Module-1
Indian Companies Act 2013
The Companies Act, 2013 was enacted to consolidate and amend the law relating to the
companies. The Companies Act, 2013 was preceded by the Companies Act, 1956. Due to
changes in the national and international economic environment and to facilitate expansion
and growth of our economy, the Central Government decided to replace the Companies Act,
1956 with a new legislation. The Companies Act, 2013 contains 470 sections and seven
schedules. The entire Act has been divided into 29 chapters. A substantial part of this Act is
in the form of Companies Rules. The Companies Act, 2013 aims to improve corporate
governance, simplify regulations, strengthen the interests of minority investors and for the
first time legislates the role of whistle-blowers and provisions relating to class action suit.
Thus, this enactment seeks to make our corporate regulations more contemporary.
Comparison of Companies Act 2013 and Companies Act 1956
Detail Companies Act 1956 Companies Act 2013
Parts 13 NA
Chapters 26 29
Sections 658 470
Schedules 15 7
Applicability of the Companies Act, 2013:
⮚ The provisions of the Act shall apply to-
⮚ Companies incorporated under this Act or under any previous company law.
⮚ Insurance companies (except where the provisions of the said Act are inconsistent with the
provisions of the Insurance Act, 1938 or the IRDA Act, 1999)
⮚ Banking companies (except where the provisions of the said Act are inconsistent with the
provisions of the Banking Regulation Act, 1949)
⮚ Companies engaged in the generation or supply of electricity (except where the provisions
of the above Act are inconsistent with the provisions of the Electricity Act, 2003)
⮚ Any other company governed by any special Act for the time being in force.
⮚ Such body corporate which are incorporated by any Act for time being in force, and as the
Central Government may by notification specify in this behalf.
The Act broadly seeks to achieve the following objectives:
⮚ To promote the development of the economy by encouraging entrepreneurship and
enterprise efficiency and creating flexibility and simplicity in the formation and
maintenance of companies;
⮚ To encourage transparency, accountability and high standards of corporate governance.
⮚ To recognize various new concepts and procedures facilitating ease of doing business
while protecting interests of all the stakeholders;
⮚ To enforce stricter action against fraud and gross non-compliance with company law
provisions.
⮚ To set up institutional structure in the form of various authorities, bodies and panels aswell
as by including recognition of various roles for professionals and other experts
⮚ To cater to the need for more effective and time bound approvals and compliance
requirements relevant in the present context.
Salient features of the Companies Act 2013
1. Class action suits for Shareholders: The Companies Act 2013 has introduced new concept
of class action suits with a view of making shareholders and other stakeholders, more
informed and knowledgeable about their rights.
2. More power for Shareholders: The Companies Act 2013 provides for approvals from
shareholders on various significant transactions.
3. Women empowerment in the corporate sector: The Companies Act 2013 stipulates
appointment of at least one woman Director on the Board (for certain class of companies).
4. Corporate Social Responsibility: The Companies Act 2013 stipulates certain class of
Companies to spend a certain amount of money every year on activities/initiatives reflecting
Corporate Social Responsibility.
5. National Company Law Tribunal: The Companies Act 2013 introduced National Company
Law Tribunal and the National Company Law Appellate Tribunal to replace the Company
Law Board and Board for Industrial and Financial Reconstruction. They would relieve the
Courts of their burden while simultaneously providing specialized justice.
6. Fast Track Mergers: The Companies Act 2013 proposes a fast track and simplified
procedure for mergers and amalgamations of certain class of companies such as holding and
subsidiary, and small companies after obtaining approval of the Indian government.
7. Cross Border Mergers: The Companies Act 2013 permits cross border mergers, both ways;
a foreign company merging with an India Company and vice versa but with prior permission
of RBI.
8. Prohibition on forward dealings and insider trading: The Companies Act 2013 prohibits
directors and key managerial personnel from purchasing call and put options of shares of the
company, if such person is reasonably expected to have access to price-sensitive information.
9. Increase in number of Shareholders: The Companies Act 2013 increased the number of
maximum shareholders in a private company from 50 to 200.
10. Limit on Maximum Partners: The maximum number of persons/partners in any
association/partnership may be upto such number as may be prescribed but not exceeding one
hundred. This restriction will not apply to an association or partnership, constituted by
professionals like lawyer, chartered accountants, company secretaries, etc. Who are governed
by their special laws. Under the Companies Act 1956, there was a limit of maximum 20
persons/partners and there was no exemption granted to the professionals.
11. One Person Company: The Companies Act 2013 provides new form of private company,
i.e., one Person Company. It may have only one director and one shareholder. The
Companies Act 1956 requires minimum two shareholders and two directors in case of a
private company.
12. Entrenchment in Articles of Association: The Companies Act 2013 provides for
entrenchment (apply extra legal safeguards) of articles of association have been introduced.
13. Electronic Mode: The Companies Act 2013 proposed E-Governance for various company
processes like maintenance and inspection of documents in electronic form, option of keeping
of books of accounts in electronic form, financial statements to be placed on company’s
website, etc.
14. Indian Resident as Director: Every company shall have at least one director who has stayed
in India for a total period of not less than 182 days in the previous calendar year.
15. Independent Directors: The Companies Act 2013 provides that all listed companies
should have at least one-third of the Board as independent directors. Such other class or
classes of public companies as may be prescribed by the Central Government shall also be
required to appoint independent directors. No independent director shall hold office for
more than two consecutive terms of five years.
16. Serving Notice of Board Meeting: The Companies Act 2013 requires at least seven days’
notice to call a board meeting. The notice may be sent by electronic means to every
director at his address registered with the company.
17. Duties of Director defined: Under the Companies Act 1956, a director had fiduciary
(legal or ethical relationship of trust) duties towards a company. However, the Companies
Act 2013 has defined the duties of a director.
18. Liability on Directors and Officers: The Companies Act 2013 does not restrict an Indian
company from indemnifying (compensate for harm or loss) its directors and officers like
the Companies Act 1956.
19. Rotation of Auditors: The Companies Act 2013 provides for rotation of auditors and
audit firms in case of publicly traded companies.
20. Prohibits Auditors from performing Non-Audit Services: The Companies Act 2013
prohibits Auditors from performing non-audit services to the company where they are
auditor to ensure independence and accountability of auditor.
21. Rehabilitation and Liquidation Process: The entire rehabilitation and liquidation
process of the companies in financial crisis has been made time bound under Companies
Act 2013.
COMPANY
Meaning
A company is registered association which is an artificial legal person, having an independent
legal, entity with a perpetual succession, a common seal for its signatures, a common capital
comprised of transferable shares and carrying limited liability
Definition
According to justice lord, ‘Lindley’. “Associations of many persons who contribute
money of money‟s worth to a common stock and invest in some trade and business and
who share profit and loss arising therefore”.
Features or Characteristics of Company
1) Registration
The Company is created only when registered under the company’s act of 2013
2) Legal entity
A company is an artificial person with a legal entity of its own. It acts through the board of
directors elected by the shareholders.
3) Common Seal
The Company being an artificial legal entity or person, it can’t act on its own. So, it acts
through natural person’s life or the secretary who is authorised Hence, The need for a
common seal of the company for all the contracts entered into by the Directors or the
secretary. The common seal is like the signature of a company
4) Perpetuity
The Company which is registered never dies with retirement or death of its members as is the
case with partnership. The company will survive for the longer Period.
5) Limited liability
In a company, by shares, the liability of members is limited to the Nominal value of the
shares held by them. In respect of partly paid shares, the liability Extends up to the balance of
the nominal value of shares.
6) Separation of ownership and management
In a company, the shareholders are the Owners but the management is interested to the board
of directors who are separate from Form the body of shares holders.
7) Transferability of shares :
In a public limited company, the shares can be easily Transferred from one person to another.
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Kinds of companies
1) Chartered Company
It a company is incorporated under a special monarch. It is called a chartered company. For
eg: - East Indian company, the chartered bank of Australia, china and India were Incorporated
by the grant of a special royal charter. These companies are not there in India at present
2) Statutory Company
A company which is created by a special act of the legislature is called a statutory company.
The state bank of India, industrial finance corporation, life Insurance, corporation of India etc
are the examples of this kind.
3) Registered Company
A company brought into existence by registration with the Registrar of the companies under
the company‟s act of 2013 is called registered company
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4) Private company
A private company has been defined as a company which:-
Limits the number of members 200
Restricts the transfer of shares from one shareholder to another.
Prohibits an invitation to the public to subscribe to its shares and debentures.
5) Public Company
Public Company is a company which requires at least 7 members to form and there is
maximum limit. It can invite the public to subscribe its shares and debentures and it does not
restrict the transfer of its shares from one shareholder to another. To commence its business,
it must have at least 3 directors & also it should obtain a certificate to commence business
from the Registrar of companies.
6) Unlimited company
The company in which the liability of the members is Unlimited is called unlimited company.
The liability of members is unlimited ie members are liable for the debts of the company to
an unlimited extent in the event of its winding up. But this type of company has become rare.
7) Companies limited by guarantee
In these companies, each member gives a guarantee for the debts of a company upto a certain
extent. Eg: - Trade associations, clubs and societies which formed to promote social and
cultural Activities.
8) Companies limited by shares
In these companies, liability being limited by shares, the member is called upon to pay only
the unpaid amount on the shares held by him. Most of the companies formed today are of this
type & in the following discussion we will deal mainly with this type of company
9) Government company
A company in which not less than 51% of share capital is held by the central government and
or any state government or governments is called a Government company. For Eg: -
Hindustan Aeronautics Limited (HAL), Indian Telephone Industries (ITI), Bharath
Electronics Limited (BEL).
10) Foreign Company
A foreign company is that company which is incorporated in a foreign country, but which has
established a place of business in India. Under section 592 of companies act, every foreign
company must, within 30 days of the Establishment of the business field with the registrar
the following documents.
A) A certified copy of its memorandum and articles of association.
B) The full address of the registered office of the company.
C) The list of directors and the secretary of the company with required particulars.
D) The name and address of the person authorized to receive any notice or documents etc.
11) Non government organisation
Under section 25 of the companies act the central government may under a license direct that
an association be registered as a company with limited liability, without addition to its name
such words as "limited" or "private limited" provided:
a) The company is formed for promoting commerce, charity, religion etc
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b) The company applies its profit in promoting its objects and its not interested in
payment of any dividend.
12) Holding and Subsidiary Company
A company which has control over another Company is called holding company in other
words, a company which holds more than 50% of the share capital in other company is called
a holding company company which is controlled by other company is called a subsidiaries
company. Eg:- Company A has 60% of share capital in Company B Here, Company A is
called a Holding company and Company B is called a subsidiary Company.
A company is deemed to be subsidiary company if any of the following conditions are satisfied
Where the board of directors is controlled by another company
Where the controlling company holds more than half in nominal value of its equity
capital
Where a company is a subsidiary of another company which is subsidiary of a holding
company, that is company C is subsidiary of company B, whereas B is a subsidiary of
holding company A.
Each holding & subsidiary has its own legal entity.
13) Other companies
a) One Man Company
It refers to a company, in which only one person holds the Entire share capital, but in order to
meet the statutory requirements of minimum number Of members, some of dummy members
mostly his relatives, friends, hold one or two Shares each.
b) Listed/quoted company
According to section 2(52) of companies act , a company which has any of its securities listed
on any recognised stock exchange such as BSE & NSE for public trading.
Most exchanges have specific requirements which companies must meet in order to be listed
and continue to stay listed.
c) Small company
Section 2(85) of companies act defines a Small company as a company, other than a public
company-
i.Paid up share capital of which does not exceed 50 lakh Rs or such higher amount as may be
prescribed which shall not be more than 5 crores rupees.
ii.Turnover of which as per its last profit and loss account does not exceed 2 crore rupees or
such higher amount as May be prescribed which shall not be more than 20 crores rupees.
Provided that nothing in this clause shall apply to-
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● A holding company or a subsidiary company
● A company registered under section 8
● A company or body corporate governed by any special
act. Example: Hawkins cookers, zydus wellness, Tata sponge
iron,
d) Body corporate
According to sec 2(11) of companies act "body corporate" or "corporation" includes a
company which is formed and registered in or outside India is known as a Corporation. But
excludes co-operative society, corporation sole and any corporation which is formed by the
notification in the Official Gazette by the Central Government.
e) Global company:
A global company refers to a company that operates in more than one country or that operates
in foreign countries. It can also be referred to as a multinational company or a transnational
company.
• Global companies have invested and are present in many countries. Generally, one
corporate office that is responsible for global strategy.
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.
iv Where two or more persons hold share jointly, they are treated as a single member.
v According to Sec 12 of the Companies Act, the minimum number of members to
vi Form a private company is two. A private company must use the word “Pvt” after its
vii Name.
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 to the public company,
we note the following :
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 th, shares and debentures of the companies
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Difference between Private Company and Public Company
Sl. Basis Private company Public company
No
1 Formation It can commence its business It can commence its business only
immediately after incorporation. It after incorporation as well as
can commence its business only obtained of commencement of
after incorporation as well as business certificates
obtained of
commencement of business
certificate
2 End words It uses the word private limited in It uses the word limited in his name
of the its name.
name
3 3. Minimum 2 members and maximum Minimum 7 members and
Membership 50 members as per 1956 & now maximum unlimited
increased
to 200 as per 2013 Act
4 Prospectus It is not required to file prospectus It must file the prospectus with
with registrar of the the registrar of the
company. company
5 Allotment 5. No legal restriction on allotment There is certain restriction
of of shares
shares
6 MOA / AOA Atleast 2 members must sign Atleast 7 members must sign MOA
memorandum of association & & AOA.
AOA
7 Public issue It is prohibited from inviting public It can invite public to subscribe
of to subscribe capital capital
capital
8 Transfer No shares are transferable and cannot Shares are freely transferable they can
of be quoted in the stock exchange. be quoted on stock exchange.
Shares
.
9 Directors It must have at least 2 directors It must a have at least 3 directors.
10 Minimu It requires at least Rs. 5 lakhs. It requires at least Rs. 1 lakh.
m
capital
requireme
nt.
11 Statuto It doesn’t require to hold It must hold statutory meeting and
ry statutory meeting. File a statutory report with registrar of
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meeti company within 6 months from the date
ng of obtainment of business
commencement
certificate
12 Share warrant It cannot issue share warrant It can issue share warrant
13 Quorum Minimum 2 members must be Minimum 5 members must
present be Present to conduct the
to conduct meeting meeting
14 Manageri No restrictions on Total managerial remuneration
al managerial shouldn’t be more than 11% of
remunerati remunerations net profit.
on
Doctrine or lifting the veil of corporate entity
The Companies Act, 2013 clarifies that a company is a separate entity distinct from its
members. Lifting the corporate veil under the Companies Act, 2013 means ignoring that
a company is a separate legal entity and has a corporate personality. Lifting of
corporate
veil as per Companies Act, 2013 ignores the separate identity of the company and looks
back at the true owners who are in control of the company.
The separate personality is a regulatory advantage, and it must be used for a lawful purpose
only. Whenever and wherever a fraudulent use is made of the legal establishment, the
individuals will not be permitted to hide behind the curtain of corporate personality.
The concerned authority will break this company’s shell and sue the individuals who have
committed such an offence. This lifting of the curtain is called lifting the corporate veil under
the Companies Act, 2013.
The basis on which Corporate Veil is lifted under Companies Act,
2013 Below-mentioned are the grounds on which Corporate Veil is
Lifted-
Under Companies Act, 2013-
1. Misstatement in Prospectus
In a case where the company’s prospectus is misrepresented, the company and every director,
promoter, and every other individual, who authorized such issue of prospectus shall be liable
to compensate the loss to every person who subscribed for shares on the faith of
misstatement. Also, these individuals may be punished with a jail term for a duration of not
less than six months. This duration may be extended to ten years. The concerned company
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and person shall also be liable to a fine that shall not be less than the sum involved in the
fraud but may extend to three times the amount involved in the fraud.
2. Miss description of Name
As per the Companies Rule, 2014, a company shall have its name printed on every official
document, including (hundis, promissory notes, BOE, and such other documents) as may be
mentioned.
Thus, where a company’s officer signs on behalf of the company any contract, BOE, Hundi,
promissory note or cheque or order for money, that individual shall be liable to the holder if
the name of the company is not properly mentioned.
3. Fraudulent conduct
In case of winding up of a company, it comes out that any business has been carried on with
intent to cheat the creditors or any other individual, or for any illicit purpose, if the Tribunal
thinks it proper so to do, be directed in person liable without limitation to obligation for all or
any debts or other obligations of the company.
Liability under the fraudulent conduct may be imposed if it is proved that the company’s
business has been carried on misguiding the creditors.
4. Ultra-Vires Acts
Directors and other officers of a company will be held liable for all those acts they have
performed on the company’s behalf if the same is ultra vires the company.
5. Failure to return the application Money
In case of Public Issue, if minimum subscription, as per the prospectus, has not been received
within thirty days of the issue of prospectus or such other period as may be mentioned, the
application money shall be returned within fifteen days from the closure of the issue.
However, suppose any the application money is not so repaid within such specified time. In
that case, the directors/officers of the company shall jointly and severally be liable to pay that
money with 15% per annum.
Additionally, the defaulter company and its officer shall be liable for a penalty of 1000rs/day
during which such default continues or Rs 100000, whichever is less.
6. Under other Statues-
Apart from the Companies Act 2013, the directors & other officers of the company may be
held personally accountable under the provisions of other statutes. For Instance, under the
Income-tax Act, 1962, where any private company is wound-up and if tax arrears in respect
of any income of any previous year cannot be recovered, every individual who was director
of that company during the relevant preceding year shall be jointly and severally accountable
for payment of tax.
7. Under Judicial Interpretation
While initially the court, based on the principle of the separate entity as well as a district
corporate persona, refused to lift the veil of corporate governance, however, due to the rise of
corporations and the ever-growing conflict between corporations and their different
stakeholders, courts have taken a more pragmatic strategy and have lifted the veil of
corporate governance.
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It isn’t easy to record every court decision in which the veil was lifted. However, there are
various circumstances where the veil of corporate character can be taken off, and the people
who are behind the corporate entities could be found out and punished.
1. Improper conduct and Prevention of Fraud.
2. Formation of the Subsidiary company to act as Agent.
3. Economic offence
4. Revenue Protection
5. The company used it for illegal purposes.
6. Company ignoring welfare legislations.
7. Company acting a mere fraud.
The Lifting of Corporate veil under the Companies Act 2013 helps ensure that corporate personality is
used for legal purposes and not on fraudulent practices or illegal activity.
Corporate Social Responsibility (CSR)
Meaning
Corporate social responsibility (CSR) is a self-regulating business model that helps a
company be socially accountable to itself, its stakeholders, and the public. By practicing
corporate social responsibility, also called corporate citizenship, companies can be conscious
of the kind of impact they are having on all aspects of society, including economic, social,
and environmental.
Definition
The Act does not define the term CSR. As per rule 2(c) of the CSR Rules “Corporate Social
Responsibility means and includes but is not limited to:
A. Projects or programs relating to activities specified in Schedule VII of the Act; or
B. Projects or programs relating to activities undertaken by the board of directors of a
company (Board) in pursuance of recommendations of the CSR Committee of the
Board as per declared CSR Policy of the company subject to the condition that such
policy will cover the subjects enumerated in Schedule VII of the Act.”
Scope of Corporate Social Responsibility
1. Health and safety: This includes workplace injury, customer and supplier injury and harm to
third part.
2. Environmental protection: Energy use, emissions (notably carbon dioxide), water use
and pollution, impact of product on environment, recycling of materials and heat
3. Staff welfare: Issues such as stress at work, personal development, achieving work/life
balances through flexibility, equal opportunities for disadvantaged or minority groups.
Medical assistance may fall also under the scheme of staff welfare.
4. Customer welfare: Through content and description of products, non-exclusion of
customer groups, fair dealing and treatment
5. Supply-chain management: Insisting that providers of bought-in supplies also have
appropriate CSR policies, ethical trading, elimination of pollution and un-recycled
packaging, eliminating exploitative labor practices amongst contractors
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6. Ethical conduct: Staff codes for interpersonal behavior, prohibitions on uses of data and
IT, management forbidden from offering bribes to win contracts, ensuring non-
exploitation of staff
7. Engagement with social causes: This includes secondment of management and staff,
charitable donations, provision of free products to the needy, involvement in the local
community, support for outreach projects such as cultural improvement or education
Provisions for CSR Activities under Schedule VII of companies Act
Activities which may be included by companies in their Corporate Social Responsibility
Policies Activities relating to:—
(i) Eradicating extreme hunger and poverty;
(ii) Promotion of education;
(iii) Promoting gender equality and empowering women;
(iv) Reducing child mortality and improving maternal health;
(v) Combating human immunodeficiency virus, acquired immune deficiency syndrome,
malaria and other diseases;
(vi) Ensuring environmental sustainability;
(vii) Employment enhancing vocational skills;
(viii) Social business projects;
(ix) Contribution to the Prime Minister's National Relief Fund or any other fund set up by
the Central Government or the State Governments for socio-economic development
and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes,
other backward classes, minorities and women.
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