UNIT II

COMPANY ACT, 1956

The Companies Act 1956 is an Act of the Parliament of India, enacted in 1956, which
enabled companies to be formed by registration, and set out the responsibilities of
companies, their directors and secretaries.
The Companies Act 1956 is administered by the Government of India through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators,
Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of
Companies (ROC) handles incorporation of new companies and the administration of
running companies.
ESSENTIAL FEATURES

1. Separate Legal Entity:It is the feature of company that company is not just
association of persons but it has separate legal entity. It is an artificial person in the
eye of law. Its asset is not the asset of shareholder. It can contract with members.

2. Separate Property: It is also feature of company that property of company is

different from its members. It can purchase or sell property without the permission of
shareholders. In other words, assets of company are not the assets of members like
partnership.

3.Limited liability is also another important feature of company. It is the reason that
large number of investors invest in limited liability companies. It is the liability of
company to repay not the liability of its members. Members’ liability is only limited
up to the purchased value of shares. They have to pay balance amount of their shares.

4. Perpetual Succession : The life of company is very stable that human being’s life.
There is no effect of changing, death, insolvency of respected member on company.
Its existence is not affected by members’ existence. Shares can easily transfer from
one member to another member, so liquidation of company is only possible by law.

5. Common Seal: Company cannot sign on any contract because it is artificial person
and it works with common seal. Every document of contract with company is only
valid, if there is common seal of company on it.

6. Right to sue: Company can sue on other parties like natural person for protecting its
assets and properties. Other persons can also charge on the company.

7. Transferable Shares. In a public company, the shares are freely transferable. The right
to transfer shares is a statutory right and it cannot be taken away by a provision(9) in
the articles. However, the articles shall prescribe the manner in which such transfer of
shares will be made and it may also contain bona fide and reasonable restrictions on
 the right of members to transfer their shares. But absolute restrictions on the rights of
members to transfer their shares shall be ultra vires. However, in the case of a private
company, the articles shall restrict the right of member to transfer their shares in
companies with its statutory definition.

TYPES OF COMPANIES
Companies are classified on the basis of incorporations, liability and control.

Under incorporations

A.Chartered companies. These are incorporated under a special charter by a monarch. The
East India Company and The Bank of England are examples of chartered incorporated in
England. The powers and nature of business of a chartered company are defined by the
charter which incorporates it. A chartered company has wide powers. It can deal with its
property and bind itself to any contracts that any ordinary person can. In case the company
deviates from its business as prescribed by the charted, the Sovereign can annul the latter and
close the company. Such companies do not exist in India.

B. Statutory Companies. These companies are incorporated by a Special Act passed by the
Central or State legislature. Reserve Bank of India, State Bank of India, Industrial Finance
Corporation, Unit Trust of India, State Trading corporation and Life Insurance Corporation
are some of the examples of statutory companies. Such companies do not have any
memorandum or articles of association. They derive their powers from the Acts constituting
them and enjoy certain powers that companies incorporated under the Companies Act have.
Alternations in the powers of such companies can be brought about by legislative
amendments.

C. Registered Companies. Private Company According to Sec. 3(1) (iii) of the Indian
Companies Act, 1956, a private company is that company which by its articles of association

i) limits the number of its members to fifty, excluding employees who are members or ex-
employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;

iii) prohibits any invitation to the public to subscribe for any shares or debentures of the
company.

Public company According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public
company which is not a Private Company”, If we explain the definition of Indian Companies
Act. 1956 in regard tothe public company,

i) The articles do not restrict the transfer of shares of the company

ii) It imposes no restriction no restriction on the maximum number of the members on the
company.

iii) It invites the general public to purchase the shares and debentures of the companies
(Differences between a Public Company and a Private company)

1. Minimum number: The minimum number of persons required to form a public company is
7. It is 2 in case of a private company.

2. Maximum number: There is no restriction on maximum number of members in a public

company, whereas the maximum number cannot exceed 200 in private companies.

3.Number of directors. A public company must have at least 3 directors whereas a private
company must have at least 2 directors

4. Restriction on appointment of directors. In the case of a public company, the directors must
file with the Register a consent to act as directors or sign an undertaking for their
qualification shares. The directors or a private company need not do so.

5. Name of the Company: In a private company, the words “Private Limited” shall be added
at the end of its name.

D. Non-Profit Organisation A not for profit organization is a type of organization that does
not earn profits for its owners. All the money earned by or donated to a not
for profit organization is used in pursuing the organization's objectives.

ON THE BASIS OF LIABILITY

I) Companies limited by Shares: These types of companies have a share capital and the
liability of each member or the company is limited by the Memorandum to the extent of face
value of share subscribed by him. In other words, during the existence of the company or in
the event of winding up, a member can be called upon to pay the amount remaining unpaid
on the shares subscribed by him. Such a company is called company limited by shares. A
company limited by shares may be a public company or a private company. These are the
most popular types of companies.

ii) Companies Limited by Guarantee: These types of companies may or may not have a
share capital. Each member promises to pay a fixed sum of money specified in the
Memorandum in the event of liquidation of the company for payment of the debts and
liabilities of the company. This amount promised by him is called ‘Guarantee’. The Articles
of Association of the company state the number of member with which the company is to be
registered. Such a company is called a company limited by guarantee.

ON THE BASIS OF CONTROL

1) Foreign and domestic : Foreign- An enterprise operating in several countries but

managed from one (home) country. Generally, any company or group that derives a
quarter of its revenue from operations outside of its home country is considered a
multinational corporation.
 Domestic- A company that conducts its affairs in its home country. A domestic
corporation is often taxed differently than a foreign corporation and may be required
to pay duties or fees on the importation of its products. Typically, a domestic
corporation can conduct business in other states or other parts of the country where it
has filed its articles of incorporation.

2) Holding and Subsidiary

Holding Company A company is known as the holding company of another company

if it has control over the other company. According to Sec 4(4) a company is deemed
to be the holding company of another if, but only if that other is its subsidiary.

A company may become a holding company of another company in either of the

following three ways -

a) by holding more than fifty per cent of the normal value of issued equity capital of
the company; or

b) By holding more than fifty per cent of its voting rights; or

c) by securing to itself the right to appoint, the majority of the directors of the other
company, directly or indirectly.

The other company in such a case is known as a “Subsidiary company”. Though the
two companies remain separate legal entities, yet the affairs of both the companies are
managed and controlled by the holding company. A holding company may have any
number of subsidiaries. The annual accounts of the holding company are required to
disclose full information about the subsidiaries.

2. Subsidiary Company: A company is known as a subsidiary of another company

when its control is exercised by the latter (called holding company) over the
subsidiary company.

3) Government and Non-Government:

Government Companies. A Company of which not less than 51% of the paid-up
capital is held by the Central Government of by State Government or Government
singly or jointly is known as a Government Company. It includes a company
subsidiary to a government company. The share capital of a government company
may be wholly or partly owned by the government, but it would not make it the agent
of the government. The auditors of the government company are appointed by the
government on the advice of the Comptroller and Auditor General of India.

b) Non-Government Companies. All other companies, except the Government

Companies, are called non-government companies. They do not satisfy the
characteristics of a government company.
FORMATION OF THE COMPANY

1. Promotion:
The first stage in the formation of a company is promotion. Promotion is the
discovery of business opportunity and organization of funds, property and ability
in business for the purpose of making profit. Promotion is always made through
the promoters, and promoters are those persons who actually promote (Sponsor)
the company.
Promoters can be further divided into three classes.
a. Professional Promoters: are those persons who form the company as their
profession when the company is incorporated, they either get the commission or a
fixed amount for the formation o company.
b. Occasional Promoters: are those persons who undertake to form a company
occasionally and take the forming of a company as their part time jobs.
c. Promoters: are those persons who make all investigations, preparation and
arrangements for incorporating a company.

2. Registration:
The process of registering is done by the following:

a) Name: Three different names have to be selected but the name should not be
a trademark. All the members should be present in the selection of the name of
the company.

b) MoA : The scope and limitations of the company are written in detail.

c) Documents: The detailed documents

Statutory declaration
List of Directors
Written consent (approval) of directors
Declaration of the qualifying shares

d) Certification:

A Public and Private Limited company having share capital cannot commence
business until it has obtained the certificate of commencement of business
(COB) from the concerned Registrar of Companies. Normally a new company
will comply with the required formalities and obtain the certificate of
commencement of business (COB) from the Registrar as soon as possible after
formation because it cannot commence any business activities or exercise its
borrowing powers without it.

3. Floatation:
 a. Capital: Where a company having a share capital has issued a prospectus
inviting the public to subscribe for its shares, the company shall not
commence any business or exercise any borrowing powers.

4. Commencement of Business
a. Prospectus or statement in lieu of prospectus
b. Declaration of fulfillment of minimum subscription
c. Declaration of fulfillment of directors, contract to purchase qualification shares.
d. Statutory declaration of compliance of legal conditions precedent on certificate of
commencement of business.

MEMORANDUM OF ASSOCIATION

The memorandum of association of a company, often simply called the memorandum (and
then often capitalized as an abbreviation for the official name, which is a proper noun and
usually includes other words), is the document that governs the relationship between the
company and the outside. It is one of the documents required to incorporate a company in
the United Kingdom, Ireland, India, Bangladesh, Pakistan and Sri Lanka, and is also used
in many of the common law jurisdictions of the Commonwealth.

CONTENTS OF MEMORANDUM OF ASSOCIATION

Name Clause: The memorandum must state the name of the company with ‘limited’ as the
word, in case of a public limited company and with ‘private limited', in the case of a
private limited company, the company is free to choose any name but it must not be
undesirable or must not resemble the name of any other registered company.

2. Registered office clause: The state in which the registered office of a company will be
situated is mentioned in this clause. The registered office of the company is the official
address of the company where the statutory books and records must normally be kept.

3. Object Clause - This sub-clause will cover any objects which are not included in the
main objects.

4. Liability Clause -This clause states the nature of liability of the members of the
company .in the case of a company limited by share or by guarantee the fact that the
liability of its members is limited must be made clear. In case of a company limited by
shares the liability of a member is limited to the nominal value of the share held by him. If
the share is fully paid up his liability is nil. But in case of partly paid-up shares the liability
is limited to the amount which is unpaid. In case of a company limited by guarantee the
liability clause must state the amount which every member undertakes to contribute to the
assets of the company in the event of its winding up.

5. Capital Clause-This clause states that amount of the capital with which the company is
to be registered. This clause should also state the number and face value of shares into
which the capital of the company is divided.
 6. Association clause -The association clause states – in this cause , the subscribes declare
that they desire to be Objects incidental or ancillary :- it covers the objects which are
incidental or ancillary to the attainment of the main object  Main object:- this sub-clause
contains the main objects of the company to the pursued on its incorporation .

ARTICLES OF ASSOCIATION

The Articles of Association is a document that contains the purpose of the company as well
as the duties and responsibilities of its members defined and recorded clearly. It is an
important document which needs to be filed with the Registrar of Companies.

1) Articles of Association of a company contain the rules and Regulations relating to the
Management of its internal Affairs.

2) It defines the rights, powers and duties of the Management.

3) It must not contain anything which is against the memorandum of association or

against the companies Act or Public policy.

4) The borrowing capacity of the company should be mentioned.

5) The lending capacity should also be incorporated in the AoA

6) The number of the shares and the restriction for the transfer of shares.

7) The Articles of Association must be printed, divided into paragraphs, numbered

consecutively and signed by each signatory to the MOA in the presence of at least one
attesting witness.

Doctrine of Constructive Notice

The doctrine of constructive notice is a doctrine where all persons dealing with a company
are deemed (or "construed") to have knowledge of the company's articles of
association and memorandum of association.

Doctrine of Indoor management

people doing business or within the Company are free to inspect the document to see if there
is any limitation of powers or limitations placed on the nature of the business.

PROSPECTUS

A prospectus is thus any document which invites the public to provide funds to the company
bye law of deposits or subscriptions to its shares and debentures. It is a valuable document
containing important details about a company It should be duly signed by the company.
ISSUE: It is an invitation to the public to subscribe to the shares and debentures of the
company. It informs public about the company and stimulates people to invest money in the
company. It provides an authentic record of the terms and conditions on which shares and
debentures have been issued. It identifies the persons who can be held responsible for any
untrue or incorrect statements made in it. It reflects the business policies and programmes of
the company. It helps the investors to take investment decisions. A public company issues this
to the Registrar of Companies

CONTENTS: Name of the company, Address of the Registered office, Nature and objects of
business, Capital structure, History of the company, Date of opening and closing subscription
list, Name of stock exchanges where applications for listing has been made, Information
about material contracts with managerial personnel, Financial information.

DETAILS: Scanning a prospectus from the view point of an investor, Nature of Prospective
investor should examine the condition business of industry, demand and supply etc. The amt
paid or proposed to be paid for goodwill acquired and other properties should be scrutinized.

A prospectus is a document issued by the company inviting the public and investors for the
subscription of its securities. A prospectus also helps in informing the investors about the risk
of investing in the company. A Prospectus is required to be issued only after the incorporation
of the company. These documents describe stocks, bonds and other types of securities offered
by the company. Mutual fund companies also provide a prospectus to prospective clients,
which includes a report of the money’s strategies, the manager’s background, the fund’s fee
structure and a fund’s financial statements. A prospectus is always accompanied by
performance history and financial information of the company. The reason for accompanying
such an information along with the prospectus is to make sure that, the investors are well
aware of the company’s background and overall performance and the investors do not fall
into the prey of investing in a bad company.

Definition of Prospectus under the Companies Act, 2013

Section 2(70) of the Act defines prospectus as, “A prospectus means any document described
or issued as a prospectus and includes a red herring prospectus referred to in section 32 or
shelf prospectus referred to in section 31 or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities of
a body corporate.”

Thus, it is clear from the above definition of the prospectus that, a prospectus is a just an
invitation to offer securities to the public and not an offer in the contractual sense.

Companies that are required to issue a prospectus

 A public listed company who intends to offer shares or debentures can issue
prospectus.
  A private company is prohibited from inviting the public to subscribe to their
shares and thus cannot issue a prospectus. However, a private company which has
converted itself into a public company may issue a prospectus to offer shares to the
public.

Types of Prospectus under the Companies Act, 2013

There are four types of a prospectus, which are as under:

 Abridged Prospectus

According to Section 2(1) of the Act, abridged prospectus means a memorandum containing
such salient features of a prospectus as may be specified by the SEBI by making regulations
in this behalf. It means that a company cannot issue application form for purchase of
securities unless such form is accompanied by an abridged prospectus.

 Deemed Prospectus

According to Section 25(1) of the Act, where a company allots or agrees to allot any
securities of the company with a view to all or any of those securities being offered for sale to
the public. Any document by which such offer for sale to the public is made is deemed to be a
prospectus by implication of law.

 Shelf Prospectus

According to Section 31 of the Act, Shelf prospectus is a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or more
issues over a certain period without the issue of a further prospectus. Only the companies
which have been prescribed by the SEBI can issue a Shelf prospectus with the Registrar.

 Red Herring Prospectus (RHP)

According to Section 32 of the Act, an RHP means a prospectus which does not have
complete particulars on the price of the securities offered and quantum of securities to be
issued. A company may issue an RHP prior to the issue of a prospectus. The company shall
file RHP with Registrar at least three days prior to the opening of the subscription list and the
offer. An RHP carries the same obligations as are applicable to a prospectus and any variation
between the RHP and a prospectus shall be highlighted as variations in the prospectus

Matters to be stated in a prospectus

Under the Companies Act, 2013

  According to Section 26 of the Act, every prospectus issued by or on behalf of a
company must be dated and that date shall unless the contrary is proved, be
regarded as the date of its publication.
 It shall state such information and set out such reports on financial information as
may be specified by the SEBI in consultation with the Central Government.

 A copy of the prospectus shall be signed by every director or proposed director or

by his agent must be delivered to the registrar on or before the date of publication.

 Every prospectus issued to the public should mention that a copy of the prospectus
along with the specified documents has been filed with the registrar.

 If prospectus includes a statement made by an expert, the expert must not be

engaged or interested in the formation or promotion or in the management of the
company. A written consent of the expert should also be obtained before the issue
of prospectus with the statement.

 A prospectus must not be issued more than 90 days after the date on which a copy
thereof is delivered for registration. If a prospectus is issued it will be deemed to
be a prospectus a copy of which has not been delivered to the registrar.

 A prospectus shall make a declaration about the compliance of the provisions of

the act and nothing contained in the prospectus is in contravention of the
provisions of the Companies Act, Securities Contracts (Regulation) Act, 1956 and
Securities Exchange Board of India Act, 1992.

 Section 27 of the Act states that a company can vary the terms of a contract
referred to in the prospectus or objects for which the prospectus was issued,
subject to the approval of an authority given by the company in general meeting by
way of special resolution. The details of the notice in respect of such resolution to
shareholders shall also be published in the newspapers in the city where the
registered office of the company is situated.

COMPANY MEETINGS

Company is an association of several persons. Decisions are made according to the view of the
majority. Various matters must be discussed and decided upon. These discussions take place
at the various meetings which take place between members and between the directors. The
importance of meetings cannot be under-emphasised in case of companies. The Companies
Act, 1956 contains several provisions regarding meetings. These provisions must be
understood and followed.

For a meeting, there must be at least 2 persons attending the meeting. One member cannot
constitute a company meeting even if he holds proxies for other members.
Kinds of Company Meetings: Broadly, meetings in a company are of the following types-

I. Meetings of Members :These are meetings where the members / shareholders of the
company meet and discuss various matters. Member’s meetings are of the following types-

A.Statutory Meeting :
A public company limited by shares or a guarantee company having share capital is required
to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not less than one month or within a
period not more than six months from the date on which it is entitled to commence business
i.e. it obtains certificate of commencement of business. In a statutory meeting, the following
matters only can be discussed

 Floatation of shares / debentures by the company

Modification to contracts mentioned in the prospectus.

The purpose of the meeting is to enable members to know all important matters pertaining to
the formation of the company and its initial life history. The matters discussed include which
shares have been taken up, what money has been received, what contracts have been entered
into, what sums have been spent on preliminary expenses, etc. The members of the company
present at the meeting may discuss any other matter relating to the formation of the Company
or arising out of the statutory report also, even if no prior notice has been given for such other
discussions but no resolution can be passed of which notice have not been given in
accordance with the provisions of the Act.
A notice of at least 21 days before the meeting must be given to members unless consent is
accorded to a shorter notice by members, holding not less than 95% of voting rights in the
company.A statutory meeting may be adjourned from time to time by the members present at
the meeting.

The Board of Directors must prepare and send to every member a report called the "Statutory
Report" at least 21 days before the day on which the meeting is to be held. But if all the
members entitled to attend and vote at the meeting agree, the report could be forwarded later
also. The report should be certified as correct by at least two directors, one of whom must be
the managing director, where there is one, and must also be certified as correct by the
auditors of the company with respect to the shares allotted by the company, the cash received
in respect of such shares and the receipts and payments of the company. A certified copy of
the report must be sent to the Registrar for registration immediately after copies have been
sent to the members of the company.

B. Annual General Meeting

Must be held by every type of company, public or private, limited by shares or by guarantee,
with or without share capital or unlimited company, once a year. Every company must in each
year hold an annual general meeting. Not more than 15 months must elapse between two
annual general meetings. However, a company may hold its first annual general meeting
within 18 months from the date of its incorporation. In such a case, it need not hold any
annual general meeting in the year of its incorporation as well as in the following year only.

In the case there is any difficulty in holding any annual general meeting (except the first
annual meeting), the Registrar may, for any special reasons shown, grant an extension of time
for holding the meeting by a period not exceeding 3 months provided the application for the
purpose is made before the due date of the annual general meeting. However, generally delay
in the completion of the audit of the annual accounts of the company is not treated as "special
reason" for granting extension of time for holding its annual general meeting. Generally, in
such circumstances, an AGM is convened and held at the proper time . all matters other than
the accounts are discussed. All other resolutions are passed and the meeting is adjourned to a
later date for discussing the final accounts of the company. However, the adjourned meeting
must be held before the last day of holding the AGM.

A notice of at least 21 days before the meeting must be given to members unless consent is
accorded to a shorter notice by members, holding not less than 95% of voting rights in the
company. The notice must state that the meeting is an annual general meeting. The time, date
and place of the meeting must be mentioned in the notice. The notice of the meeting must be
accompanied by a copy of the annual accounts of the company, director’s report on the
position of the company for the year and auditor’s report on the accounts. Companies having
share capital should also state in the notice that a member is entitled to attend and vote at the
meeting and is also entitled to appoint proxies in his absence. A proxy need not be a member
of that company. A proxy form should be enclosed with the notice. The proxy forms are
required to be submitted to the company at least 48 hours before the meeting.

C. Extraordinary General Meeting: Every general meeting (i.e. meeting of members of the
company) other than the statutory meeting and the annual general meeting or any
adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by
the Board of Directors for some urgent business which cannot wait to be decided till the next
AGM. Every business transacted at such a meeting is special business. An explanatory
statement of the special business must also accompany the notice calling the meeting. The
notice must should also give the nature and extent of the interest of the directors or manager
in the special business, as also the extent of the shareholding interest in the company of every
such person. In case approval of any document has to be done by the members at the meeting,
the notice must also state that the document would be available for inspection at the
Registered Office of the company during the specified dates and timings.

INDEPENDENT DIRECTORS - AN OVERVIEW

The Companies Act,1956 does not provide us the specific definition of an Independent
Director. But Independent Directors are in the limelight as per the Companies Act, 2013. A
separate criterion has been established for the companies to have an Independent Director.
Basically, we can say that an independent director is a non-executive director of a company
who helps the company in improving corporate credibility and governance standards. He/ She
does not have any kind of relationship with the company that may affect the independence of
his/ her judgment.
The term “Independent Director” has been defined in the Act, along with several new
requirements relating to new requirements relating to their appointment, duties, role, and
responsibilities. The provisions relating to appointment of Independent directors are
contained in Section 149 of the Companies Act, 2013 should be read along with Rule 4 and
Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014

Applicability On Appointing An Independent Director

Listed Public Company

Every listed public company shall have
 at least one-third of a total number of directors as independent directors.

Any fraction contained in that one-third shall be rounded off as one.

Unlisted Public Company

The Central Government may prescribe the minimum number of independent directors in
case of any class(es) of public companies.
As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014,
the following classes of companies shall have at least 2 directors as independent directors.
 Public Companies with paid-up share capital of Rs. 10 crores or more.
 Public Companies with turnover of Rs. 100 crore or more.
 Public Companies with aggregate outstanding loans, debentures, and deposits,
exceeding Rs. 50 crores.

Every independent director shall, at first meeting of the board in which he participates as a
director and thereafter at the first meeting of the Board in every financial year or when a
situation arise which effects his status of independence
The terms and conditions of appointment of independent directors shall also be posted on the
company’s website.

Role of an Independent Director

Independent Director acts as a guide, coach, and mentor to the Company. The role includes
improving corporate credibility and governance standards by working as a watchdog and help
in managing risk. Independent directors are responsible for ensuring better governance by
actively involving in various committees set up by company
The independent directors are required because they perform the following important role :
1. facilitate withstanding and countering pressures from owners;
2. fulfill a useful role in succession planning;
 3. on issues such as strategy, performance, risk management, resources, key
appointments and standards of conduct he must support in gaining independent
judgment to bear on the board’s deliberations
4. while evaluating the performance of board and management of the company bring an
objective view
5. scrutinizing, monitoring and reporting management’s performance regarding goals
and objectives agreed in the board meetings
6. safeguard the interests of all stakeholders, particularly the minority shareholders;
7. balance the conflicting interest of the stakeholders;
8. satisfying themselves that financial controls and systems of risk management are in
operation and check on the integrity of financial information
9. in situations of conflict between management and shareholder’s interest, aim towards
the solutions which are in the best interest of the company
10. establishing the suitable levels of remuneration of

 executive directors,
 key managerial personnel
 senior management

One Person Company (“OPC”)

Section 2(62) of the Companies Act, 2013 (“Act”) defines OPC as a company which has only
one person as a member.

Legal Nature of OPC

OPC can be registered only as a private company which means that all the provisions
applicable to private company will be applicable to an OPC, unless otherwise expressly
excluded in the Act or rules made thereunder.

How OPC is different from a ‘Sole Proprietorship’

Naming the OPC

Section 3(1)(c) of the Act provides that the words ‘One Person Company’ must be mentioned
below the name of the company in bracket wherever it appears.

Who can incorporate an OPC?

Any naturally born Indian who is also a resident of India (i.e. have stayed in India for at least
182 days during the immediately preceding FY). However, one of such person cannot form
more than one OPC.

Restriction on Incorporation of an OPC

OPC cannot be incorporated or converted into Section 8 Company (i.e. company with
charitable objects, etc.) or carry out non-banking financial activities, including investment in
securities of any body corporate.

How many types of OPCs can be incorporated under the Act?

There can be five types of OPCs that can be incorporated under the new Act, viz.

1. OPC Limited by Shares;

2. OPC Limited by Guarantee with Share Capital;

3. OPC Limited by Guarantee without Share Capital;

4. Unlimited OPC with Share Capital, and

5. Unlimited OPC with Share Capital.

OPC Limited by Shares

Just like a private company limited by shares, an OPC must have a minimum paid-up capital
of Rs. 1 Lakh and cannot make invitation to public to subscribe for its securities. The
restriction on right to transfer shares as applicable to a private company shall also apply to an
OPC.

Members and Directors in an OPC

The minimum and maximum number of members in an OPC can be only one. As per Section
152(1) of the Act, an individual being member of OPC is deemed as First Director of the
OPC until the director(s) are duly appointed by the member. The minimum and maximum
number of directors in an OPC can be one (1)and fifteen (15) respectively. In order to
increase the number of directors beyond 15 directors, a special resolution must be passed by
the OPC to that effect.

Nominee in an OPC

An OPC must mention one person as ‘Nominee’ in the event of death, incapacity, etc. who
will- (a) become a member of OPC; (b) be entitled to all shares of the OPC, and (c) bear all
liabilities of OPC. However, written consent of such Nominee to act as nominee must be
obtained and filed with the RoC at the time of incorporation along with MoA and AoA.

A Nominee may, withdraw his consent by giving a notice in writing to the sole member and
to the OPC. The sole member then nominates another person as nominee within 15 days of
the receipt of the notice of withdrawal. Further, the OPC is required to file with RoC: (a)
notice of such withdrawal of consent; (b) name of the new person nominated by it (in Form
No INC-4 along with the fee as provided in the Companies (Registration offices and fees)
Rules, 2014), and (c) written consent of the new person so nominated (in Form No.
INC.3).The above filing requirement has to be fulfilled within 30 days of receipt of the notice
of withdrawal of consent from the earlier nominee. Also, a Nominee can be changed at any
time by providing a notice to the RoC.

Ordinary and Special Resolutions by an OPC

Section 114 of the new Act is talks about ordinary and special resolutions. As per S. 122(3), it
will be enough for an OPC, if the resolution is communicated by the member to the Company
in the minutes book (as required under section 118) and signed and dated by the member.
Such date will be then considered as date of meeting. Where there is only one director on the
Board of an OPC, a resolution by such director must be entered into the minutes book and
signed and dated by such director.

Board Meetings and AGM

OPC (also Small Cos. and Dormant Cos.) is deemed to have complied with S. 173, if at least
one meeting of the BOD is has been conducted in each half of a calendar year and the gap
between two meeting is not less than 90 days. Section 173 and 174 (Quorum of Meeting of
BOD) will not apply to an OPC in which there is only one director on its Board. Further, an
OPC is not required to hold an AGM.

Financial Statements of an OPC

Financial Statement of an OPC must be approved by the Board and needs to be signed by
only one director for submission to the auditor. It is to be noted that an OPC need not prepare
Cash Flow Statement as part of its financial statement. The copy of such financial statement
along with other documents etc. must be filed with the RoC within 180 days from the closure
of the financial year. Report of the Board to be attached to the financial statement shall mean,
in case of an OPC, a report containing explanations or comments by the Board on every
qualifications, reservations or adverse remarks or disclaimer made by the auditor in his
report.

Annual Returns & Auditor’s Report of an OPC

Annual Returns of an OPC must be signed by a company secretary and the director. In case
there is no company secretary, the signature is required only from the Director. Mandatory
rotation of auditor after expiry of maximum term is not applicable to an OPC.

Contract between OPC and Member

Where an OPC enters into a contract with its sole member (who is also the director), unless
the contract is in writing, the OPC should shall ensure that the terms of the contract/ offer are
incorporated in the memorandum of the OPC or recorded in the first meeting of the Board
held next after entering into such contract. The above provision is, however, not applicable if
the contracts are entered into by the company in the ordinary course of business. The other
requirement is that the OPC must intimate the RoC about every such contract recorded in the
minute book of its Board under section 193(1) within 15 days of the date of approval by the
Board.

Penalty of non-compliance with the provision of the Act

If an OPC or any officer of such company contravenes the provisions of Co. Incorporation
Rules, 2014, such contravening party will be punishable with fine which may extend to Rs.
10,000/- and with a further fine which may extend to Rs. 1000 for every day after the first
during which such contravention continues.

Duties of Director

Major Corporate Debacles of recent times like Kingfisher, Sahara, Satyam etc has again and
again proved the inability of Company Act 1956 to be ineffective in upholding Corporate
Governance. Every time it is the Directors who are responsible in breaking Shareholders
expectation and sometimes betraying the sentiments of stakeholders under a false veil of
charisma, while using the corporate mechanism to fulfill personal welfare. To meet this
challenge Companies Act 2013 has been enacted almost 50 years after the last amendment. It
is built on the principles of responsibility of the Board, protection of interests of the
Shareholders, self- regulation and openness through disclosures. The 2013 amendment has
ensured several effective measures through clearly defining liabilities and responsibilities of
the Directors and penal actions on failure to follow the same.

 The duties, liabilities and responsibilities which promotes corporate governance

through the sincerest efforts of directors in efficient management and swift
resolution of critical corporate issues and sincere and mature decision making to
avoid unnecessary risks to the corporate entity and its shareholders.
 Keeping the interests of company and its stakeholders ahead of personal interests.

Now let us delve into the Section 166 of the 2013 Act that stipulates the Duties of the
Directors as follows:

1. A director must act in accordance with the Articles of Association of the company
2. A director must pursue the best interests of the stake holders of the company, in
good faith and to promote the objects of the company.

3. A director shall use independent judgement to exercise his duties with due and
reasonable care , skill and diligence.

4. A director should always be aware of conflict of interest situations and should try
and avoid such conflicts for the interest of the company.

5. Before approving related party transactions, the Director must ensure that adequate
deliberations are held and such transactions are in interest of the company.
 6. To ensure vigil mechanism of the company and the users are not prejudicially
affected on account of such use.

7. Confidentiality of sensitive proprietary information, commercial secrets,

technologies, unpublished price to be maintained and should not be disclosed
unless approved by the board or required by law.

8. A Director of a Company shall not assign his office and any assignment so made
shall be void.

9. If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one Lakh Rupees but
which may extend to five Lac Rupees.

To ensure independence and equitableness of the Board, the Companies Act 2013 also casts
various responsibilities on the Independent Directors. An Independent Director is a member
of the Board of Directors,but doesn’t own any share of the company nor does have any
financial relationship with the company other the sitting fees it receives. As per Schedule IV
of the Companies Act 2013

1. Protecting and promoting interests of all and specially for Minority Stakeholders
2. Acting as a mediator in case of Conflict of Interest amongst the stakeholders

3. Assistance in forwarding independent and equitable judgement to the Board of

Directors

4. Adequate attention towards related party transactions

5. Honest and impartial reporting of any unethical behavior, violation of code of

conduct or any suspected fraud in the contract.

Types of Directors-
1. Residential Director- As per Section 149(3) of Companies Act,2013 every company shall
at one director who has stayed in India for a total Period of not less than 182 days in the
Previous calendar year.
2. Independent Director- As per section 149(6) an independent director in relation to a
company, means a director other than a Managing Director, Whole Time Director Or
Nominee Director. Companies which have to appoint Independent Director:- As per Rule 4
of Companies (Appointment and Qualification of Directors) Rules,2013 the following class
of companies have to appoint atleast two independent directors:-
A} Public Companies having Paidup Share Capital-Rs.10 Crores or More;
B} Public Compnies having Turnover- Rs.100 Crores or More;
C} Public Companies have total outstanding loans, debenture and deposits of Rs. 50
Crores or More.
Person Qualified for Independent Directorship-
A) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
& experience;
B) i) Who is or was not a promoter of the Company or its Holding, Subsidiary or Associate
Company(HSA Companies);
ii) Who is not related to Promoters or directors in the company, its HSA companies;
C) Who has or had no Pecuniary (relating to Money) relationship with Company and its HSA
company or their promoters, directors during the 2 immediately preceding financial years or
during the current financial year;
D) none of whose relatives has or had pecuniary relationship with company, its HSA
company or their Promoters, directors -amounting to 2% or more of its gross turnover or total
income; -or fifty lakhs or such higher amount as may be prescibed, whichever is lower.
During the 2 immediately preceding financial years or during current financial year.
E) Who neither himself nor any of his relative-
1. Holds or has held the position of KMP or has been employee of the Company or its HSA
companies in any of the 3 financial years;
2. He or his relative has an employee or proprietor or a partner in any of the three financial
years immediately preceding the financial year in which he is proposed to be appointed- as a
auditor firm, Company Secretary in practice, Cost Auditor, Legal Consultant of the company
or its HSA companies;
3. Holds with relaives 2% or more of the total voting power of the Company;
4. He or his has not be Chief Executive or Director of any Non-Profit Organization that
receive 25% of its receipt from the Company or HSA Companies or its Promoters or directors
or that NGO holds 2% or more of the total voting power of the Company.
F) Who possesses such other qualification as may be prescribed. Tenure of Director: - an
independent director hold office for a term up to 5 consecutive years, -Also eligible for
reappointment by passing Special Resolution and require its reappointment in Boards Report.
-He shall not hold office for more than 2 Consecutive terms but shall not be eligible to
appoint after expiration of 3 Years of ceasing to become an independent director.
Remuneration to Independent Director- An independent director shall not be eligible for any
stock option as per section 149(9) of Act. But they may receive remuneration by way of fee
provided under section 197(5) of the Act. Sitting fees for Board meeting and other committee
meeting shall not be exceed Rs. 1,00,000 per meeting.
3. Small Shareholders Directors- A listed Company may have one director elected by small
shareholders. May appoint upon notice of not less than 1000 Shareholders or 1/10th of the
total shareholders, whichever is lower have a small shareholder director which elected form
small shareholder.
 4. Women Director- As per Section 149 (1) (a) second proviso requires certain categories of
companies to have At Least One-Woman director on the board. Such companies are any
listed company, and any public company having-
1. Paid Up Capital of Rs. 100 crore or more, or
2. Turnover of Rs. 300 crore or more.

5. Additional Directors: Any Individual can be appointed as Additional Directors by a

company under section 161(1) of the New Act.
6. Alternate Directors- As per Section 161(2) A company May appoint, if the articles
confer such power on company or a resolution is passed (if an Director is absent from
India for atleast three months).
 An alternate Director cannot hold the office longer than the term of the Director in
whose place he has been appointed.
 Additionally, he will have to vacate the office, if and when the original Director
returns to India.
 Any alteration in the term of office made during the absence of the original Director
will apply to the original Director and not to the Alternate Director.
7. Shadow Director- A person, who is not appointed to the Board, but on whose directions
the Board is accustomed to act, is liable as a Director of the company, unless he or she is
giving advice in his or her professional capacity.
8. Nominee Directors- They can be appointed by certain shareholders, third parties through
contracts, lending public financial institutions or banks, or by the Central Government in case
of oppression or mismanagement.

APPOINTMENT OF MANAGING DIRECTOR, WHOLE – TIME DIRECTOR OR

MANAGER (SECTION 196):

A company can appoint either Managing Director or Manager not both. {Sub – section (1)}

Appointment of Managing Director, Whole – Time Director or Manager shall only be for a
term which must be less than five years. However, the company may re-appointment them for
next term before expiry of their present term but not earlier than one year before expiry of the
term. This means, company may re-appoint them for next term in last one year of current
term. {Sub – section (2)}

The minimum age for appointment for these positions is twenty – one years and normal
retirement age is seventy years. Words used in this Section are “shall appoint or continue the
employment of”. A company may appoint a person on these positions, who has attained the
age of seventy years. Where it is proposed to appoint a person who has attained aged of
seventy years, an explanatory statement justifying such appointment shall be annexed to the
notice for motion of appointment. {Sub – section (3)}

Appointee should not be an un-discharged insolvent nor has any time been adjudged as an
insolvent. Appointee has not any time suspended payment to his creditors or has made a
composition with them. Appointee should not be a convict of an offence and sentenced for a
period of more than six months. {Sub – section (3)}

Board of Directors in its meeting shall appoint Managing Director, Whole Time Director or
Manager, subject to the approval of the company in its next General Meeting. This
appointment should be in accordance with provision of Section 197 and Schedule V. Where,
such appointment is at variance to the conditions specified in the schedule, this appointment
shall also be subject to the approval of the Central Government. {Sub – section (3)}

The Notice convening Board or General Meeting for such appointment shall include terms
and conditions of such appointment, remuneration payable and other matter including
interests of directors in such appointment. {Sub – section (4)}

A return of such appointment shall be filed within sixty days of such appointment. {Sub –
section (4)}

Provisions of this Section 196 are applicable to all companies; while, provisions of next
Section 197 which deals with Managerial remuneration are to public companies.

There is a little difference in appointment of Manager, Managing Director or Whole – Time

Director, which reflect from definition clause. While drafting agreement and resolution for
such appointment, one should take care of respective definition. These positions solely
depend upon drafting of appointment documents not only on the designation mentioned in
these documents.

MANAGERIAL REMUNERATION (SECTION 197, 198):

There is no restriction relating to managerial remuneration for a private company. {Section

197(1)}

Total managerial remuneration payable by a public company to its directors (including

Managing Director and Whole Time Director) and Manager in a financial year shall not
exceed eleven percent of net profit of the company. Manner of calculation is given in Section
198. {Section 197(1)}

Any remuneration exceeding 11% of net profit limit may be payable subject to compliance of
conditions given in Schedule V. In case these requirements of Schedule are not fulfilled, such
remuneration will be subject to the approval of Central Government. {First Proviso to Section
197(1)}
The remuneration of any one Managing Director or Whole Time Director or Manager shall
not exceed 5% of net profit. Where, there is more than one Managing Director or Whole
Time Director, the overall limit is 10% of net profit. The remuneration may exceed this limit
only after approval by company in general meeting and after satisfying the conditions given
in this Section and Schedule V. {Second Proviso to Section 197(1)}

The remuneration to other directors shall not exceed 3% of net profit, where there is no
Managing Director, Whole – Time Director or Manager. In any other case, remuneration shall
not exceed 1% of net profit. {Second Proviso to Section 197(1)}

The percentage as mentioned in sub – section (1) shall be exclusive of remuneration

popularly known as sitting fee. {Section 197(2)}

Net profit for this section shall be computed as per method given in Section 198. {Section
197(8)}

In case of no profit or inadequate profit, the company shall pay remuneration to directors,
Managing Directors, Whole Time Directors and Managers in accordance with Schedule V or
with previous approval of Central Government. {Section 197(3)} {Section 197(11)}

The remuneration payable to any director shall be determined either by articles of the
company or by resolution or by special resolution passed by the company where its articles
required for special resolution. The remuneration payable to directors shall be inclusive of all
remuneration payable to him for services rendered by him in any other capacity except
services rendered are of professional in nature and in opinion of Nomination and
Remuneration Committee or of Board of Directors as the case may be, director has requisite
qualification for practice of profession. {Section 197(4)}

A Director may receive remuneration by way of fee for attending meetings of the Board or
committee thereof. The amount of such remuneration shall not exceed the amount prescribed
by the Government. {Section 197(5)}

Remuneration of Director or Manager may be paid monthly payment or otherwise by way of

specified percentage of profit or partly by one and partly by other way. {Section 197(6)}

An Independent Director shall not be entitled of any stock option. Independent Director may
receive fee as per sub – section (5), reimbursement of expenses and profit related commission
as approved by members (in general meeting). {Section 197(7)}

If any director receives directly or indirectly by way of remuneration any sum in excess of
prescribed limit, he shall refund such sum. Until refund, he will keep this sum in trust for the
company. {Section 197(9)}

Without Central Government permission, the company shall not waive recovery of any such
sum. {Section 197(10)}
Every listed company shall disclose ration of remuneration of each director to the median
employees’ remuneration and such other details as prescribed. {Section 197(12)}

Premium paid for “Kay Managerial Personnel Liability Insurance” shall not be included to
the remuneration of any key managerial personnel. However, if such person found guilty,
such premium shall be treated as part of their remuneration. {Section 197(13)}

Any director, receiving commission from the company and Managing Director or Whole
Time Director may receive any remuneration or commission from holding company or
subsidiary company. This information shall be disclosed by company in the Board’s Report.
{Section 197(14).

COMPANY SECRETARY

Role and need of company secretary under Companies Act 2013

The present Companies Act has strengthened the role of company secretaries. Some of the
key areas that have directly impact the role of company secretaries in employment or in
practice due to this Act are as follows:

1. Introduction of secretarial audit

Secretarial Audit is the process to check whether the company is adhering to the legal and
procedural requirements and a process to monitor the company’s compliance with the
requirements of the stated laws. The objective behind the introduction of secretarial audit is to
improve corporate governance and compliance.

According to Section 204 of the Companies Act 2013, it is the duty of the Company
Secretary in practice to perform secretarial audit of every listed company and any such other
class of prescribed companies. The Central Government has prescribed the such other class of
prescribed companies as-

 Every public company with a paid-up share capital of Rs. 50 Crore or more.
 Every public company with a turnover of Rs. 250 Crore or more.

2. Secretarial standards

The objective behind the formulation of secretarial standards is to integrate, harmonize and
standardization of diverse secretarial practices. The Companies Act, 2013 under Section 118
has made the compliance of Secretarial Standards compulsory on meeting of the Board of
Directors and on general meetings.

3. Annual return
Annual return is a comprehensive document contains information regarding share capital,
directors, shareholders, changes in directorships etc about the company. Under the old
Companies Act of 1956 the annual return of the listed companies are required to be signed by
the company secretary in practice. The new Companies Act, 2013 under Section 92 has
widened this requirement by providing that annual returns of companies having such paid up
capital and turnover to be signed and certified by the company secretaries in practice.

4. Appointment of whole-time key managerial personnel

Under Section 203 of the new Companies Act, 2013, the companies has to compulsorily
appoint the whole time Key Managerial Personnel in respect of certain class of companies as
prescribed by the Central Government to ensure good corporate governance and regulation.
The company shall have the following whole-time Key Managerial Personnel (KMP):

 Managing Director, or Chief Executive Officer or manager and in their absence, a

whole-time director.
 Company Secretary.

 Chief Financial Officer.

So this made the appointment of whole-time Company Secretary mandatory for better
efficiency.

5. Functions of company secretary

According to Section 205 of the Companies Act, 2013 the Company Secretary shall discharge
following functions and duties, this is the first time that the duties of the company secretary
have been specified in the company law:

 To report to the Board about the compliance with the provisions of this Act.
 To ensure that the company complies with the applicable secretarial standards.

 To provide to the directors of the company the guidance they require in discharging
their duties, responsibilities and powers.

 To facilitate the convening of meetings and attend Board, committee and general
meetings and maintain the minutes of these meetings.

 To obtain approvals from the Board, general meeting, the government and such other
authorities as required under the provisions of the Act.

 To assist the Board in the conduct of the affairs of the company.

 To assist and advise the Board in ensuring good corporate governance and in
complying with the corporate governance requirements and best practice.

Corporate Social Responsibility or CSR.

 This may sound strange to the ones out there that don’t have a large company or the
people in start-up companies. Make no mistake though that this is an important topic to
think about as this is something that applies to all companies be it large or small.
Regardless of their size, each company is a brand and these brands must continue to
uphold or elevate their reputation in the eyes of the public. For them to do that, they
need to know about CSR which is what we are going to talk about right now.

Without waiting too long time we get started on the basic stuff which is the
definition.

Corporate Social Responsibility or CSR is a corporation’s initiative to assess and

take responsibility for the company’s effects on environmental and social wellbeing.

CSR is the continuing commitment by business to behave ethically and contribute

to the economic development while improving the quality of life of the workforce
and their families as well as that of the local community and society at large.

Basically, this means “good company, good people, good environment.” No one
wants to work for a company that pollutes the environment around them, puts the
workforce in difficulty working conditions. So, companies have the responsibility to
ensure that they only contribute to the betterment and not the detriment.

Now that we got a good idea about what it is its time to ask the next big question,
Why is it important? I know that we all understood the importance that CSR has by
the definition alone but it is always important to gain a little more clarity on the
subject.

With issues such as environmental damage, improper treatment of workers and

production that leads to danger to the customers CSR is becoming more and more
important. For example, imagine a company that does only good. They create the
best environment for the workers and give them everything that they need to get the
job done. They even adopt a few environmental policies that help reduce their
carbon footprint and organize a couple of charities and food drives to help the weak
and destitute.

Now anyone can see that that is a great company and of course people are going to
want to work there and who wouldn’t? If you felt like you were working for a
company that cared about you and the world you live in won’t that motivate you to
do better?

There are also a few stats about how important CSR is and how much companies
pay attention to their reputation.

 Of the total populace, 55% of consumers are ready to pay more for products when
they come from socially responsible companies.
  A whopping 65% of the fortune 500 companies in existence offer matching gift
programs.

 A total of 17.8 billion dollars is the amount that corporations have given to charities in
the last year.

To help you out a little further, here are the top reasons why companies rely and adopt CSR
strategies.

 Better public image

 Better media coverage

 Boosts employee engagement

 Attain and retain investors

 More volunteer participation.

 Varied sources of revenue

Starbucks

In case some of you are unfamiliar with the brand, Starbucks is like Café Coffee day but
much much bigger. The company has been in existence for more than a couple of decades.
From the get-go, it has always strive to operate and conduct itself in an ethical manner. In
Fortune’s Magazine the company is ranked as the fifth most socially responsible company in
2012 (and that is a tough list to crack). There are a lot of reasons for high ranking like how
the company looks for better ways to develop sustainable production of the coffee. Starbucks
have a few guidelines in place called the C.A.F.E practices which are to ensure environmental
leadership, product quality and economic accountability. The company also supports Ethos
Water which is another company that is known to provide clean water for more than a billion
people.

Walt Disney

The super company that has been around since you grandfather was a kid still has a sparkling
reputation. Walt Disney company focuses primarily on the community, the environment and
volunteerism aspects of CSR. They were instrumental in providing aid after the 2010
earthquake that hit Haiti. The company is also known for protecting the environment, giving
proceeds from nature films to plants trees in the rain forest and protects thousands of acres of
coral reef.

Aditya Birla Group

Model villages: One of our unique initiatives is to develop model villages, so each of our
major companies is working towards the total transformation of a number of villages in
proximity to our plants. Making of a model village entails ensuring self-reliance in all aspects
viz., education, health care and family welfare, infrastructure, agriculture and watershed
management, and working towards sustainable livelihood patterns. Fundamentally, ensuring
that their development reaches a stage wherein village committees take over the complete
responsibility and our teams become dispensable