Company Law in India - A Brief

[Submitted by V. Durga Rao,
Advocate, Madras High Court]

January 2, 2010

In view of the vastness of the subject, the complications and listening at many of my colleagues, I have decided to present a small brief on Companies to be formed under the provisions of Companies Act, 1956, the difference between Private Limited and Public Limited Companies, the applicable law and also the complications. I know the vastness of the subject and I just want to present a small brief as follows:

1. Most significantly, the companies are of two kinds i.e., Private Limited Companies and Public Limited Companies.
    
2. A Public Limited Company can either opt to list its shares in any of the stock exchanges in accordance with the SEBI Guidelines or remain unlisted.
    
3. If a Public Limited Company chooses to list its shares in the Stock Exchanges and if its shares are listed, then, it is called “Listed Public Limited Company”.
    
4. The basic things of incorporation and functioning are like:
    
   
   1. A company needs to be incorporated with Memorandum and Articles with the Registrar of Companies and upon registration, the Company is considered independent from its members and it will be considered as a Juristic Person.
       
   2. There should be minimal capital, subscribers and directors to any company though capital requirements etc. may vary depending upon the kind of the Company.
       
   3. The Company does its business in accordance with its objects as mentioned in Objects Clause in the Memorandum.
       
   4. The Board of Directors or the Board is given certain powers to conduct day-to-day affairs of the Business.
       
   5. Certain important powers can only be exercised by the shareholders at the General Body Meetings.
       
   6. After incorporation, there will be statutory meeting, board meetings, extraordinary general body meetings and an Annual General Body Meeting.
       
   7. Every Company is supposed to maintain the records, preserve the books and papers in accordance with the provisions of the Companies Act, 1956.
       
   8. Every Company is supposed to file certain reports annually like Balance Sheet, Profit & Loss Account and Annual Return with the Registrar of Companies.
       
   9. The ultimate power in any company rests with the shareholders or the members except on very very limited issues like declaration of dividend.
       

5. It is important to note the basic difference between private limited company and the public limited company and the difference is as follows:
    
   

   1. A Company is a Private Limited Company if the transfer of shares is restricted and the Company is restrained from soliciting investments from the public.
       
   2. A Company is a Public Limited Company when its shares are freely transferable and the company can solicit investments from the public in accordance with the provisions of the Act and the regulations.
       
   3. The requirements of forming a Private Limited Company differ from Public Limited Company. For example, the minimum number of directorship in a Private Limited Company is two, whereas for a Public Limited Company, it is three.
       
6. There will be confusion generally as to what is the law applicable to Private Limited Companies, Public Limited Companies and the Listed Public Companies and the brief on the law applicable is as follows:
    
   
   1. The provisions of Companies Act, 1956 will be applicable to the private companies; however, the private companies are allowed to have their own regulations on many issues as dealwith under the provisions of Companies Act, 1956.
       
   2. Apart from the provisions of the Companies Act, 1956, the rules of the Central Government, will be applicable to all Private Limited Companies.
       
   3. The Private Limited Companies and every company should follow the principles enshrined in the Accounting Standards issued by ICAI though the requirement of necessary disclosure in the financial statements is relaxed to Private Companies to a great extent.
       
   4. Every Company is expected to follow the Secretarial Standards issued by ICSI for good Corporate Governance and in order avoid the unnecessary litigation though the application is optional.
       
   5. The provisions of the Companies Act, 1956 and the central government rules are applicable to the Public Companies apart from mandates in Accounting Standards.
       
   6. The discretion of regulating its own affairs through Articles is restricted to Public Companies and provisions of the Act will be applicable to Public Companies to a great extent.
       
   7. The Companies Act, 1956, the rules prescribed by Central Government, the regulations framed by the SEBI, the agreement with Stock Exchanges, the mandates in Accounting Standards, governs the functioning of Listed Public Companies.
       
7. I feel that the Company Law is always interesting and also complicated. There are many complicated areas in Company Law and few complications and complications in practice are as follows:
    
   
   1. Many Private Limited Companies and also closely held companies do not adhere to Corporate Governance, do not maintain the minutes, records, books and papers and, due to non-adhering to corporate governance, the dispute resolution will be very very difficult where there come disputes between groups or among the members in the Company.
       
   2. The Private Limited Companies and the closely held companies used to have understandings and agreements with the primary motive of business expansion and profit and in the course those may not be inconformity with the applicable Company Law and it poses many problems.
       
   3. Despite the MCA scheme and availability of easy e-filing, many companies and especially Private Limited Companies, are defaulting in filing the documents with the ROC and it will have so many implications in the course and especially when dispute comes.
       
   4. The transactions between the Parent Company and its subsidiaries become controversial more often and the provisions of the Act are ignored in most cases.
       
   5. Dispute Resolution Mechanism is alleged to be not effective when there are disputes between two groups in a company needing urgent relief.
       
   6. The liquidation proceedings are alleged to be protracted and the investors are kept in dark in getting their lawful share during the liquidation and we need a sophisticated liquidation mechanism and the things can certainly be speed-up.
       
   7. The BIFR reference and the arrangement/amalgamation provisions are criticized most often, but, as I feel, we have a best amalgamation provisions under the guidance of High Court on implementation and there is a re-look at law applicable Sick Industrial Companies as everybody knows.
       
   8. Though, a listed public limited company is well regulated as compared to private companies and public limited companies in view of Listing Agreement with Stock Exchanges, SEBI regulations, disclosure requirements as per Accounting Standards, the issue of insider trading, the take-overs, complicated stock purchase agreements threatens the investor at times.
       

In my opinion, a Listed Public Limited Company in India, is well regulated and can be trusted in view of plethora of SEBI regulations, guidelines; listing agreements and the requirements to be complied with the Stock Exchanges on continual basis, application of disclosure requirements and the action to be taken by SEBI for violating the regulations with its enormous power under SEBI Act in the interests of shareholders.

Note: I have just given very very small brief on Corporate Structure and applicable laws and complications in Company Law in India and I am aware of the vastness of the subject.

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