Basic key points of India’s Companies Act 2013

Brief history

In medieval times, traders in England executed their business through partnerships. A financier used to provide capital, in return for a share in the profits of the business. The liability of a financier was limited to the chunk of money he lent. The formation of the Royal Charter, several regulated companies were established. They had a separate legal identity along with a common seal and the authority to transfer shares amongst its members. Another type of company of which materialised were joint-stock companies. Members operated on a joint account with joint-stock. By the end of the 17th century, several indigenous monopolistic syndicates were incorporated. They even invited the public to subscribe to its securities. This led to a boom in the industry. Several industries were incorporated without charters or with obsolete charters. Consequently, the Bubble Cat was passed in 1719 to supervise the companies. The act prohibited the formation of companies, barring those approved by the Royal charter. The intent behind the act was to prevent small companies from sprouting up as it abated the power in the hands of the parliament and to subside the clash with paramount companies. The act remained in force till 1825 and proved to be a failure. Many companies failed to obtain charters for incorporation, stunting growth and development of the industry. Furthermore, it was problematic to sue unincorporated companies as their proprietorship kept changing, and partners apprehended unlimited liability. Likewise, there was no perusal on the activities of unethical promoters. Let us discuss the key provisions of Companies Act 2013.

Ergo, the board of trade was handed responsibility for reviewing company legislation in England. The growth of industrialisation, prompted the formation of several acts. The Trading companies act, 1834, the joint-stock companies act, 1844 were few of the initial acts passed then. The parliamentary committee on joint stock companies headed by William Gladstone spearheaded the passing of the joint-stock companies act, 1844. The act interdicted the formation of unregistered companies, mandating registration of new companies with 25 or more members. Furthermore, the act provided for limited liability to members of a registered company. Successive to sundry amendments, Companies act, 1862 was passed. Post world war-II, there was a shift in economic trends. This paved way for the revocation of old acts and the genesis of new acts.

It is pertinent to appreciate the history behind company law in England, as it is adopted by several commonwealth jurisdictions, including India. It helps provide an insight into the inception of company law in India.

Company law in India

Company laws in India has been earnestly influenced by its counterparts in England. The first company law in India was the joint stock companies act, 1850. This act recognised the concept of a separate legal entity, corporate identity. However, it did not grant the privilege of limited liability to members of a company. It was soon replaced by the Joint Stock Companies Act, 1857 which recognised the concept of limited liability, excluding banking companies. Later, in 1858, the concept of limited liability was extended to banking companies as well.

The first comprehensive act which aimed at consolidating and amending laws relating to incorporation, regulation, and dissolution was the Companies act, 1866. This too was traced on top of the blueprint of its English correspondent. Following several amendments and revocation of the act, the Indian companies act, 1913 was passed. The act floundered despite considerable amendments. Moreover, the industrial revolution was in full swing, aggravating malpractices in the promotion and management of companies.

Thereafter, the government of India appointed a 12-member committee headed by H.C. Bhabha to review the former act and recommend propositions. Consequently, the Indian Companies Act, 1956 was enacted. The act remained in force for six decades with extensive and cogent amendments.

However, the new act failed to keep pace with the burgeoning Indian economy and growing international market post the 1991 economic reforms. Hence, piecemeal amendments in the Act could not serve the changing needs.[1] Therefore, in harmony with recommendations made by the Parliamentary Standing Committee on Finance and suggestions of stakeholders and investors, the Companies Act, 2013 was passed. This was landmark legislation as it brought about manifold concepts such as one-person company, independent director, woman director, corporate social responsibility, etc. This legislation too was based on the companies act in England. However, it has been drafted to accommodate the Indian circumstances and the socio-capitalist pattern of Indian economy to the best possible extent.[2]

New concepts introduced in Companies act 2013

The Companies 2013 act is a benchmark for company law in India, it has brought about many new concepts. This will help foster a positive environment for investment and growth and help India achieve its objectives of a stronger social and economic policy. Some of them are:

1. One-person company, small, associate and dormant company: The inclusion of new companies has been a welcome change, as now even an individual, both Indian citizen as resident in India, can incorporate a company. Section 2(62) defines one-person company as a company having only a single member.

Section 2(85) defines a small company as a company other than a public company having a paid-up share capital not exceeding ₹50 lakhs and a turnover in the immediate preceding financial year not exceeding two crores. Since, it is not a public company, it enjoys all the exemptions granted to private companies.

Section 2(6) defines associate company, in relation to another company, means a company in which the former company has significant influence amounting to at least 20% voting power or control of or participation in business as enounced in the terms of the agreement, but it isn’t its subsidiary company and includes a joint venture company.

Section 455 defines a dormant company as a company which is not active. It is formed and registered, for the purpose for a future project, to hold an asset or intellectual property and has no significant accounting transaction. Rule 3 of the Companies (Miscellaneous) Rules, 2014 states that a company has to pass a special resolution in the general meeting, or issue a notice to all shareholders, and obtain at least 3/4th of their consentfor obtaining the status of a dormant company.

It further increased the maximum number of shareholders under Section 2(68) for a private company.

• Provision for entrenchment of articles: The new act provides for entrenchment of articles of association. Section 5(3) states that articles of a company may contain provisions in regard to entrenchments, whereby specified provisions of the articles can be altered, if more restrictive conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are complied with. Section 14 administers the alteration of articles.
• Promoter: Section 2(69) defines a promoter as a person who has been named in the prospectus or in the company’s financial returns. He has control over the affairs of the company, and the board of directors acts upon his advice or instructions. However, a person who acts merely in his professional capacity is not a promoter. A promoter stands at a fiduciary relationship with the company.[3]
• Private placement of securities:The term was first used by the Sahara India real estate corporation ltd., by issuing optionally fully convertible debentures on private placement basis[4]. However, it was held to be a public offer by SEBI, and upheld by the Hon’ble Supreme Court. Explanation 1 to Section 42 defines private placement as any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by public offer) through private placement offer-cum application, which satisfies the conditions specified in the section. As per Rule 14 of the Companies (prospectus and Allotment of Shares) Rules, 2014, the select group of persons should not exceed 200.
• Resident director: Section 149(3) states that every company shall have at least one resident director who has stayed in India for a period of not less than 182 days in the current financial year. In case of a newly incorporated company, the requirement shall be enforced proportionately.
• Woman director: Second proviso to Section 149(1) expounds that a class of company or class of companies shall have at least one woman director. As per Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, every listed company and any other company having a paid-up share capital of ₹100 crores or more, or turnover of ₹300 crores or more shall have a woman director.
• Independent director: The importance of having an independent director on board was discussed in the recommendations given by the J.J. Irani committee. It explicated that independent companies in public companies with significant public interest would promote corporate governance. Section 149(6) defines independent director as a person of integrity, and who possess relevant expertise and experience. He must not be the promoter of the company or be related to or have any pecuniary relationship with the directors, or promoters of the company. According to Section 149(7), an independent director on his first board meeting, has to give a declaration to the effect that he meets the criteria mentioned in Section 149(6)

Section 149(4) states that every listed company shall have at least 1/3rd of the total number of directors as independent directors. As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, public companies having a paid-up share capital of ten crores or more, or having turnover of ₹100 crores or more, or who have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crores shall have at least two independent directors on its board. Section 149(10) specifies that an independent director shall hold office for a term up to five consecutive years, but shall be eligible for re appointment on passing of a special resolution by the board.

• Board of directors: Section 2(10) describes it as the collective body of the directors of the company. Section 149 states that every company shall have a board of directors consisting of individuals as directors. It also prescribes the minimum number of directors in each type of company. A public company shall have a minimum of 3 directors and a private company shall have a minimum of 2 directors. Likewise, a one-person company shall have a minimum of 1 director. Each company is allowed to have a maximum of 15 directors, however the limit can be increased by passing a special resolution. Furthermore, a director cannot hold office as a director in more than 20 companies at the same time. Similarly, the maximum number of public companies in which an individual can be appointed as a director shall not exceed 10.

The new act has further defined the duties of a director under Section 166. It includes the duty of good faith and fiduciary obligation, not to achieve undue gain or advantage, to take due care and reasonable care, etc. Furthermore, a meeting of the board shall be called by giving not less than seven days’ notice in writing or electronic means to every director.

• Key managerial personnel: As per Section 2(51), key managerial personnel in relation to a company means the chief executive officer, or the managing director, or the manager, the company secretary, and so forth as mentioned in the section. He is basically an officer of the company with ostensible authority to enter into agreements on behalf of the company; is entrusted with the task to ensure that all the compliances of the act are abided by. Section 196 restricts a company from employing a managing director and a manager at the same time. Likewise, no company can appoint or re-appoint any individual as its managing director, whole-time director or manager for a term, exceeding five years at a time. The proviso to Section 196(2) states that no re-appointment shall be made earlier than one year before the expiry of the term. Section 203 expounds the appointment of a key managerial person and the curbs on his office.

Section 203(2) read that a whole time key managerial personnel shall be appointed by means of a resolution of the board containing the terms of remuneration in addition to particulars of his appointment. Similarly, Section 203(3) states a whole-time key managerial personnel shall not hold office in more than one company, except in its subsidiary company at the same time.

Section 203(1) read with Rule 8 of the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014, expounds that every listed company and every other public company having a paid-up share capital of ten crores or more shall have whole-time key managerial personnel as enunciated. Likewise, Rule 8A states that a company, besides the ones covered under Rule 8, which has a paid-up share capital of five crores or more shall have a whole-time company secretary. If any company defaults in complying with the provisions, both the company and every director including key managerial personnel shall be held liable to a penalty. The new act further prohibits insider trading of securities by any person including any director or key managerial person of a company.

Furthermore, Section 204 provides for secretarial audit report for bigger companies by a company secretary in practice. Such report shall be annexed with the boards report made in terms of Section 134(3).

1. Report on the annual general meeting: Section 121 provides for every public listed company to prepare a report on each annual general meeting and file it with the registrar within 30 days of the conclusion of the fees along with such fees as may be prescribed. The company and every officer who is in default shall be held liable to a penalty if they fail to comply with the provision.
2. Uniform financial year: Section 2(41) prescribes financial year in relation to anybody corporate as the period ending on 31st day of March every year. Likewise, if a company has been incorporated on or after the 1st day of January of a year, the financial year shall be the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company is made up.

The proviso to the section states that where a company is an associate, subsidiary, holding company to a company incorporated outside India and it follows a different financial year for consolidation of it accounts, then, such company on an application made to the central government in such form as may be prescribed, may allow such period as its financial year.

Section 129 describes financial statements. Section 129(3) calls for consolidated financial statements if a company has more than one or more subsidiaries or associate companies.

1. National financial reporting authority: Section 132 prescribes the constitution of a national financial reporting authority. Its function is to make recommendation to the central government on formulation and laying down of accounting policies and standards and to monitor and enforce its compliance. Likewise, it also has to chaperon the quality of service offered by professionals and suggest improvements, if necessary.

The new act provided for its constitution, however it did not come into being till October, 2018.

1. On audits: Section 138 read withRule 13 of the Companies (Accounts) Rules, 2014 prescribes the class of companies, whose board ought to appoint either a chartered accountant or a cost accountant, who shall conduct an internal audit of the functions and activities of the company.

Section 139(2) mandates listed companies and a certain category of unlisted companies and private companies to compulsorily rotate their auditors once they have served office for a fixed period. Likewise, Rule 6(3)(i) of the Companies (Audit and Auditors) Rules, 2014 states that the period prior to the commencement of the act for which an auditor or audit firm has held office of a company should be considered when calculating the rotation period.

Section 143(3)(g) states the maximum number of audits an auditor can perform is 20 in a year. However, this ceiling does not comprise of one-person companies, dormant companies, small companies, and private companies having paid-up share capital of less than ₹100 crores.

1. Serious fraud investigation officer: Section 212 calls for investigation into affairs of the company by a serious fraud investigation officer. Section 212(4) determines the power of a serious investigation officer to investigate, who shall have powers of an inspector as mentioned in Section 217.
2. Fast-track and cross-border mergers:Section 233 provides the scheme for a simplified fast-track merger. In the old act, all mergers had to go through lengthy proceedings, and the intervention of the high court was mandatory, making the whole process cumbersome and prolonged. Fast-track mergers under the new act, require approval from shareholders, creditors, official liquidator, regional director, and registrar of companies. The scheme has to be read with Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

Likewise, Section 234 provides for cross-border mergers. However, it was notified by the ministry of corporate affairs in April, 2017. The cross-border merger could either be an outbound merger or an inbound merger, where the resultant company is either an Indian company or a foreign company. The valuation shall be done as per Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. Aforementioned valuation shall be done by members of sanctioned professional bodies in consonance with internationally accepted principles on accounting and valuation.

1. Establishment of special courts: Section 435 states that the central government may, for the purpose of administering speedy trial of offences, establish or designate a special court. Section 436 expounds the offences triable by special courts. The territory of Delhi has 8 designated special courts.
2. Establishment of National company law tribunal: The proposal to set up a tribunal was first put forth by Justice Eradi Committee, 1999[5]. Section 408 prescribes for the constitution of a national company law tribunal. Likewise, Section 410 prescribes for the establishment of an appellate tribunal. The Ministry of corporate affairs vide its notification dated 1st June, 2016 dissolved the company law board under Section 466 and notified for the establishment of a company law tribunal and its appellate body. All the extant matters of the company law board were transferred to the tribunal for adjudication. Their constitutional validity was upheld by the Hon’ble Supreme Court.[6] They are governed by the National Company Law Tribunal (NCLT) Rules, 2016.
3. Mediation and conciliation: Section 442 states that the central government shall maintain a panel of experts, known as the mediation and conciliation panel. The experts shall have such qualifications as may be prescribed. Parties in dispute during the pendency of any proceedings before the central government or the tribunal or the appellate tribunal can request to refer the same to mediation or conciliation along with the prescribed fees. This was an attempt to be in conformity with international norms and modernise the way companies are owned and operated in India. Companies (Mediation and Conciliation) Rules, 2016 were notified in September, 2016.
4. Democracy of shareholders:Post the Satyam scandal, shareholders were unable to claim damages due to a lack of provision for class action suit in the old act. However, American investors were able to file a suit due to a concept of representative action introduced in 1938. It enabled a large number of people who have suffered similar injuries to file a claim through a legal representative. This helps reduce the multiplicity of suits and brings into its ambit minor legal redressal. Section 245 describes class action suit. It permits a certain percentage or number of members and depositors to collectively file an application before the tribunal if they are of the opinion that the affairs of the company are being conducted in a manner detrimental to the interests of the company and shareholders. Section 245(3) prescribes the minimum number of members required to file a class-action suit. Furthermore, Section 245(6) states the order of the tribunal shall be final and binding on any person associated with the company. Section 245(7) expounds that any person who fails to comply with the order shall be liable to a penalty. Moreover, Section 245(8) states that upon diagnosis, if an application is found to be vexatious, then the tribunal may reject the application and dictate the party to pay costs to the opposite party. It is regulated by the National Company Law Tribunal (NCLT) Rules, 2016.

Likewise, Section 246 states that provisions of Section 337 and Section 341 shall apply mutatis mutandis in reference to an application made to the tribunal under Section 245.

• Vigil mechanism:Rule 7 of the Companies (Meeting of Board and its Powers) Rules, 2014 read with Section 177(9) provides for every listed company, every other company which accepts deposits from the public, and every company which has borrowed money from banks and public financial institutions in excess of ₹50 crores to establish a vigil or whistle blowing mechanism. Upon report of grievance by a director or employee, the audit committee shall appropriately investigate the matter. Section 177(10) provides for adequate safeguards against victimisation. However, anonymous complaints won’t be entertained.
• Worker’s rights on winding up: Section 2(94A) defines winding up or liquidation. Interestingly, it was introduced in November, 2016 when the insolvency and bankruptcy code, 2016 came into being. The new act also provides for two methods of liquidation, voluntary winding up and winding up by tribunal. Section 327 provides for preferential payments. It enunciated seven cases, where the payments shall be paid in priority to all other debts. The ministry of corporate affairs vide notification dated 24th January, 2020 notified the Companies (Winding-Up) Rules, 2020.
• E-governance under the act:The new act has made good use and utilisation of information and communication technology. It seeks to digitise mechanisms and procedures for convenience, transparency, and efficiency. Rule 27 and 29 of the Indian Companies (Management and Administration) Rules of 2014read with Section 120 prescribes maintenance and inspection of documents in electronic form. Section 173(3) read with Rule 18 allows notice of a meeting of the board by electronic means. Likewise, Section 175(1) allows passing of a resolution by circulation through electronic means, as approved by the majority of shareholders. Section 123 further allows remittance of dividend to entitled shareholders by electronic mode.

Section 108 read with Rule 20, asserts that members and shareholders of every listed company or a moderately big company with at least 1000 shareholders, should employ the facility to vote electronically at board meetings, for passing any special or ordinary resolution.

• Corporate social responsibility: The term was coined in 1953 with the publication of Bowen’s Social Responsibility of a Businessman, one of the most pertinent provision which has been introduced in the new act is Section 135. Section 135(1) read with Schedule VIII provides for every company having a net worth of ₹500 crores or more or, turnover of ₹1000 crores or more or, net profit of ₹500 crores or more during the immediately preceding financial year shall establish a corporate social responsibility committee. Section 135(5) enucleates that the board referred to in Section 135(1) shall ensure that a company spends, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years. The proviso to the section exemplifies that a company shall give preference to its local area.

Companies (Corporate Social Responsibility Policy) Rules, 2014 aid overseeing policies in companies. Rule 6 and 7 spell out the CSR Policy and CSR Expenditure respectively. Likewise, Rule 8 clarifies CSR Reporting and Rule 9 makes it mandatory for companies to disclose contents of their policy in its report on their website. Rule 3 clarifies that if the section is applicable to a company as per the aforementioned criteria, it shall also be applicable on its holding and subsidiary company, regardless of whether they satisfy such criteria.

Second proviso of Section 135(5) states that if a company fails to spend such amount, then such unspent amount shall be transferred to a fund within a period of 6 months of the expiry of the financial year. Section 135(6) expounds that if any amount remains unspent in pursuance to any ongoing project, then such unspent amount shall be transferred to a special account known as unspent corporate social responsibility account within 30 days. Section 135(7) explicates that if any company and any officer in default contravene the section and its provisions, it shall be liable to a fine.

Major amendments

1. Companies (Amendment) Act, 2015:
2. Minimum paid-up share capital relaxed: The requirement of minimum paid-up share capital of ₹1 lakh for private companies and ₹5 lakhs for public companies has been dispensed with.
3. Common seal made optional: Earlier the act mandated for the fixation of common seal on documents, bill of exchanges, share certificates, etc. It now stands amended and is made optional. As per the proviso to Section 22(2), all documents which required affixing the common seal, may now be authorised either by 2 directors or by a director and the company secretary.
4. Certain resolutions no longer public documents:Section 117 read with Section 399 mandated certain resolutions and agreements, to be filed with the registrar within 30 days. Such documents were open for the public to inspect and survey. However, post amendments such documents will no longer be available for public perusal or be licensed to take copies thereof.
5. Companies (Amendment) Act, 2017:
6. Introduction of Section 3A: Section 3A states that if at any time, the number of members is reduced below the statutory limit, 7 for public companies and 2 for private companies, and the company carries on business for 6 months while cognizant of that fact. Every person who was a member during such period will be held severally liable for the debts contracted by a company during those 6 months. This section was there in the old act but was removed from the new act.
7. Requirement of registered office post incorporation: A company shall within 30 days of its incorporation have a registered office capable of receiving and acknowledging all communications and notices addressed to it. Earlier, the requirement was to have an office from the 15th day of its incorporation.
8. Omission of Section 194 and 195: Both the sections which deal with insider trader and forward dealing have been omitted from the act as the SEBI regulations are of broad scope to cover all occurrences of fraud.
9. Companies (Amendment) Ordinance, 2018:
10. Introduction of Section 10A: As per Section 10A, a company having a share capital shall not commence business or exercise borrowing power unless a declaration has been filed by the director to the registrar within 180 days from the date of incorporation.
11. Insertion of Section 12(9): Section 12(9) authorises the registrar to cause physical verification of the registered office of the company if he has reasonable belief that the company is in default in complying with provisions of the section. If in contravention, the registrar may, without prejudice to Section 12(8) initiate action for removal of the name of the company from the register of companies.
12. Failure to comply with Section 165(1): Section 164(1)(h)(i) has been added. It sets forth that a person shall not be eligible for the post of a directorif he exceeds the maximum number of directorships as mentioned in Section 165.
13. Companies (Amendment) Act, 2019:
14. Powers shifted to central government: Applications for adoption of different financial year by a company which is a holding or subsidiary company of a company incorporated outside India and alteration of articles to convert a public company into private company under Section 2 and 5 which were required to be filed with the NCLT, will now have to be filed with the central government.
15. Insertion of Section 29(1A): Section 29(1A) enables such class or classes of companies to issue securities in a dematerialised form in the manner laid down in depositories act, 1996. Earlier, it was only limited to public companies.
16. Amendment to Section 35: Insertion of Section 35(2)(c)removes the requirement of delivering the copy of the prospectus with the registrar for purposes of registration. Now, it is only required to be filed with the registrar instead of delivering it.

Conclusion

The 2013 statute is a landmark legislation. It is more comprehensive and less complicated than its predecessor. It welcomes the use of e-governance and management/administration of the company. Newer concepts like small company and one-person company aid small entrepreneurs to flourish, and stricter regulatory compliances along with SEBI and RBI regulations help keep checks and balances on the powers of companies.

However, with frequent amendments over time, it has failed to provide a sturdy, stable platform for companies to function. Active engagement and consultations with relevant stakeholders right from the initial policy formulation stage would perhaps help in understanding potential concerns and challenges and coming up with a framework that is geared for dealing with these issues.[7]

Also read Group Of Companies Doctrine and Indian laws

[1]NolakhaRatan, Company Law and Practice, Page 1.3, 1st Ed. 2015

[2]MadhuTyagi&Arun Kumar, Company Law, Page 4, 2003

[3] Emile Erlanger V. New Sombrero Phosphate Co. (1878) 2 LR App. Cas. 1218

[4]Sahara India Real Estate Corporation Ltd. v. SEBI, (2012) 10 SCC 603

[5] Justice Eradi Committee http://164.100.47.5/rs/book2/reports/home_aff/72ndreport.htm

[6]India v. R. Gandhi, President, Madras Bar Association (2010) 11 SCC 1

[7] Phoenix Legal, Companies Act 2013: Time to Reboot?, MONDAQ, available on https://www.mondaq.com/india/shareholders/890282/companies-act-2013-time-to-reboot (Accessed on 07/10/2020)