Company Law in India
Company law is a compendium of legislative measures, rules, and regulations that govern the formation, structure, management, operation, administration, and compliance of companies. The Companies Act, 2013 (the “Act”), – which replaced the erstwhile Companies Act, 1956 – along with circulars, orders, rules, amendments, forms, and notifications together encompass the company law in India.
Company – Meaning, Nature, Characteristics
A company is a separate legal entity or legal person (a.k.a. Artificial Legal Person) that has its own corporate personality independent from that of its members. It is legally competent like a natural person to own property, incur debts, borrow money, have a bank account, have transferable shares, employ people in its name, enter into contracts, sue, or be sued independently. However, in certain cases, the courts may examine a company from beyond the purview of its corporate personality and begin to look at the members or managers directly, termed as the ‘lifting of the corporate veil’.
Company v/s Partnership Firms and Limited Liability Partnership
Partnership firms are often confused to have similar characteristics as a company. However, unlike a company’s distinction from its members as a legal person, a partner is an agent of the partnership firm whose liability is unlimited and the partner cannot independently dispose of the property or contract with the firm or transfer their shares without the other partner’s consent. Furthermore, the process of dissolution, accounting, and auditing of a partnership firm differs from that of a company.
On the other hand, a limited liability partnership is a blend of both, a company and a partnership firm. It is a separate legal entity like a company but functions in consonance with the contractual agreement between the partners with flexible compliance and governance like a partnership firm.
Kinds of companies
Companies in India are incorporated when a certain number of persons sign a memorandum for any lawful purpose, with or without limited liability, and contractually agree to comply with the requirements of the Act. These companies can be divided into various kinds on the basis of the following categories:
- Based on incorporation: Statutory Company, Registered Company
- Based on members: Private, Public, One Person Company
- Based on liability: Limited by shares, Limited by guarantee, Unlimited
- Based on control: Associate or Joint Venture Company, Holding and Subsidiary Company
A company can further be classified into Foreign Company, Government Company, and Section 8 Company.
Incorporation of a Company
The formation and incorporation of a company begin with the registration of at least one suitable name, in order of preference, with a maximum of six other options, followed by the filing of documents like a declaration of compliance, notice of situation of the registered office, and particulars of the director(s), etc. post the name approval. A company’s incorporation is incomplete without drafting and stamping the Memorandum and Article of the Company. These two documents are vetted by the Registrar of Companies (the “RoC”) having jurisdiction over the proposed registered office of the company. RoC further issues a certificate of incorporation, and a Corporate Identity Number, post which the companies are required to maintain copies of all documents and information.
Some of the significant company documents and records that have been detailed in the Act are Memorandum of Association, Articles of Association, Prospectus, Share Certificate, Share Warrant, and Statutory Registers.
Directors and Key managerial personnel
A company’s values and standards are maintained through strategic planning, performance reviews, and robust financial, human resource, and risk management. It requires entrepreneurial leadership demonstrated by the Board of Directors. The constitution of the Board, its powers, restrictions, and appointment of directors are elaborated in the Act. The Act also mandates appointment of Key Managerial Personnel (the “KMP”) by certain classes of companies, as the collective in charge of its operations, and decision-making. Section 2(51) of the Act defines KMP of a company to include the Chief executive officer, manager or managing director, Company Secretary, Whole-time director, Chief financial officer, and such other officers, designated by the Board as KMP but are not more than one level below the directors in whole-time employment or as may be prescribed.
Corporate Finances
Corporate finances are the funds or capital that play a great role in the establishment of the company, operating business activities, decision-making, and long-term planning for the company’s future. The issuance of rights shares, employee stock options, preferential allotments, buy-back of shares, and shares with differing voting rights are only a few of the ways to generate capital. It entails a number of approvals, disclosures, filings, and record-keeping requirements that must be met in accordance with Chapter IV of the Act read with the Companies (Share Capital and Debentures) Rules, 2014.
Company Administration and Corporate Governance
The Act with the Companies Rules provides a robust framework for corporate governance and administration, thus, including, but not limited to, the independent directors’ qualifications and responsibilities, mandatory appointment of a female director, and creation of specific committees such as the CSR Committee, the Audit Committee, the Nomination and Remuneration Committee, and the Stakeholders Relationship Committee. The provisions further dilate the scope, conduct, and essentials of board meetings, General Meetings, and Shareholder Meetings for the efficient functioning of the companies.
Accounts, Financial Statements & Audits
All kinds of companies are mandated to maintain a “Book of Accounts” which forms the basis of the financial statements of the company for annual return filing. It inter alia includes records maintained in respect of the company’s business transactions, trade of goods and services, and assets and liabilities. The achievement of a company’s business goals, accurate financial reporting on its operations, preventing fraud and asset theft, and lowering its cost of capital ultimately depend on maintaining an efficient system of internal controls.
Corporate Social Responsibility
India became the first country in the world to have statutorily mandated Corporate Social Responsibility (“CSR”) for certain companies with the enactment of the Act. It strengthens India’s corporate philanthropy by mandating social welfare for companies, whether private limited or public limited, to spend at least 2% of the average net profits made during the 3 immediately preceding financial years, within the defined activities and parameters. Section 135 of the Act read with the CSR Rules sets out a logical framework for the companies to comply with for the formation of the CSR committee, their roles and objects, and the parameters to be adopted for compliance.
Company Processes
A company in its lifetime undergoes various changes and processes. It may experience a compromise demanding vigorous dispute resolution through a compromise plan, arrangement of the rights and obligations of the company’s shareholders, restructuring the capital structure by transfer of assets, amalgamation through mergers and acquisitions, and finally, the winding up of a company, either voluntary or mandatory, to terminate the existence of the company and asset management. All corporate law issues arising during the lifetime of a company are adjudicated by quasi-judicial bodies like National Company Law Tribunal, National Company Law Appellate Tribunal, and other Appellate Tribunals and Special Courts in India.
Did you know that the first provision for registration of joint stock companies in India was made in 1850, based on the English Joint Stock Companies Act 1844? It is intriguing to see how far the company laws in India have come since then!!