Companies Act, 2013 Study Notes

26.01 Evolution and history of company law in India

The earliest business associations in England were the Merchant Guilds.
1600: a Royal Charter established the East India Company.
1844: England passed its first Joint Stock Companies Act.
1850: taking the English Act of 1844 as a base, India provided for registration of joint stock companies.
1913: the Indian Companies Act introduced private companies into the corporate sector.
After Independence, on the recommendation of the Shri H.C. Baba committee and the English Companies Act 1948, the Companies Act 1956 was introduced. It came into force on 1 April 1956.

To sustain the trust and faith of shareholders and protect their rights.
To keep strict control over all the activities of a company.
To regulate effective annual meetings.
To use the investment of the general public for the development and welfare of society.

The Company Law Board (CLB) was abolished and the National Company Law Tribunal (NCLT) was formed.
Rehabilitation of sick companies passed from the BIFR, which worked under the Sick Industrial Companies Act 1985 (SICA), to the NCLT.

Passed in the Lok Sabha on 18 December 2012 and in the Rajya Sabha on 8 August 2013; President's assent on 29 August 2013.
29 chapters, 470 sections and 7 schedules, against 13 chapters, 658 sections and 15 schedules in the 1956 Act.
New chapters on registered valuers, Government companies, Nidhis, NCLT and Appellate Tribunal, and Special Courts.

Area	Change made by the 2013 Act
Types of companies	Public, private and One Person Company (new concept)
Members of a private company	Maximum 200
Memorandum object clause	Objects for which the company is incorporated and matters in furtherance
Key Managerial Person, Section 2(51)	CEO or MD or Manager, Company Secretary, Whole-time Director, CFO
Whole-time KMP, Section 203	Prescribed classes of companies must have KMPs
Issue at a discount	Not allowed, except sweat equity shares
Preference shares	Redeemable within 20 years, except prescribed infrastructure projects
Consolidation and division of shares	Needs Tribunal approval if voting percentage changes

A company is a corporate body and a legal person, distinct from its members. 'Corporation' comes from the Latin corpus, meaning body; it is an artificial legal person.
Public corporations like LIC, RBI and SBI were created by special Acts of Parliament; Tata Steel and Reliance Industries were formed under company law.
Section 2(20): a company incorporated under this Act or any previous company law.
Body corporate, Section 2(11): includes private, public, one person and small companies, LLPs and foreign companies; excludes co-operative societies and certain other bodies corporate.

Section 3(1): seven or more persons for a public company, two or more for a private company, one for a One Person Company.
Four stages: promotion, registration, capital subscription, commencement of business.
A private company starts business right after registration; a public company must also pass capital subscription and commencement of business.

In a company limited by shares, capital means share capital divided into shares of fixed value. Example: Rs.10,00,000 = 10,000 shares of Rs.100 or 1,00,000 shares of Rs.10.
Share, Section 2(84): a share in the share capital of a company, including stock.
Two classes of share capital: equity share capital (with voting rights, or with differential rights) and preference share capital.
Preference shares carry a preferential right to dividend at a fixed rate and to repayment of capital on winding up.

Kind	Feature
Cumulative / Non-cumulative	Arrears of dividend carried forward / dividend only from each year's profit
Redeemable / Non-redeemable	Repaid after a fixed period or notice / repaid only on winding up
Convertible / Non-convertible	Can / cannot be converted into equity shares
Participating / Non-participating	Share / do not share surplus profits after equity dividend

Tenure: normally 20 years; infrastructure project companies may issue up to 30 years, subject to redemption of at least 10% of such shares.

At par: at face value; no legal restriction.
At premium: above face value (Rs.10 share at Rs.12, premium Rs.2). Premium goes to the Securities Premium Account (Section 78), used to write off preliminary and issue expenses and premium on redemption, and for buy-back (Section 77A). It is not available for dividend.
At discount: below face value; prohibited by Section 53.
Sweat equity shares (Section 54): issued at a discount to employees or directors for know-how or intellectual property rights.
Bonus shares: issued free to existing shareholders out of reserves, by making partly paid shares fully paid or by issuing new shares.
Right shares: offered to existing equity shareholders on a pro rata basis through a letter of offer.

A share certificate is legal proof of ownership, issued within three months of allotment under the common seal. It shows company name, date of issue, member details, shares held, nominal value, paid up value and distinctive number (Section 45).
A share warrant is a negotiable document of title; issue needs prior Central Government approval and authority in the Articles. Its holder is generally not a member.

A company may convert fully paid shares into stock, and stock into shares, under Table A (Articles 36-39) if its Articles permit.

Section 2(30): includes debenture stock, bonds or any instrument evidencing a debt, secured or not.
Features: issued under common seal; holders are creditors; fixed interest; redeemed after a fixed period; secured or unsecured; interest is tax deductible; no voting right.
Kinds: convertibility (NCD, PCD, FCD, OCD); security (secured, unsecured); redemption (redeemable, irredeemable); registration (registered, bearer).

Debentures	Shares
A loan	Part of capital
Fixed rate of interest	Dividend at varying rate
Usually a charge on assets	No charge
No voting right	Voting right
Interest payable even without profit	Dividend only out of profits
Interest is a deductible expense	Dividend is not deductible

Navratna companies include BEL, HAL, HPCL and SCI; Maharatna companies include NTPC, ONGC and SAIL.