The Companies Act, 2013 is an important legislation in India that governs the functioning and regulation of companies. In this detailed explanation, we will cover the key provisions and aspects of the Companies Act, 2013, providing you with a comprehensive understanding of its provisions.
The Companies Act, 2013 is an Act of the Parliament of India that replaced the Companies Act, 1956. It was enacted to bring about significant changes in corporate governance and to align the Indian corporate sector with international standards. The Act consists of 470 sections divided into 29 chapters, along with various schedules and rules.
Incorporation of Companies:
The Companies Act, 2013 provides provisions for the incorporation and registration of different types of companies. It recognizes several types of companies, including private companies, public companies, one-person companies, and producer companies.
- Private Company:
A private company is defined as a company with a minimum paid-up share capital as prescribed by law, and by its articles, restricts the transferability of shares, limits the number of members to a maximum of 200, and prohibits any invitation to the public to subscribe to its shares or debentures. The Act sets out the procedures and requirements for the incorporation of a private company.
- Public Company:
A public company is a company that is not a private company. It can issue shares to the public and can be listed on a stock exchange. The Act provides regulations for the incorporation of public companies, including requirements related to minimum capital, number of directors, and compliance with various legal formalities.
- One Person Company (OPC):
The concept of OPC was introduced in the Companies Act, 2013, allowing a single individual to form a company. OPCs have limited liability and are not required to have a minimum number of shareholders. However, an OPC must nominate a nominee who will take over the company in case of the sole member’s death or incapacity.
- Producer Company:
The Act provides for the formation of producer companies, which are companies formed by a group of producers engaged in the production, marketing, or sale of primary produce. These companies aim to improve the income and well-being of their members by facilitating cooperative efforts.
Memorandum of Association (MoA) and Articles of Association (AoA):
Every company, at the time of incorporation, is required to prepare a Memorandum of Association and Articles of Association.
- Memorandum of Association:
The MoA is a legal document that defines the company’s objectives, scope of activities, and powers. It sets out the company’s name, registered office, capital clause, liability of members, and other fundamental details. The MoA is a public document and can be inspected by anyone.
- Articles of Association:
The AoA contains the internal rules and regulations that govern the management and operations of the company. It defines the rights, duties, and powers of the company’s members, directors, and officers. The AoA specifies details regarding share capital, transfer of shares, appointment and removal of directors, conduct of meetings, and other operational matters. The AoA is a private document and is not available for public inspection.
- Alteration of MoA and AoA:
The Act provides procedures for altering the MoA and AoA of a company. Any change to the MoA or AoA requires shareholder approval through a special resolution, along with compliance with other legal formalities. The alteration must be filed with the Registrar of Companies for record- continued
Promoters and Promoter’s Contracts:
The Companies Act, 2013 defines a promoter as a person who initiates the formation of a company, takes steps to bring it into existence, and controls its affairs during its early stages. Promoters play a crucial role in the incorporation and initial setup of a company.
- Duties and Liabilities of Promoters:
Promoters have certain duties and liabilities towards the company and its shareholders. They must act in good faith, disclose all material facts, and not make secret profits. Promoters can be held liable for any misrepresentation, non-disclosure of information, or fraudulent actions during the formation of the company.
- Promoter’s Contracts:
The Act also deals with promoter’s contracts, which are contracts entered into by the promoters on behalf of the company before its incorporation. Such contracts may be ratified or adopted by the company after its incorporation, subject to certain conditions. However, if the company does not ratify the contract, the promoter remains personally liable for any obligations arising from it.
Prospectus and Allotment of Securities:
When a company intends to raise capital from the public by issuing shares or debentures, it is required to prepare a prospectus containing all the relevant information about the company, its operations, financials, and terms of the issue. The Act lays down detailed provisions regarding the contents of the prospectus, its registration with the Registrar of Companies, and the obligations of the company and its directors in relation to the prospectus.
- Allotment of Securities:
The Act regulates the allotment of securities by companies. It mandates that securities must be allotted within a specified time and in compliance with the provisions of the Act. Allotments must be made on a fair and non-discriminatory basis, and companies are prohibited from issuing shares at a discount, except in certain specified cases.
Securities and Exchange Board of India (SEBI):
The Act also recognizes the regulatory role of the Securities and Exchange Board of India (SEBI) in relation to the issuance and listing of securities. SEBI is the primary regulatory authority for the securities market in India and has the power to regulate and supervise public issues, listing requirements, and disclosure norms.
Share Capital and Debentures:
The Companies Act, 2013 provides detailed provisions regarding the share capital and debentures of companies.
- Share Capital:
The Act defines different types of share capital, including equity shares, preference shares, and rights shares. It sets out rules for the issue, transfer, and buyback of shares, as well as the payment of dividend and maintenance of share capital accounts. The Act also regulates the reduction of share capital and provides procedures for altering the share capital structure.
Debentures are debt instruments issued by companies to raise funds. The Act governs the issuance, terms, and redemption of debentures. It requires companies to create a Debenture Redemption Reserve (DRR) to ensure the availability of funds for the repayment of debentures.
- Buyback of Securities:
The Act permits companies to buy back their own securities, subject to certain conditions and procedures. Buyback of securities can be done out of free reserves, securities premium account, or proceeds of a fresh issue of shares or other specified sources. The Act specifies the limits, timing, and methods for buyback, and requires companies to maintain necessary records and comply with reporting requirements.
Directors and Key Managerial Personnel:
The Companies Act, 2013 contains provisions regarding the appointment, qualifications, powers, and duties of directors and key managerial personnel.
- Appointment and Qualifications of Directors:
The Act sets out the procedures and qualifications for the appointment of directors, including the minimum and maximum number of directors, their retirement by rotation, and the filling of casual vacancies. It also mandates the requirement of obtaining Director Identification Number (DIN) and the filing of Director’s Report.
- Independent Directors:
The Act introduced the concept of independent directors to ensure the independence and impartiality of the board of directors. It specifies the criteria for determining independence and lays down the roles, responsibilities, and liabilities of independent directors.
- Key Managerial Personnel (KMP):
The Act defines key managerial personnel, which includes the managing director, whole-time director, and company secretary. It prescribes qualifications, appointment procedures, and roles of KMPs. Certain obligations, such as signing the financial statements, are specifically assigned to KMPs.
Board Meetings and General Meetings:
The Act provides regulations regarding board meetings and general meetings of companies.
- Board Meetings:
It sets out the frequency and procedures for conducting board meetings, including the notice period, quorum requirements, voting procedures, and minutes of the meeting. The Act emphasizes the importance of board meetings for decision-making and requires the maintenance of proper records.
- General Meetings:
General meetings, such as annual general meetings (AGMs) and extraordinary general meetings (EGMs), are platforms for shareholders to participate in decision-making and raise concerns. The Act outlines the procedures for conducting general meetings, including the notice period, quorum requirements, and voting methods. It also provides provisions for proxy voting and electronic voting.
Corporate Social Responsibility (CSR):
The Companies Act, 2013 mandates certain companies to undertake corporate social responsibility activities and contribute a specified percentage of their profits towards CSR.
- CSR Applicability:
The Act applies to companies meeting specific criteria, such as a net worth of a certain amount, turnover exceeding a prescribed limit, or a net profit above the specified threshold. Such companies are required to spend a minimum percentage of their average net profits of the preceding three years on CSR activities.
- CSR Activities and Reporting:
The Act provides a list of eligible CSR activities, including eradicating hunger and poverty, promoting education, gender equality, and environmental sustainability. It requires companies to form a CSR committee, develop a CSR policy, and disclose their CSR initiatives in their annual reports.
- Corporate Governance:
The Companies Act, 2013 emphasizes the importance of corporate governance and lays down provisions to ensure transparency, accountability, and ethical practices in companies.
- Corporate Governance Framework:
The Act establishes a framework for corporate governance, including provisions related to independent directors, audit committees, nomination and remuneration committees, and related party transactions. It encourages the adoption of best practices to safeguard the interests of shareholders and stakeholders.
- Disclosure and Reporting:
The Act mandates companies to make various disclosures and file regular reports to ensure transparency. It requires companies to prepare and file financial statements, directors’ reports, and other statutory reports within specified timelines. Companies are also required to disclose information regarding their shareholding patterns, related party transactions, and corporate social responsibility activities.
Characteristics of a Company
A company is a legal entity formed under the provisions of the Companies Act or similar legislation in various jurisdictions. It is important to understand the characteristics of a company to grasp its nature and functioning.
- Legal Entity: A company is a separate legal entity distinct from its shareholders or members. It has its own rights, liabilities, and obligations, and can sue or be sued in its own name. The company’s debts and liabilities are generally limited to its assets, protecting the personal assets of its shareholders.
- Limited Liability: One of the most significant characteristics of a company is limited liability. The liability of the shareholders or members is limited to the amount they have invested in the company in the form of shares or other contributions. Their personal assets are not at risk, except in certain exceptional circumstances where personal guarantees are involved.
- Separate Legal Personality: A company has a separate legal personality, meaning it can enter into contracts, own property, and conduct business in its own name. The actions and obligations of the company are distinct from those of its shareholders or directors. The company’s legal rights and obligations continue even if there are changes in its ownership or management.
- Perpetual Succession: A company enjoys perpetual succession, which means its existence continues even if there are changes in its membership or ownership. The death, insolvency, or retirement of shareholders does not affect the company’s continuity. The company can continue to operate and fulfill its contractual obligations independently.
- Transferability of Shares: Companies have shares that represent ownership interests. These shares are transferable, allowing shareholders to buy or sell their shares to others. The transfer of shares does not affect the company’s existence or operations. However, private companies may have certain restrictions on the transferability of shares as per their articles of association.
- Separate Management: Companies are managed by their board of directors, who are appointed or elected by the shareholders. The shareholders have the power to appoint and remove directors, but they do not directly participate in day-to-day management activities. The directors are responsible for the company’s strategic decisions, policy-making, and overall management.
- Limited Decision-Making: Major decisions in a company are made through a democratic process. The shareholders exercise their decision-making powers in general meetings, such as annual general meetings, where important matters like appointment of directors, approval of financial statements, and dividend distribution are discussed and voted upon.
- Regulatory Compliance: Companies are subject to various legal and regulatory requirements. They must comply with the Companies Act, other relevant legislation, and regulations applicable in their jurisdiction. They are required to maintain proper books of accounts, file annual reports, and meet statutory obligations related to taxation, employment, and corporate governance.
- Ability to Raise Capital: Companies have the advantage of being able to raise capital by issuing shares or other securities to the public or private investors. This provides them with a means to finance their operations, investments, and growth. The ability to raise funds from a wide pool of investors enhances their financial capabilities.
- Separate Taxation: Companies are subject to separate taxation. They are required to file their tax returns and pay taxes on their profits. The tax rates and regulations may vary depending on the jurisdiction and the type of company. Shareholders may also be liable for taxes on dividends or capital gains they receive from the company.
Types of Companies
There are several types of companies that can be formed under the Companies Act or similar legislation in different jurisdictions. The specific types of companies may vary depending on the country’s legal framework. Here are some common types of companies:
- Private Limited Company: A private limited company, often denoted as “Pvt. Ltd.” or “Limited (Ltd.)”, is a privately held company with a minimum number of two members and a maximum of 200 members. It restricts the transferability of shares and prohibits inviting the public to subscribe to its shares or debentures. This type of company is suitable for small to medium-sized businesses.
- Public Limited Company: A public limited company, denoted as “Limited (Ltd.)”, is a company that offers its shares to the public and can be listed on a stock exchange. It must have a minimum number of seven members, and there is no upper limit on the maximum number of members. Public limited companies have more stringent regulatory requirements and are suitable for larger businesses seeking to raise capital from the public.
- One Person Company (OPC): An OPC is a type of private limited company that can be formed with only one person as a member and director. It provides a separate legal entity with limited liability to the sole member. OPCs are suitable for individuals who want to establish a company on their own, allowing them to operate as a separate legal entity while enjoying limited liability.
- Not-for-Profit Company: Not-for-profit companies, also known as Section 8 companies (under the Indian Companies Act, 2013), are formed for promoting arts, science, commerce, sports, education, research, social welfare, religion, charity, or other similar objectives. These companies do not distribute profits to their members and utilize their income for the promotion of their stated objectives.
- Foreign Company: A foreign company is a company incorporated outside a particular jurisdiction but operates within that jurisdiction, either through a branch office or as a subsidiary. Foreign companies are subject to specific regulations and reporting requirements in the jurisdiction where they operate.
- Holding Company: A holding company is a company that controls and holds the majority of shares or has control over the composition of the board of directors of other companies (subsidiary companies). The primary purpose of a holding company is to exercise control and manage its subsidiary companies.
- Subsidiary Company: A subsidiary company is a company in which the majority of shares are owned by another company (the parent company). The parent company, known as the holding company, has control over the subsidiary’s composition of the board of directors and can influence its operations and decision-making.
- Joint Venture Company: A joint venture company is formed when two or more independent entities come together to carry out a specific business project or activity. The joint venture company operates as a separate legal entity and is owned by the participating entities in a predetermined proportion.
- Government Company: A government company is a company in which the government, either central or state, holds a controlling stake. These companies are established to undertake commercial activities or provide specific services on behalf of the government.
- Producer Company: A producer company is a type of company formed by individuals engaged in the production, procurement, or sale of primary produce. The primary objective of a producer company is to enhance the income and well-being of its members, who are also the primary producers.
Formation of a Company
The formation of a company involves several steps and legal requirements. The specific process may vary depending on the jurisdiction, but here is a general outline of the steps involved in forming a company:
- Determine Company Type and Structure: Decide on the type and structure of the company you want to form, such as a private limited company, public limited company, or one-person company. Consider factors like ownership, liability, and capital requirements.
- Choose a Name: Select a unique name for your company that complies with the legal requirements of your jurisdiction. Ensure that the chosen name is not already in use and does not violate any trademarks or intellectual property rights.
- Prepare the Memorandum of Association (MOA): The MOA defines the company’s name, registered office address, objectives, authorized share capital, and details of its shareholders. It outlines the company’s main activities and its relationship with its shareholders.
- Prepare the Articles of Association (AOA): The AOA contains the rules and regulations for the internal management of the company. It outlines the powers and duties of the directors, procedures for meetings, voting rights of shareholders, and other operational matters.
- Appoint Directors and Promoters: Determine the individuals who will serve as the company’s directors and promoters. Directors are responsible for managing the company’s affairs, while promoters initiate the company’s formation process.
- Obtain Director Identification Number (DIN): Directors need to obtain a unique DIN from the relevant regulatory authority. This identification number is necessary for legal compliance and official communications.
- Obtain Digital Signature Certificate (DSC): In many jurisdictions, company documents and filings are required to be digitally signed. Directors may need to obtain a digital signature certificate, which provides authenticity to electronic documents.
- File Incorporation Documents: Prepare the necessary incorporation documents, including the MOA, AOA, and other prescribed forms, as required by the applicable laws. Submit these documents to the designated authority, such as the Registrar of Companies, along with the required fees.
- Payment of Stamp Duty and Registration Fees: Pay the applicable stamp duty and registration fees for incorporating the company. The amount varies based on the authorized share capital or other relevant factors.
- Obtain Certificate of Incorporation: Once the authorities review and approve the incorporation documents, they will issue a Certificate of Incorporation. This certificate confirms the legal existence of the company and includes important details such as the company’s registration number.
- Obtain Tax Registrations: Register the company for tax purposes, such as obtaining a tax identification number, value-added tax (VAT) registration, or other applicable tax registrations, as per the jurisdiction’s requirements.
Fulfill Additional Requirements: Depending on the jurisdiction and the nature of the business, there may be additional requirements to fulfill, such as obtaining licenses, permits, or approvals from relevant authorities.