatory for
companies to form CSR committees, and formulate CSR policies. For certain
companies, mandatory disclosures have been made with regard to CSR.
Listed companies ought to have
one director to represent small shareholders as well.
There is provision for search
and seizure of documents, during the investigation, without an order from a
magistrate.
Norms have been made stringent
for accepting deposits from the public.
Setting up of the National
Financial Reporting Authority (NFRA) has been provided for. It engages in the
establishment and enforcement of accounting and auditing standards and
oversight of the work of auditors. (Due to notification of NFRA, India is now
eligible for membership of the International Forum of Independent Audit
Regulators (IFIAR).)
The Act bans key managerial
personnel and directors from purchasing call and put options of shares of the
company, if such person is reasonably expected to have access to
price-sensitive information.
The Act offers more power to
shareholders in that it provides for shareholders’ approval for many major
transactions.
1.2 Formation of Company, Stages of Formation
Formation of COMPANIES
The formation of a company is
a lengthy process. For convenience, the whole process of company formation may
be divided into the following four stages: 1. Promotion Stage 2. Incorporation
or Registration Stage 3. Capital Subscription Stage 4. Commencement of Business
Stage.
Stage # 1. Promotion Stage:
Promotion is the first stage in
the formation of a company. The term ‘Promotion’ refers to the aggregate of
activities designed to bring into being an enterprise to operate a business. It
presupposes the technical processing of a commercial proposition with reference
to its potential profitability. The meaning of promotion and the steps to be
taken in promoting a business are discussed in brief here.
Promotion of a company refers
to the sum total of the activities of all those who participate in the building
of the enterprise up to the organisation of the company and completion of the
plan to exploit the idea. It begins with the serious consideration given to the
ideas on which the business is to be based.
According to C.W. Grestembeg,
“Promotion may be defined as the discovery of business opportunities and the
subsequent organisation of funds, property and managerial ability into a
business concern for the purpose of making profits therefrom.”
According to H.E. Heagland,
“Promotion is the process of creating a specific business enterprise. Its scope
is very broad, and numerous individuals are frequently asked to make their
contributions to the programme. Promotion begins when someone gives serious
consideration to the formulation of the ideas upon which the business in
question is to be based. When the corporation is organised and ready for
operation, the major function of promotion comes to an end.”
According to Guthmann and
Dougall, “Promotion starts with the conception of the idea from which the
business is to evolve and continues down to the point at which the business is
full, ready to begin operations in a going concern.”
Stage # 2. Incorporation or Registration Stage:
Incorporation or registration
is the second stage in the formation of a company. It is the registration that
brings a company into existence. A company is properly constituted only when it
is duly registered under the Act and a Certificate of Incorporation has been
obtained from the Registrar of Companies.
Procedure to Get a Company Registered:
In
order to get a company registered or incorporated, the following procedure is
to be adopted:
(A)
Preliminary Activities:
Before
a company is incorporated, the promoter has to take a decision regarding the
following:
1. To decide the name of the
company
2. Licence under Industries Development
and Regulation Act, 1951
(B)
Filing of Document with the Registrar:
1. Memorandum of Association
2. Articles of Association
3. List of directors
4. Written consent of
directors
5. Statutory declaration
Certificate
of Incorporation:
On the registration of
memorandum and other documents, the Registrar will issue a certificate known as
the Certificate of Incorporation certifying under his hand that the company is
incorporated and, in the case of a limited company that the company is limited.
The specimen
of the certificate of incorporation is given below:
Effects
of Incorporation:
The
certificate of incorporation is conclusive evidence of the fact that:
(i) The company is properly
incorporated and duly registered;
(ii) The terms of the
Memorandum and Articles are within the law;
(iii) All requirements of the
Act in respect of registration have been complied with;
(iv) A private company can
start its business after getting the certificate of incorporation; and
(v) With the issue of
certificate, the company takes birth with a separate legal entity.
Stage # 3. Capital Subscription Stage:
A private company or a public
company not having share capital can commence business immediately on its
incorporation. As such ‘capital subscription stage’ and ‘commencement of
business stage’ is relevant only in the case of a public company having a
share capital. Such a company has to pass through these additional two stages
before it can commence business.
Under the capital subscription
stage comes the task of obtaining the necessary capital for the company.
For
this purpose, soon after the incorporation, a meeting of the Board of Directors
is convened to deal with the following business:
1. Appointment of the
Secretary. In most cases, the appointment of pre-team secretary (who is
appointed at the promotion stage) is confirmed.
2. Appointment of bankers,
auditors, solicitors and brokers, etc.
3. Adoption of draft
‘prospectus’ or ‘statement in lieu of prospectus’.
4. Adoption of underwriting
contract, if any.
Besides
the above-mentioned business, the Board also decides as to whether:
(i) a public offer for capital
subscription is to be made, and
(ii) Listing of shares at a
stock exchange is to be secured.
The company will now proceed
to obtain the permission of the Controller of Capital Issue, New Delhi, under
the Capital Issue Control Act, 1947 if a public offer for sale of shares and
debentures exceeding Rs. one crore is to be made during a period of 12 months,
unless the issue fulfils the conditions of exemption as laid down in the
Capital Issue (Exemption) Order, 1969.
The Capital Issue Control Act,
1947 however, does not apply to a private company, a banking company, an
insurance company and a government company provided it does not make an issue
of securities to the general public.
After the above formalities
have been completed, the directors of the company file a copy of the
‘prospectus’ with the Registrar and invite the public to subscribe to the shares of
the company by putting the ‘prospectus’ in circulation.
Application for shares are
received from the public through the company’s bankers and if the subscribed
capital is at least equal to the minimum subscription amount as disclosed in
the prospectus and other conditions of a valid allotment are fulfilled, the
directors of the company pass a formal resolution of allotment.
Allotment letters are then
posted, the return of allotment is filed with the Registrar and share certificates
are issued to the allottees in exchange of the allotment letters. If the
subscribed capital is less than the minimum subscription or the company could
not obtain the minimum subscription within 120 days of the issue of the prospectus,
all money will be refunded and no allotment can be made.
It may be noted that a public
a company having a share capital, but not issuing a ‘prospectus’ has to file with
the Registrar ‘a Statement in lieu of Prospectus’ at least three days before
the directors proceed to pass the first allotment resolution.
Stage # 4. Commencement of Business Stage:
After getting the certificate
of incorporation, a private company can start its business. A public company
can start its business only after getting a’ certificate of commencement of
business’.
After
getting the certificate of incorporation:
(i) A public company issues a prospectus
of inviting the public to subscribe to its share capital,
(ii) A minimum subscription is
fixed, and
(iii) The company is required
to sell a minimum number of shares mentioned in the prospectus.
After making the sale of the
required number of shares a certificate is sent to the Registrar stating this
fact, along with a letter from the banks, that it has received an application
money for such shares.
The Registrar scrutinizes the
documents. If he is satisfied, then issues a certificate known as Certificate
of Commencement of Business. This is the conclusive evidence of the
commencement of the business.
The
specimen of a certificate of commencement of business is given below:
1.3 Promoters, Function of Promoter, Duties & Liabilities of Promoter
PROMOTERS
Meaning
of a Promoter:
The idea of carrying on a
business which can be profitably undertaken is conceived either by a person or
by a group of persons who are called promoters. After the idea is conceived,
the promoters make detailed investigations to find out the weaknesses and
strong points of the idea, to determine the amount of capital required and to
estimate the operating expenses and probable income.
The term ‘promoter’ is a term
of business and not of law. It has not been defined anywhere in the Act, but a
number of judicial decisions have attempted to explain it.
ADVERTISEMENTS:
According to L.J. Brown. “The
term promoter is a term not of law but of business, usefully summing up in a
single word a number of business operations familiar to the commercial world by
which a company is generally brought into existence.”
According to Justice C.
Cockburn. “Promoter is one who undertakes to form a company with reference to a
given object and to set it going, and who takes the necessary steps to accomplish
that purpose.”
According to Palmer, “Company
promoter is a person who originates a scheme for the formation of the company,
has the memorandum and the articles prepared, executed and registered and finds
the first directors settle the terms of preliminary contracts and prospectus
(if any) and makes arrangement for advertising and circulating the prospectus
and placing the capital.”
According to Guthmann and
Dougall. “Promoter is the person who assembles the men, the money and the
materials into a going concern.”
From
these definitions of promoter it is concluded that:
“Promoter is the person who
originates the idea for the formation of a company and gives the practical shape to
that idea with the help of his own resources and with that of others.”
A person cannot be held as
promoter merely because he has signed at the foot of the Memorandum or that he
has provided money for the payment of formation expenses.
The promoters, in fact, render
a very useful service in the formation of the company. A promoter has been
described as ”a creator of wealth and an economic prophet.” The promoters carry
a considerable risk because if the idea sometimes goes wrong then the time and
money spent by them will be a waste.
In the words of Henry E.
Heagland, “A successful promoter is a creator of wealth. He is an economic
prophet. He is able to visualise what does not yet exist and to organise
business enterprise to make the products available to the using public.”
A promoter may be an individual,
a firm, an association of persons or even a company.
Functions
of a Promoter:
The
Promoter Performs the following main functions:
1. To conceive an idea of
forming a company and explore its possibilities.
2. To conduct the necessary
negotiation for the purchase of a business in case it is intended to purchase an
existing business. In this context, the help of experts may be taken, if
considered necessary.
3. To collect the requisite
number of persons (i.e. seven in case of a public company and two in case of a
private company) who can sign the ‘Memorandum of Association’ and ‘Articles of
Association’ of the company and also agree to act as the first directors of the
company.
4. To decide about the
following:
(i) The name of the Company,
(ii) The location of its
registered office,
(iii) The amount and form of
its share capital,
(iv) The brokers or
underwriters for a capital issue, if necessary,
(v) The bankers,
(vi) The auditors,
(vii) The legal advisers.
5. To get the Memorandum of
Association (M/A) and Articles of Association (A/A) drafted and printed.
6. To make preliminary
contracts with vendors, underwriters, etc.
7. To make arrangement for the
preparation of the prospectus, it's filing, advertisement and issue of capital.
8. To arrange for the
registration of the company and obtain the certificate of incorporation.
9. To defray preliminary
expenses.
10. To arrange the minimum
subscription.
Duties
of Promoter:
The
duties of promoters are as follows:
1.
To disclose the secret profit:
The promoter should not make
any secret profit. If he has made any secret profit, it is his duty to disclose
all the money secretly obtained by way of profit. He is empowered to deduct the
reasonable expenses incurred by him.
2.
To disclose all the material facts:
The promoter should disclose
all the material facts. If a promoter contracts to sell the company a property
without making a full disclosure, and the property was acquired by him at a
time when he stood in a fiduciary position towards the company, the company may
either repudiate the sale or affirm the contract and recover the profit made
out of it by the promoters.
3.
The promoter must make good to the company what he has obtained as a trustee:
A promoter stands in
fiduciary position towards the company. It is the duty of the promoter to make
good to the company what he has obtained as trustee and not what he may get at
any time.
4.
Duty to disclose private arrangements:
It is the duty of the promoter
to disclose all the private arrangement resulting in him profit by the promotion
of the company.
5.
Duty of promoter against the future allottees:
When it is said the promoters
stand in a fiduciary position towards the company then it does not mean that
they stand in such relation only to the company or to the signatories of
memorandums of the company and they will also stand in this relation to the future
allottees of the shares.
Liabilities
of Promoter:
The
liabilities of promoters are given below:
1.
Liability to account in profit:
As we have already discussed
that promoter stands in a fiduciary position to the company. The promoter is
liable to account to the company for all secret profits made by him without
full disclosure to the company. The company may adopt any one of the following
two courses if the promoter fails to disclose the profit.
(i)The company can sue the
promoter for an amount of profit and recover the same with interest.
(ii) The company can rescind
the contract and can recover the money paid.
2.
Liability for mis-statement in the prospectus:
Section 62(1) holds the
promoter liable to pay compensation to every person who subscribes for any
share or debentures on the faith of the prospectus for any loss or damage
sustained by reason of any untrue statement included in it. Sec. on 62 also
provides certain grounds on which a promoter can avoid his liability. Similarly
Sec. 63 provides for criminal liability for mis-statement in the prospectus and
a promoter may also become liable under this section.
The promoter may also be
imprisoned for a term which may extend to two years or maybe punished with the
fine up to Rs. 5,000 for untrue statements in the prospectus. (Sec. 63).
3.
Personal liability:
The promoter is personally
liable for all contracts made by him on behalf of the company until the
contracts have been discharged or the company takes over the liability of the
promoter.
The death of the promoter does not
relieve him from liabilities.
4.
Liability at the time of winding up of the company:
In the course of winding up of
the company, on an application made by the official liquidator, the court may
make a promoter liable for misfeasance or breach of trust. (Sec. 543).
Further, where fraud has been
alleged by the liquidator against a promoter, the court may order for his
public examination. (Sec. 478).
1.4 Types of Company
Different Types of Companies
Companies can be classified into different
types based on their mode of incorporation, the liability of the members, and the number of the members. The most common types of companies are:
- Royal Chartered Companies
- Statutory Companies
- Registered or Incorporated Companies
- Companies Limited By Shares
- Companies Limited By Guarantee
- Unlimited Companies
- Public Company (or Public Limited Company)
- Private Company (or Private Limited Company)
- One Person Company
Types Of Companies Based On The Mode of Incorporation
Companies can be classified into three
types based on whether they are created by a special act, special order, or are
registered just like any normal company.
Royal Chartered
Companies
Royal Chartered Companies are companies
created by the Royal Charter. This means they are granted power or a right by
the monarch or by special order of a king or a queen. Examples of Royal
Chartered Companies are East India Company, BBC, Bank Of England, etc.
Statutory Companies
Statutory Companies are companies
incorporated by means of a special act passed by the central or state
legislature. They are mostly invested with compulsory powers and are
responsible to carry out some special business of national importance. Some
examples of statutory companies are The Reserve Bank of India (formed
under RBI act, 1934), Life Insurance Corporation of India (formed under LIC
Act, 1956).
Registered Or
Incorporated Companies
All the other companies which are incorporated
under the companies' act passed by the government comes under this head. These
companies come under existence only after they register themselves under
the act and the certificate of incorporation is passed by the Registrar of
companies. Google India Pvt Ltd is an example of incorporated companies.
Types Of Companies Based On The Number Of Members
Public Limited
Company
The legal existence of a Public Limited
Company is separate from its members (shareholders) and the liability of its
members is also limited. Its existence is thus not affected by the retirement
or death of its shareholders. A minimum of 7 members is needed to form a Public
Limited company but there is no maximum limit on this. The company collects its
capital by the sale of its shares to the shareholders. The shareholders of a
company do not have the right to participate in the day-to-day management of
the company, thus separating ownership from management. All the major decisions
of the company are taken by the Board of Directors.
Private Limited
Company
Private Limited (Pvt Ltd) companies have
more than 2 and less than 50 members and their liability is limited or
unlimited depending on the type of the company it is. Unlike Public Limited
companies, here the transfer of shares is limited to its members and the
general public cannot subscribe to its shares and debentures. Pvt Ltd companies
are exempted from many rules and regulations which are applicable to Public
Limited companies, for example, the need to file a prospectus with the Registrar,
the need to hold the statutory general meeting or maintain annual reports, etc.
Also, it can start operations after receiving just the certificate of
incorporation, whereas a Public Limited company needs a certificate of
commencement as well. It is a great option if you want the advantages of
limited liability and yet want greater control over your business and maintain
its privacy. This is the most popular type of company for start-ups to be
registered as.
One Person Company
One Person Company (OPC) as a company type
was introduced in the Companies Act of 2013 in India. It is similar to a sole
proprietorship but the owner shall have limited liability and thus his personal
assets would not be at risk of losses need to be recovered or if the company is
liquidated.
Types of Companies Based On The Liability Of The Members
In case of liquidation, the members of a
company can either be liable to pay even from their personal assets or to the
extent of the face value of shares held by them. It all depends on how the
company is registered as. Companies can be classified into three types based on
the liability of the members. These are –
Companies Limited By
Shares
The liability of the shareholders is
limited to the extent of the face value of shares held by them. Most Pvt Ltd
companies are of this type.
Companies Limited By
Guarantee
In these companies, in case of
liquidation, the shareholders promise to pay a certain fixed amount to cover
the liabilities of the company.
Unlimited Companies
There is no limit on the liability of the
shareholders. In case of liquidation, they might have to pay even from their
personal assets to cover the liabilities of the company. This type of company
is quite uncommon today due to obvious reasons.
There are a lot of options to choose from
when you plan to register your startup. Make sure you research the pros and
cons of each and register your firm accordingly. Now that you know about
different types of companies, let’s move on to the guide on how to register your company.
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