Chapter 4: The Companies Act, 2013

Overview:
The rapid growth of trade, commerce and industry in modern times has brought about a number of
changes in the size of a firm. With the expansion in the scale of operation of business undertakings,
enterprises organized on the basis of sole proprietorship, or partnership found themselves unequal
to the task of meeting all the capital requirements of the present day large scale business. Thus, a
new form of business organization came into existence and this is called a 'Joint Stock Company' or
simply a 'Company' or 'Corporation'.

In India, the company form of organization has attained much importance in the wake of rapid
industrialization through the five year plans. The functioning of joint stock companies in India was
regulated by the Companies Act, 1956, as amended to-date. However, the new Companies Act, 2013
has now replaced the Companies Act, 1956.

In simple language, the term company means an association of persons formed for some common
purpose. When a few persons form a company for the purpose of some business of profit it is called
a joint-stock company. The persons forming the company are called 'share holders' The liability of
the members of the company is usually limited.

Definition:
A joint stock company is an incorporated association formed for the purpose of carrying on some
business. Legally, it is an artificial person having a distinctive name and a common seal. It may be
defined as “an artificial person created by law with a distinctive name and separate legal entity,
common seal, a common capital contributed by members and comprising of transferrable shares of
a fixed denomination, with limited liability and with perpetual succession.
A more popular definition is the one given by the Lord Justice Lindley.

According to him a company is "an association of many persons who contribute money or money's
worth to a common stock and employed it in some trade or business and who share the profit or
loss arising there from. The common stock so contributed is denoted in money and is the capital of
the company. The persons who contributed it or to whom it belongs are members The portion of
capital to which each member is entitled is his share The shares are always transferable although the
right to transfer them may be restricted".

From the above definition, it is clear that, a company is an incorporated association, which is
an artificial person created by law, having an independent legal entity, with capital divisible into
transferable shares carrying limited liability, having a common seal and perpetual succession.

Registration:
The company is created only when registered under the Companies Act, 2013. It comes into
existence from the date mentioned in the certificate of incorporation. But for the formation of public
company at least seven persons and for private company at least two persons are necessary. These
persons agree to come together and lend their names to the Memorandum of Association and other
legal requirements of registration for the incorporation of a company, with or without limited
liability.

Legal Entity:
A company is an artificial legal person. It's created by a process other than natural birth. It doesn't
possess the physical attributes of a natural person. At the same time, it's clothed with many of the
rights of a natural person. It's invisible, intangible, immortal and exists only in the eyes of law. It has
no body and no soul. Because of these physical disabilities, a company is called an artificial person.
But it can't be treated as a fictitious entity because it really exists.

Common Seal:
As a company is an artificial person, it can't act on its own. It acts through natural persons who are
known as directors.
All contracts entered into by directors must be under the common seal of a company.
The common seal with the name of the company engraved on it, is used as a substitute for its
signature.
The common seal is affixed on important documents such as share certificate, share warrant and
also on important contracts. No documents issued by the company shall be binding on it unless it
bears the common seal which is duly witnessed by at least two directors of the company.

Perpetuity:
The company created by law lives in perpetuity unlike a human being. It never dies with retirement
or death of its members as is the case with partnership. It is created by law and an end to it can be
put by the process of law only. This establishes in law the perpetual succession which means that
once a company is established, it exists irrespective of the variation or the composition of its
members. This lends stability and long life to a company form of organization.

Limited liability
Limited liability is where a person's financial liability is limited to a fixed sum, most commonly the
value of a person's investment in a company or partnership.
If a company with limited liability is sued, then the claimants are suing the company, not its owners
or investors.
A shareholder in a limited company is not personally liable for any of the debts of the company,
other than for the amount already invested in the company and for any unpaid amount on the
shares in the company, if any.

Transferability Of Shares
The capital of a company is divided into shares, which may be for a certain amount say₹10, ₹100
etc. and in a public company these shares are freely transferrable.
The right to transfer shares is a statutory right and it can't be taken away by a provision in the
Articles.
Section 80 states this principle by providing that, "the shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the Articles of the
company".
Corporate personality is the fact stated by the law that a company is recognized as a legal entity
distinct from its members.
A company with such personality is an independent legal existence separate from its shareholders,
directors, officers and creators.
This is famously known as the veil of incorporation.

Registered Company:
A company brought into existence by registration with the Registrar of Companies under the
Companies Act of 2013 is called a registered company.
Under the Companies Act of 2013, the kinds of companies which can be registered are:
1. Private company
2. Public company
3. One person company
Registered companies may be of two types:
1. Ordinary business companies
2. Government companies

On the basis of liability of members, companies can be classified into three types:
1. Unlimited companies: The liability of the members is unlimited. i.e. members are liable for
the debts of the company to an unlimited extent in the event of its winding up.
2. Companies with liability limited by shares: The member is called upon to pay only the unpaid
amount on shares held by him.
 3. Government company: a company in which not less than 51% of the share capital is held by
the Central Government or State Government or Governments is called a Government
Company. E.g. HMT, BEL, ITI, HAL.

Comparison between One person company and sole proprietorship company

Section 2(71) : Public 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;
Major amendments in the Companies Bill
1. E Governance allowed for the first time
2. One person company and corporate social responsibility have been introduced.
3. Accountability on the part of companies is increased by appointment of independent
directors, CSR committee to protect interest of minority shareholders.
4. Introduction of vigil mechanism, encouraging ethical corporate behavior, rewarding
employees for their integrity, providing vital information to management about deviant
practices
5. Empowering Central Government to take decisions on vital issues
6. Introducing provision to facilitate the companies to secure capital more freely.
Promotion of company:
The persons who undertake the responsibility to bring the company into existence are called
promoters. Promotion involves discovery of specific business opportunity and subsequent
organization of the factors of production. The steps which are taken to persuade the persons to
come together for achievement of a common objective through the company form of organization is
called promotion.

Steps in company promotion:

1. Discovery of an idea and preliminary investigation
an idea to start some business either in the new field or in
existing lines of manufacture
2. Detailed investigation
 3. Assembling: it means getting the support and consent of others to act as directors or
founders, arranging for patents, a suitable site for the company, machinery, equipment and
making contracts for filling the positions.
4. Financing the proposition: the promoter prepares a prospectus to present to public and
underwriters to persuade them to finance the proposition.
Functions of promoter:
1. Conceive the business idea
2. Investigation to ensure feasibility of the proposition
3. Collecting people
4. Organizing the company
5. Part of the administration as a chairman
Types of promoters:
1. Professional promoters
2. Financial promoters
3. Occasional promoters
Duties and liabilities of promoters:
1. Duty not to make secret profit at the cost of the company: A promoter cannot make any
profit at the expense of the company without the knowledge and consent of the company.
2. Duty to disclose all material facts: A promoter is not allowed to derive a profit from the sale
of his own property to the company unless all material facts are disclosed to the
independent board of directors or in the Articles of association of the company or in the
prospectus or to the existing and intended shareholders directly.
The death of a promoter does not relieve his estate from liability arising out of abuse of his fiduciary
position.
Preliminary contracts are contracts entered into by the promoters on behalf of the company before
its incorporation. Such contracts are not legally binding upon the company.
On the request of the promoters of a company, a solicitor prepares the Memorandum of Association
and Articles of Association of a company, pays the registration fees and get the company registered.
Memorandum of Association
It is one of the most important documents and must be drafted with care. It has to be filed with the
Registrar of Companies during the process of incorporation of a Company. It contains the
fundamental conditions upon which the company is allowed to operate. It is the document that
governs the relationship between the company and the outside. It is one of the documents required
to incorporate a company.
Articles of Association
It is a document which, along with the Memorandum of Association form the
company's constitution, defines the responsibilities of the directors, the kind of business to be
undertaken, and the means by which the shareholders exert control over the board of directors.
Steps and formalities for incorporation of a company
Promoters have to take certain steps for getting the certificate of incorporation from the Registrar of
companies. On hearing from Registrar about availability of names for the proposed company, they
have to prepare the following documents and file them with the registrar of Companies of the State
in which the registered office of the company is situated.
On hearing from Registrar about availability of names for the proposed company, they have to
prepare the following documents and file them with the registrar of Companies of the State in which
the registered office of the company is situated.
1. Memorandum of Association
2. Articles of Association
3. Address of the registered office.
4. A list of directors
5. Consent in writing of the directors
6. An undertaking of the directors to take and pay for qualification shares.
7. The statutory declaration by an advocate or an attorney or a CA practicing in India, who is
engaged in formation of a company or by a person named in the Articles as director,
manager, or secretary.

Capital subscription
A private company and a public company not having any share capital can commence business
immediately after obtaining the Certificate of Incorporation. But a public company having share
capital can commence business only after obtaining another certificate called “Certificate of
commencement of business” from the Registrar of Companies.
Hence a public company having a share capital has to undergo two additional stages viz. the
subscription and commencement of business stage.
In the capital subscription stage, the company has to make arrangements for obtaining the
necessary capital for the company. For this purpose, immediately after getting the certificate of
incorporation, the company convenes a board meeting to deal with:
1. Appointment of the secretary
2. Adoption of preliminary contracts
3. Appointment of bankers, solicitors, legal advisors, brokers, auditors etc.
4. Adoption of draft prospectus or statement in lieu of prospectus
5. Listing of shares on the stock exchange
6. Adoption of underwriting contracts
Commencement of business
To obtain the certificate, the following conditions must be fulfilled:
1. Prospectus or a statement in lieu of prospectus
2. The number of shares allotted is not less than minimum subscription mentioned in the
prospectus
3. The directors have taken up and paid for qualification shares
4. The declaration that no money is liable to become refundable to applicants for shares for
reason of failure on the part of the company to apply for or to obtain permission for the
shares or debentures
5. The declaration by one of the directors to the effect that all the conditions regarding the
commencement of business have been complied with.
Duties of secretary before incorporation:
The secretary has to assist the promoters in performing preparatory work and in fulfilling many legal
formalities. He has to assist the promoters in convening and conducting meetings, drawing up
preliminary contracts and documents required for registration. At this stage, he may also take the
help of specialists such as solicitor and CA.
Duties of secretary after incorporation:
Arranging for subscription to the shares of the company and complying with the legal requirements
before applying to the Registrar for the certificate of commencement of business.

Formation of a Company
Step Wise Formalities for Formation of A New Company:
Persons desirous of forming a company must adhere to the step by step procedure as
discussed below:—
I. Selection of type of the company.
II. Selection of name for the proposed company.
III. Apply for Directors Identification Number and Digital Signatures, if does not have
IV. Drafting of Memorandum and Articles of Association.
V. Stamping, digitally signing and e-filing of various documents with the Registrar.
VI. Payment of Fees.
VII. Obtaining Certificate of Incorporation.
VIII. Obtaining Certificate of Commencement of business (in case of public limited
Companies).

Pre-incorporation:
• At Least 2 Promoters: Promoters who will promote/ incorporate the company. Promoters
may be individual or body corporate.
• At Least 2 Directors: Directors should be individual only. No Body corporate/ HUF or
Partnership Firm can be appointed as Directors.
• Generally, in most of the cases, Promoters and Directors are the same in Private Limited
Companies.
• Directors must have DIN (Directors Identification Number)- Process Given Below:
• One of such two directors must have DIGITAL SIGNATURE who can apply with any of DSC
Vender i.e. E Mudra/ Siffy/ TCS etc.

Process for Name Approval

• The promoters should apply for the name of the company to be approved with the
concerned ROC of the State where the company has to be formed in E Form- INC- 1 by
payment of Rs. 1000 through Credit Card or Net Banking.
• One of the Promoters should fill up e-form INC-1, digitally sign by Promoter and Professional
and then upload the e-Form on the MCA21 Portal. Before doing so, the following three
points have to be complied with:
• a. All the Promoters should have their DIN No.
• b. At least one Promoter should have the DSC. (Class 2 Digital Signature)
• c. The proposed names selected should fall in guidelines prescribed.

Post incorporation:

Once you get Certificate of Incorporation in form INC-21. You company Name and Details of
Directors will be available on MCA Web-Site. Now a Company having share capital required to obtain
a separate CERTIFICATE OF COMMENCEMENT of business according to section 11 of the Companies
Act, 2013.

Certificate of commencement of business:

Ø Declaration from Director in e-form INC-21. (On stamp paper)

Prospectus:
Prospectus is an invitation issued to the public to offer for purchase/subscribe shares or debentures
of the company. In other words, any advertisement offering shares or debentures of the
company for sale to the public is a prospectus. A company secures capital by the issue of prospectus
inviting deposits or offers for shares and debentures from the public.
Meaning of Prospectus
It is a document containing detailed information about the company. It is an invitation to the public
for subscribing to the shares or debentures of the company.
Private limited companies are strictly prohibited from issuing prospectus and they cannot invite
public to subscribe to their shares. Only public limited companies can issue prospectus. Thus, it is an
open invitation extended to the public at large.

Underwriting:
Underwriting is the process by which investment bankers raise investment capital from investors on
behalf of corporations and governments that are issuing either equity or debt securities.

Underwriters also research and assess the risk each applicant presents.
The underwriting agreement can be considered the contract between a corporation issuing a new
securities issue and the underwriting group that has agreed to purchase and then resell the issue for
a profit. The purpose of the underwriting agreement is to ensure that all of the players understand
their responsibility in the process, thus minimizing potential conflict.

Subscription for shares

After filing a copy of the prospectus with the Registrar, arrangements are made for issue of the
prospectus to the public. Usually an arrangement is made with the company’s banker to receive
applications and the public is requested to send applications to to this banker along with application
money. After the close of last day of the application, the banker forwards the applications to the
company. On receipt of applications equal to minimum subscription, the board of directors proceed
to allot shares after passing the necessary resolution.

Capital: The Concept

Capital in business concept refers to money invested in a business by a firm in land, building, plant,
machinery, furniture, and intangible assets such as goodwill, patent rights, trade marks etc.
These are called as fixed assets or fixed capital.
Money used for buying and holding stocks, receivables, generated accounts during the course of
business, outstanding, bank and cash balances held on the date of balance sheet are called working
or floating capital.
These two types of capital: fixed and working: put together constitute the concept of capital.
The total capital of the business of a company is mobilized in two forms:
• Ownership securities: These are the kinds of shares issued by the company plus the retained
earnings in case of going companies
• Creditorship securities: These are the debentures of different kinds and loan bonds

Capital of company
Company form of business organization is best suited to raise funds compared to sole proprietorship
and partnership because:
• The capital of a company is raised through public issue of shares. Since there is no limit to
the number of owners, unlike in case of sole proprietorship and partnership, a public
company can issue shares to a large number of shareholders. In case of a private company,
maximum are 200 shareholders. Naturally, the share capital of a public company will be
large.
• A public company can augment its funds through issue of debentures.
• A public company can also accept public deposits.
• Public financial institutions will finance public companies by underwriting shares, by
investing in securities, and by direct lending.

Part A: Share capital

Share capital of a company consists of individual shares of fixed denomination. The shares of a public
limited company are transferrable. The share capital may be nominal/authorized/registered share
capital, issued capital, paid up capital or reserve capital.
• Nominal/authorized/registered share capital: This refers to the amount of share capital
which a company is incorporated with. It is the share capital as mentioned in the
Memorandum of Association of a company.
• Issued capital: It is that portion of the authorized capital which a company decides to issue
for public subscription.
• Subscribed capital: it is that portion of the issued capital which the investing public
subscribes to. A good company will be able to achieve good response to the share issue. In
such a case, entire issued capital will be the subscribed capital.
• Called up capital: This is that portion of the issued capital which the company calls on shares.
• Paid up capital: This is that portion of the called up capital which is paid by the shareholders.
• Uncalled capital: The remainder of the issued capital which is not called up is uncalled share
capital. The company may call the uncalled capital any time subject to the stipulated terms
of the issue and provisions of its Articles of Association.
• Reserve capital: this refers to that portion of the uncalled capital which can be called only in
the event of winding up.

Meaning of shares
As per sec. 2(84) of the Companies Act, “A share means a share in the share capital of the company
and includes stock, except where a distinction between stock and share is expressed or implied”.
“A share is a bundle of rights and obligations” or liabilities for the shareholders when the company is
a going concern.
The owner of the shares enjoys the right to receive a proportionate part of other profits, if any, and
proportionate part of the assets of the company upon liquidation. The owner has the obligation to
pay for the full value of the shares.

Classes of shares
Shares of a company can be:
• Equity shares: Sec. 43 states that “equity share capital means all share capital which is nor
preference share capital”. Equity shares do not carry preferential rights enjoyed by
preference shareholders viz. payment of dividend and repayment of capital at the time of
liquidation of the company.
• Preference shares: preference shares are those which have preferential right as to payment
of dividend and return of capital when the company goes into liquidation.

Issue of shares
• Issue of shares at par: normally the shares are issued at their par value i. e. at a price written
on the face of the share certificates concerned. No legal restrictions are there for this.
• Issue of shares at premium: sometimes a growth oriented company with good prospects
issues shares at a premium i.e. at a price above the par value. Section 52 lays down certain
restrictions upon the use of premium amount so collected. It shall be transferred to the
share premium account and this amount is to be treated as share capital for reduction
purposes and to be disclosed in balance sheet every year.
• Issue of shares at a discount: a company is permitted to issue shares at a discount if at least
one year has passed from commencement.
• Issue of sweat equity shares: this means equity shares issued to directors or employees at
discount.

Merits of shares:
• Raising capital
• Source of long term finance
• Credit worthiness
• Trading on equity
• Cost of capital is less
• Growth advantage
• Create ownership
• Profit and wealth maximization
• Voting rights

Demerits of shares:
• Demanding and time consuming
• Trading on equity not possible
• Over-capitalization
• Inflexibility of capital structure
• Investors’ anxiety
• Legal hurdles
• Speculation
 • Recession period management: fall in market price
• Loss on liquidation

Steps involved in the issue of prospectus and receiving the applications:

• Appointment of bankers
• Appointment of underwriters and brokers
• Securing of stock exchange quotations
• Public issue of shares
• Approval and filing of prospectus
• Publicity and issue of prospectus
• Receiving of applications
• Scrutiny of applications
• Sorting of applications
• Closure of application list
• Recording of applications
Allotment of shares
The application for shares by intending shareholders is an offer for the purchase of shares and when
accepted by company is known as allotment of shares. (Act of allotting, distributing and
appropriating shares of a company to particular persons).
Special provisions
• Registration and issue of prospectus
• Minimum subscription as disclosed in the prospectus
 • Application money: the company must receive at least 5% of the nominal value of shares in
cash as application money.
• Application money to be deposited in the scheduled bank
• Refund of application money in specific cases
• Opening of subscription list
• Prospectus to be delivered to the Registrar

Compulsory listing of all public issues

It has been made compulsory for every public company which makes an issue to the public, to
arrange with one or more recognized stock exchanges to list its shares.
Transfer of shares
The shares in the company are movable property and they can be transferred in the manner
provided by the Articles of the company. Shares are the personal property of the shareholder and he
has power to transfer his shares. A transfer must be in writing, duly stamped and executed and
signed both by transferor and the transferee.

Transmission of shares
The transmission of shares signifies involuntary assignment of shares because in this case, property
in shares passes ‘not by act of the parties’ but by ‘operation of law’. For instance:
• On the insolvency of shareholder, property in shares passes on to his Official Receiver who
shall become entitled to the shares owned by the insolvent.
• On the death of the shareholder, the property in shares passes to his legal representatives
who shall become entitled to shares owned by the deceased.

Lien on shares
A lien is the right to retain possession of a thing until a claim is satisfied. In case of a company, lien
on a share means that a member would not be permitted to transfer his shares unless he pays his
debt to the company. The Articles provide that the company shall have a first lien of the shares of
each member for his debts and liabilities to the company.
The death of the shareholder does not destroy the lien.
The company can enforce its lien on shares by the sale of those shares in case the member defaults
in payment of the amount due against him.

Surrender of shares
The Companies Act does not provide for surrender of shares.
Shares are said to be surrendered when they are voluntarily given up.
The Articles of a company may authorize the directors to accept surrender of shares.
Surrender of shares is valid where it is done to relieve the company from going through the formality
of forfeiture of shares and the shareholder is willing to surrender the shares.

Forfeiture of shares
A company has no inherent power to forfeit shares. The power to forfeit shares must be contained
in the Articles.
Whereas shareholder fails to pay the amount due on call, the directors may, if so authorized by the
Articles, forfeit his shares.
Purchase by a company of its own shares (Section 77)
A company limited by shares or a company limited by guarantee having a share capital cannot buy
its own shares except when the share capital of the company is reduced in pursuance of section 100-
104 or where shares are to be purchased for prevention of oppression and mismanagement under
section 407 of the Companies Act.
Buying its own shares by a company means a permanent reduction of capital without sanction of the
court which is ultra-vires of the Act.
A company shall not give loan or financial assistance or guarantee directly or indirectly for acquiring
its own shares or the shares of holding company.

Employees Stock Option Scheme

Employees stock option plan commonly referred to as ESOP is an employee-owner method that
provides a company’s workforce with an ownership interest in the company. The option granted
under the plan confers a right but not an obligation on the employee.
Stock options are subject to vesting, requiring continued service over a specified period of time.
Extending benefits through ESOPs is like creating a win-win situation for both the employer and the
employee.

Debentures
According to Section 2(30) of the Companies Act, 2013, “debenture includes debenture stock, bonds
and any other securities of a company whether constituting a charge on the assets of the company
or not”.
The term debenture refers to an instrument under the common seal of the company acknowledging
the debt due by the company to the holders of the debenture. It also contains an undertaking to
repay the debt at a specified date or at the option of the company. The terms of the issue of
debenture stipulates for the payment of interest at the specified rate payable at specified intervals.

Listing of shares
A stock exchange does not deal in the securities of all companies. Only those securities that are
listed can be bought and sold at the stock exchange. For the purpose of listing of securities, a
company has to apply to the stock exchange. The stock exchange after receiving the application will
decide whether to list the securities of the company or not. If permission is granted by the stock
exchange to deal in the securities therein, then such a company is included in the official trade list of
the stock exchange. This is known as ‘listing of securities’.

Membership of a Company

Section 55: “Member”, in relation to a company, means—

 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;
 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;
  Every person holding shares of the company and whose name is entered as a beneficial
owner in the records of a depository;
 The general rule is that any person who is competent to contract may become a
member. A contract to purchase shares is like any other contract and other contracting
parties must be competent to enter into the contract. The provision of the Indian
Contract Act 1872 regarding the person who can contract would apply.

Company Meetings

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