Companies Act 2013

The history of the Indian Company Law began with the Joint Stock Companies Act of 1850. Thereafter, a cumulative process of amendment and consolidation brought us to the most comprehensive and complicated piece of legislation, the Companies Act, 1956.

Companies Act 2013 deals with the formation, regulation, responsibilities, and dissolution of companies. It was introduced to replace its predecessor so that the act is more in accordance with the current corporate scenario. Additionally, this act also aims to encourage growth and development of the economy by simplifying the process of setting up and maintaining an organisation.

To this end, many of the rules and regulations mentioned in Companies Act 1965 has been revamped and modernised. As a result, companies Act 2013 only consists of 29 chapters and 470 sections whereas the Companies Act 1956 had 658 sections and 7 schedules

DEFINITIONS

“associate company”,

in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement;

“authorised capital” or “nominal capital”

means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the  company

body corporate” or “corporation”

includes a company incorporated outside India, but does not include—

(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;

“company”

means a company incorporated under this Act or under any previous company law;

“debenture”

includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company
or not; financial statement” in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement

issued capital”

means such capital as the company issues from time to time for subscription;

member”,

in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;

net worth

means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

paid-up share capital” or “share capital paid-up”

means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paidup in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called;

private company

 means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;

public company”

means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed:

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

share

 means a share in the share capital of a company and includes stock

“subscribed capital”

means such part of the capital which is for the time being subscribed by the members of a company

turnover

 means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year

Companies Act 2013 has defined company as any entity which has come into existence under this act or any other company Act. The main types of company that has been mentioned in this act include – 

One-person Company – It is a type of company which has only one person as to its member.

Private Company – A type of company which can have maximum members up to two hundred and a minimum of two is known as a private company.

Features of a private company are as follows: 

A private company can have a minimum share capital of up to any amount as decided by the members.This type of company cannot freely transfer their share to the public.

Public Company – This refers to those companies where 51% or more shares are held and regulated by central or state governments. Furthermore, this type of company can issue shares to the public. Minimum seven members are needed to form a public company.

Incorporation of Company

Companies Act 2013 also mentions in detail the essential regulations that need to be followed while registering a company under this act. These rules and regulations are discussed below – 

• First, the company needs to choose a suitable name with the last words being either private limited (in case of a private company) or limited (in case of a public company). 
• However, the member needs to keep in mind that the name must not be similar to any other company already registered under the Companies Act 2013. Moreover, the name should not be considered offensive under law or is undesirable by the Central Government.
• Members can ensure that the name chosen for their company does not violate the provisions of names and emblems stated under the prevention of Improper Use Act, 1950, through the name-checking services provided on the official website of the Ministry of Corporate Affairs. 
• An application should be made along with fee and proper documents to the registrar for approval and reservation of the name under Companies Act 2013.
• After applying, the name will be reserved for sixty days from the application date.
• The members then need to fill out form numbers 1, 18 and 32 to apply for registration.
• Memorandum and articles of association should be drafted and then verified by the Registrar.
• Memorandum and articles of association should be stamped and signed by all company members in presence of one witness.
• Members also need to furnish details such as an address, occupation, father’s name, shares subscribed, etc.
• After the above steps are complete, applicants can log in to the official web portal and submit the forms 1, 18, 32, memorandum and articles of association along with other mandatory documents. 

 The steps to form or register a company under Companies Act 2013:

• Step 1: Application for allotment of Director Identification Number in DIR-3: Apply for the Directors identification number by attaching documents - resistance proof, ID proof, copy of verification by the Applicant in DIR - 4 and specimen signature. 
• Step 2: Applicability of name: The name of a company can be reserved by making an application to the registrar.  An application for reservation of name is to be filed through Form No. INC-1 alongwith the fees as provided under the Companies (Registration offices and fees) Rules, 2014.
• Step 3: Application of incorporation of company: Filing of application with the Registrar of companies alongwith relevant documents - Memorandum of Association, Articles of Association, Declaration of accepting Table A, Affidavit from each subscriber in INC - 9 and specimen signature in INC - 10. 
• Step 4: Notice of location of registered office of Company under Incorporation INC-22: Proof of registered office addresses (Lease deed/Conveyance/Rent Agreement with the rent receipts).
• Step 5: Intimation regarding its first directors DIR - 12: e-Form DIR - 12 needs to be filed with the registrar within 30 days from the date of appointment/resignation taking place. 
• Step 6: Declaration prior to commencement of business INC-21: Declaration has to be filled by director within a period of 180 days from the date of incorporation. 

 features of Companies Act 2013

 Companies Act 2013 has introduced new features as given below:

1. Democracy of shareholders: The Companies Act 2013 has introduced new concept of class action suits to make shareholders more knowledgeable and informed about their rights. 

2. More power to shareholders: The Companies Act 2013 has given an eminent importance to shareholders. The Act provides approvals from shareholders on various important transactions. They have been vested with the power to sanction the limit.

3. Corporate social responsibility: The Companies Act 2013 stipulates the class of companies to spend a certain amount on various activities and initiatives to contribute towards corporate social responsibility.

4. Women empowerment: The Companies Act 2013 emphasizes on appointing atleast one woman Director (on certain class of companies). This feature is enacted in order to widen the talent pool enabling big corporation to seek benefits from diversified backgrounds having different opinions. 

5. National Company Law Tribunal: The Act has introduced National Company Law Tribunal and the National Company Law Appellate Tribunal for replacing the Company Law Board and Board for Industrial and Financial Reconstruction. Now, the courts are relieved of their burden, while simultaneously providing specialized justice. 

6. Fast track mergers: The Companies Act 2013 simplifies the procedure of mergers and amalgamations in certain class of companies like - small companies and holding & subsidiary in order to obtain approval of the Indian Government. 

7. Cross borders mergers: The Companies Act 2013 now permits cross border mergers in both ways; a foreign company merging with an India Company and vice versa. But it can only be done with the prior permission of RBI.

8. Strict prohibition on forward dealings and insider trading: The Companies Act 2013 prohibits key managerial personnel and directors from purchasing call and put options of shares of the company. Earlier these regulations were framed by SEBI as the capital market regulator. 

Provisions of Companies Act 2013

The Ministry of Corporate Affairs has notified 12th September 2013 as effective date for 98 sections of Companies Act 2013. Certain important provisions are given below to ensure timely compliance by the companies:

1. Special resolution for borrowing in excess paid - up capital and free reserve: Section 180 of the Companies Act 2013 requires that company cannot borrow in excess of its paid up capital and free reserves, unless approved by the special resolution. A private company is also required to pass special resolution of its proposed borrowing with its existing borrowing exceeds the paid – up capital and free reserves. 

2. Provisions on free reserves: Section 2 (43) defines the free reserve as amount available for distribution according to the latest audited balance sheet. However, it excludes the revaluation reserve and change due to change in carrying value of its assets/liability routed through profit & loss or otherwise. 

3. Limit on maximum partners: The maximum number of persons/partners in any association or partnership cannot exceed 100. This restriction is not applicable on a company formed by professionals like – CAs, CSs, lawyers etc.

4.  Net - Worth: According to Section 2(57) of Companies Act 2013 includes securities premium account; however it excludes write back of depreciation in Net - Worth. 

5. One Person Company: The Indian Companies Act 2013 provides new form of private company, i.e. one person company is introduced. It includes only one director and one shareholder. In case of a private company, minimum 2 shareholders and 2 directors were included.

6. Restriction on composition: Every company will have minimum one director who stays in India for atleast 182 days in the previous calendar year. 

7. Rotation of Auditors: The Act provides rotation of auditors in case of publicly traded companies. The Act also prohibits auditors from performing non - audit services.

Important Sections under the Company Act

The Companies Act 2013 also specifies the responsibilities of a company in certain circumstances within the following sections – 

Section 73  

Companies are barred from inviting or accepting any kind of money deposits from the public under Section 73 of Companies Act 2013. Exceptions under this rule include companies like financial institutions, NBFCs or any other companies specified by the Government of India and the RBI.

Section 135 

A company which has a net turnover of Rs.5 hundred crore or more in the preceding year is required to form a corporate social responsibility committee under Section 135 of Companies Act, 2013.  The committee must have three or more directors, out of which one should act as an independent entity.

Section 139  

A company at its first general annual meeting must appoint an auditor under the regulation of Section 139 of Companies Act 2013. The auditor should hold office for five annual general meetings, starting from the conclusion of the AGM in which he or she was appointed.

Section 180 

Board of directors can sell, lease, or dispose of any undertaking of a company only with the consent of the whole company, as per Section 180 of Companies Act 2013.

Section 185 

According to Section 185 of Companies Act 2013, a company cannot offer any loan directly or indirectly to any of its directors, or any other individual or entity in whom the director is interested.

Section 186 

As per Section 186 of Company Act 2013, companies are not allowed to carry out more than two layers of inter-corporate investment.

Section 188  

A public or private limited company cannot carry out any kind of transactions such as selling, disposing of, leasing, buying of property or land, availing or providing services with a related party under Section 188 of Companies Act 2013. Appointing a related party to any place which is profitable to the company is also prohibited.

Section 189 

As specified under Section 189 of Companies Act 2013, more than one registers should be maintained, containing details of arrangements in which directors are interested, as applicable under Sec 185 of Companies Act 2013 and 188.

Section 197 

Remuneration of directors of a public company must not be more than 11% of net profits earned by the company in a financial year, according to section 197 of Companies Act 2013.

Section 102 of CA, 2013 corresponds to Section 173 of CA, 1956 which specifies the requirement of annexing a statement along with the notice of general meeting where any special business has to be transacted. The important changes in this section are:

i. Interest of not only directors/manager has to be disclosed (as prescribed in CA, 1956) but also that of every key managerial personnel and relatives of directors, manager and KMP.

ii. Earlier, with regard to any special business concerning another company, disclosure of shareholding interest of director/manager in that other company had to be disclosed if such share holding was more than 20%. Now the percentage has been changed to 2% and also the same has been made applicable to all promoters, directors, manager and KMP.

iii. CA, 2013 also specifies that if any benefit accrues to any director, manager, promoter or KMP or their relatives because of non-disclosure or insufficient disclosure, then the concerned person will be deemed to be holding the amount of benefit in trust for the company. This is a new specification under CA, 2013.

iv. CA, 2013 also contains the penalty clause which provides for a penalty of Rs. 50,000/- or 5 times the amount of benefit, whichever is more. Earlier no specific penalty was provided.

v. This Section is applicable to all companies except to a One Person Company.

Earlier, Section 170 of CA, 1956 provided that the provisions of section 173 will apply to private companies only if the Articles do not provide anything otherwise.

MCA has clarified that the provisions of this section will apply to all notices issued on or after 12th September, 2013.

Section 103 – Quorum for meetings

This section corresponds to section 174 of the CA, 1956 which prescribes the quorum for general meetings

Section 180 – Restrictions on powers of Board

This section corresponds to section 293 of CA, 1956 which contains a list of items which can be transacted by the Board only after obtaining approval of the shareholders. The important points of difference are:

i. CA, 2013 mandates approval by means of special resolution only.

ii. CA, 1956 mandated that approval has to be obtained in a meeting. This requirement seems to have been dispensed with in CA, 2013 as the word “meeting” has been replaced with “special resolution”.

iii. This Section is applicable to all companies as compared to only public companies and subsidiaries of public companies as contained in CA, 1956.

MCA has clarified that the provisions of this section will apply to all notices issued on or after 12th September, 2013.

Section 185 – Loans to Directors etc.

This section corresponds to Section 295 of Companies Act, 1956 which contains provisions regarding giving loans to directors and other entities in which directors are interested. The main points of difference in the new Act are:

i. This Section is applicable to all companies as compared to only public companies and subsidiaries of public companies as contained in CA, 1956.

ii. In CA, 1956 loans were permitted with approval of Central Government. Now, the transaction is totally prohibited except in following cases:

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

i. Following transactions are prohibited subject to exception above:

a. Giving of loan, including any loan represented by a book debt

b. Giving any guarantee or providing any security in connection with any loan taken.

ii. The above transactions by the company to following entities are prohibited subject to exception above:

(a)  any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b)  any firm in which any such director or relative is a partner;

(c)  any private company of which any such director is a director or member;

(d) anybody corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Section 192 – Restrictions on non-cash transactions involving directors

This is a new section introduced under CA, 2013. This Section contains that a company has to obtain prior approval its members by means of a special resolution for entering into any agreement relating to acquisition/sale of assets for consideration other than cash between the company and its director, or director of holding, subsidiary or associate company or any other person connected with the director.

The Section also contains that the notice calling the general meeting should include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.

Section 447 to 449 – Punishment for fraud, false statement and false evidence

Section 447 is a new Section under CA, 2013 which deals extensively with fraud. Section 447 defines fraud as:

“fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss

Penalty for Fraud

Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

This section has far reaching consequences as firstly the penalty is very stringent – imprisonment up to ten years, secondly, many sections in the Act are linked to this section by providing in those sections that the penalty is same as that for fraud and thirdly the definition of fraud is very wide in its connotation. It covers all persons including directors, employees, professionals etc.

Section 448 and 449 correspond to Section 628 and 629 of the CA, 1956 respectively. There is no change in the sections except that the penalty has been increased.

Section 450 – Punishment where no specific penalty or punishment is provided

This section corresponds to Section 629A of Companies Act, 1956 and provides penalty for those cases where no specific penalty has been provided in the respective section or any where else in the Act. In CA, 2013 the amount has been raised to Rs. 10,000/- plus Rs. 1,000/- for every day of default as against Rs. 5,000/- plus Rs. 500/- provided in CA, 1956.

This Section has been notified from 12.09.2013 and it means that now for any contravention under the Sections of Companies Act, 1956 also, for which no penalty is provided in the Act, the penalty as provided in CA, 2013 will be applicable.