Year: 2020

Management Notes

Joint Stock Company Meaning, Features, Advantage and Disadvantage

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Joint Stock company is a voluntary association formed for the purpose of carrying on some business. Legally, it is an artificial person and having a distinctive name and a common seal. Lord Justice Lindley of England has defined joint-stock company as “an association of many persons who contribute money or moneys’ worth to a common stock and employ it for a common purpose.

The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.”

The term “joint stock company” has been defined by the Companies Act in India as a company limited by shares having a permanent paid-up or nominal share capital of fixed amount divided into shares, also of fixed amount held and transferable as stock, and formed on the principle of having in its members only the holders of those shares or stock and other persons.”

The important features of a joint stock company are the following – an artificial person created by law, with a distinctive name, a common seal, a common capital with limited liability, and with a perpetual succession. An analysis of the above definition reveals many distinctive features of joint-stock company, which distinguish it from other forms of business organization.

Features of Joint Stock Company

  1. Separate Legal Entity

A joint stock company has a separate legal existence apart from the persons composing it. It can own property and sue in a court of law. A shareholder being an entity distinct from that of a company can sue the company and be sued by it whereas a partnership organization or a sole proprietor has no such legal existence in the eye of the law, separately from the persons composing it. Hence there can’t be a contract between a partner and the firm whereas there can be a contract between a shareholder and a company.

  1. Perpetuity

A joint-stock company has the characteristic of perpetuity unlike a partnership or a sole trading concern. Once, a company is formed, it continues for an unlimited period until it is formally liquidated. The maxim “men may come and men go but I go on forever” applies in the case of the company. But a sole trading concern comes to an end with the death of a sole trader, and in the case of partnership, death, retirement, or insolvency of any member of the partnership would dissolve the firm.

  1. Limited Liability

In the case of joint-stock company the liability of members is normally limited by guarantee or by the shares he has taken. If a member has already paid the complete amount due on his shares, he is not further liable towards the debts of the company. But in the case of sole proprietorship and partnership, the liability is unlimited and in the case of the latter, it is also both joint and several.

  1. Number of Members

In the case of public limited company the maximum number of members is unlimited, the minimum being seven. In the case of a private limited company, the maximum is two. But the number of partners in a partnership cannot exceed ten in the case of business and twenty in other lines of business.

  1. Separation of Ownership from Management

In the case of partnership, partners are not only the owners of the business but they take part its management also. Every member of a partnership firm is an agent of the firm and also of the other members. In the case of joint-stock company, the shareholders are the owners while the management is entrusted to a board of directors, who are separate from shareholders.

  1. Transferability of Shares

The shareholder of a company can transfer his shares to others without consulting other shareholders, whereas in a partnership a partner cannot transfer his share without the consent of all the other partners.

  1. Rigidity of Objects

In the case of partnership, the scope of its business can be changed at any time with the consent of all the partners, whereas a joint stock company cannot do any business not already included in the object clause of the Memorandum of Association of the company. A change in the object clause under condition laid down in the Companies Act is essential for making any alteration in the scope of the business.

  1. Financial Resources

On account of liability and diffusion of ownership in joint company organization, there is a great scope for mobilizing a large capital. But in the case of partnership or sole proprietorship, because of the limited number of members, the resources at their command are limited.

  1. Statutory Regulation

A company has to comply with numerous and varied statutory requirements. It has to submit a number of returns to the government, whereas partnership and sole proprietorship are free from much State control and statutory regulations. Further in the case of the company, accounts must be audited by a charted accountant but it is not compulsory in the case of partnership and sole proprietorship.

Advantages of Joint Stock Company

  1. Financial Strength

The joint stock company can raise a large amount of capital by issuing shares and debentures to the public. There is no limit to the number of shareholders in a company. (However, in a private company the membership cannot exceed 50.) The capital of the company is divided into numerous parts of small value called shares and this attracts even the person with limited resources.

Further, anyone can purchase the shares and leave the responsibility of management to the body of persons called directors. Again, as the shares are freely transferred by selling it in the stock market, this works as an added attraction to the investors. Because of this, the joint stock form of organization is well adopted for raising amounts of capital.

  1. Limited Liability

One important factor which attracts the investors to subscribe is the principle of limited liability. According to this a shareholder’s liability is limited only to the extent of the face value of the shares held by him and his personal properties are not affected. This form of organization is a great attraction to persons who do not want to take much risk in other forms of organization that do not enjoy the benefit of limited liability.

  1. Benefits of Large Scale Organization

As the size of a company is large, the economies of large-scale organization and production are secured. Due to this, the cost of production will be less and the society is in a position to get its requirements at a lesser price.

  1. Scope for Expansion

As there is no limit to the number of persons in a company, there is a great scope for expansion of the business. A company, which is making good profits, can create big reserves which can be used for the expansion of the company. In addition, the availability of managerial talent in the company facilitates the expansion of the business.

  1. Stability

A company is a legal entity and enjoys perpetual succession which means the retirement or death of a shareholder cannot affect the company Even the change in the management or the owner or disputes over the ownership of shares or stock cannot affect the continuity of a company. The companies are well suited for business, which require a long period to establish and consolidate.

  1. Transferability of Shares

One special feature of company is that shares are freely transferable from one person to another without the knowledge of the shareholders. The existence of stock exchanges where shares and debentures are sold and purchased has facilitated as good as cash as they can be sold at any time and there is an added attraction to the investors.

  1. Efficient Management

In company organizations, the agents of production are effectively combined and also there is scope for increased efficiency of direction and management. The most efficient persons may be chosen as directors and if found indifferent, they may be changed in the next meeting. Normally, as the directors have a great stake in the business, in the interest of the company, and in their own interest, they have to be very efficient.

  1. Higher Profit

As a large capital is invested in companies, it would be possible for them to use the expensive machinery and up-to-date equipment resulting in greater production, reduced cost, and higher profit. The progress of industries and commerce of the nation.

  1. Diffused Risk

In this form of organization, the risk is reduced for each shareholder, because it is diffused and spread over several shareholders of the company. This is an advantage from the individual investor’s point of view.

  1. Bolder Management

In this form of organization, as the persons who manage the company have relatively smaller financial stake, they can become adventurous. There are many industries, which would not have come into existence if people had been unduly cautious.

Starting of a new enterprise needs an adventurous spirit and in case of joint-stock company because of its limited liability and smaller financial stake of the persons, who manage it, people can become adventurous and thus start new enterprises.

  1. Social Benefit

The company form of organization has encouraged the habit of saving and investment among the public. It has also indirectly helped the growth of financial institutions such as banks and insurance companies by providing avenues to invest their funds. Further, as companies cannot be managed by all the shareholders who are large in number, it has to employ professional managerial personnel and this has helped the development of management as a profession.

Disadvantages of Joint-Stock Company

  1. Formation is Difficult

The formation of a company involves a long-drawn-out complex procedure. For formation many provisions of the Companies Act are be complied with. Large amount of money have to be spent in order to fulfill the preliminaries. Further, in many cases government sanction is required. These difficulties discourage many persons from starting companies.

  1. Fraudulent Management

Many a time unscrupulous promoters by presenting the prospectus as a rosy picture manage to get capital from the public. This results in companies being started and managed by incapable and fraudulent hands.

  1. Concentration of Control in Few Hands

In theory, democratic principles are followed in the management of companies, but in practice it is nothing but oligarchy of managing director and directors leading to concentration of control in a few hands. The shareholders have no say in the affairs of the company.

As they are spread throughout the country, very few care to attend the meetings and those who do not attend, normally give proxies in favor of managing director or directors. All these facilitate the concentration of economic power in the hands of a few persons.

  1. Encourages Speculation

This form of organization encourages speculation on the stock exchange. Usually the value of the company’s share depends on the dividends declared and reputation of the company, which can be manipulated. This may encourage the managing director and directors to manipulate the shares on the stock exchange in their own interest to the detriment of the majority of shareholders.

  1. Lacks Initiative and Motivation

As there is indirect delegated management in the company form of organization, there is no initiative and motivation. The paid officials who manage the company have no personal interest and this leads to inefficiency and waste.

  1. Conflict of Interest

There is a conflict of interest between persons who are at the helm of affairs of company and shareholders. Many times dishonest persons at the top succeed in cleverly misleading and cheating the shareholders. Again there is a clash of interest between the shareholders.

Again there is a clash of interest between the preference shareholders and equity shareholders. While the preference shareholders want the creation of large reserves out of profits, the equity shareholders are interested in distributing the entire profit by way of dividends.

  1. Excessive Government Control

A company form of organization is very much controlled by the government and it has to observe many provisions of the different regulations of the government. Again, heavy penalty is imposed for the non-observance of the provisions of the Acts. Companies spend much of their precious time in complying with the provisions and the statutory rules.

  1. Lack of Prompt Decision

The prompt decisions which are possible in case of other organizations such as sole-trading organization and partnership are not possible in a company form of organization. Owing to the difficulty of getting the requisite quorum and the presence of diverse interests, which may lead to disagreement, prompt decision cannot be taken.

  1. Monopolistic Control

There is a great possibility for companies to form combination or amalgamate with a view to getting monopolistic control. This is very harmful to the other producers and businessmen in the same line and also to the consumers.

Management Notes

Steps in Formation of Joint Stock Company

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Stage 1. Promotion Stage

Promotion is the first stage in the formation of a company. The term ‘Promotion’ refers to the aggregate of activities designed to bring into being an enterprise to operate a business. It presupposes the technical processing of a commercial proposition with reference to its potential profitability. The meaning of promotion and the steps to be taken in promoting a business are discussed in brief here.

Promotion of a company refers to the sum total of the activities of all those who participate in the building of the enterprise upto the organization of the company and completion of the plan to exploit the idea. It begins with the serious consideration given to the ideas on which the business is to be based.

According to C.W. Grestembeg, “Promotion may be defined as the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits therefrom.”

According to H.E. Heagland, “Promotion is the process of creating a specific business enterprise. Its scope is very broad, and numerous individuals are frequently asked to make their contributions to the programme. Promotion begins when someone gives serious consideration to the formulation of the ideas upon which the business in question is to be based. When the corporation is organized and ready for operation, the major function of promotion comes to an end.”

According to Guthmann and Dougall, “Promotion starts with the conception of the idea from which the business is to evolve and continues down to the point at which the business is full, ready to begin operations in a going concern.”

Stage 2. Incorporation or Registration Stage

Incorporation or registration is the second stage in the formation of a company. It is the registration that brings a company into existence. A company is properly constituted only when it is duly registered under the Act and a Certificate of Incorporation has been obtained from the Registrar of Companies.

Procedure to Get a Company Registered

In order to get a company registered or incorporated, the following procedure is to be adopted:

(i) Preliminary Activities

Before a company is incorporated, the promoter has to take decision regarding the following:

  • To decide the name of the company
  • Licence under Industries Development and Regulation Act, 1951

(ii) Filing of Document with the Registrar

  • Memorandum of Association
  • Articles of Association
  • List of directors
  • Written consent of directors
  • Statutory declaration

Stage 3. Capital Subscription Stage

A private company or a public company not having share capital can commence business immediately on its incorporation. As such ‘capital subscription stage’ and ‘commencement of business stage’ are relevant only in the case of a public company having a share capital. Such a company has to pass through these additional two stages before it can commence business.

Under the capital subscription stage comes the task of obtaining the necessary capital for the company.

For this purpose, soon after the incorporation, a meeting of the Board of Directors is convened to deal with the following business:

  • Appointment of the Secretary. In most cases the appointment of pre-tem secretary (who is appointed at the promotion stage) is confirmed.
  • Appointment of bankers, auditors, solicitors and brokers etc.
  • Adoption of draft ‘prospectus’ or ‘statement in lieu of prospectus’.
  • Adoption of underwriting contract, if any.

Besides the above mentioned business, the Board also decides as to whether:

  • A public offer for capital subscription is to be made, and
  • Listing of shares at a stock exchange is to be secured.

The company will now proceed to obtain the permission of the Controller of Capital Issue, New Delhi, under the Capital Issue Control Act, 1947 if a public offer for sale of shares and debentures exceeding Rs. one crore is to be made during a period of 12 months, unless the issue fulfils the conditions of exemption as laid down in the Capital Issue (Exemption) Order, 1969.

The Capital Issue Control Act, 1947 however, does not apply to a private company, a banking company, an insurance company, and a government company provided it does not make an issue of securities to the general public.

After the above formalities have been completed, the directors of the company file a copy of the ‘prospectus’ with the Registrar and invite public to subscribe to the shares of the company by putting the ‘prospectus’ in circulation.

Application for shares are received from the public through the company’s bankers and if the subscribed capital is at least equal to the minimum subscription amount as disclosed in the prospectus, and other conditions of a valid allotment are fulfilled, the directors of the company pass a formal resolution of allotment.

Allotment letters are then posted, return of allotment is filed with the Registrar and share certificates are issued to the allottees in exchange of the allotment letters. If the subscribed capital is less than the minimum subscription or the company could not obtain the minimum subscription within 120 days of the issue of prospectus, all money will be refunded and no allotment can be made.

It may be noted that a public company having a share capital, but not issuing a ‘prospectus’ has to file with the Registrar ‘a Statement in lieu of Prospectus’ at least three days before the directors proceed to pass the first allotment resolution.

Stage 4. Commencement of Business Stage

After getting the certificate of incorporation, a private company can start its business. A public company can start its business only after getting a’ certificate of commencement of business’.

After getting the certificate of incorporation:

  • A public company issues a prospectus of inviting the public to subscribe to its share capital,
  • A minimum subscription is fixed, and
  • The company is required to sell a minimum number of shares mentioned in the prospectus.

After making the sale of the required number of shares a certificate is sent to the Registrar stating this fact, along-with a letter from the banks, that it has received application money for such shares.

The Registrar scrutinizes the documents. If he is satisfied, then issues a certificate known as Certificate of Commencement of Business. This is the conclusive evidence of the commencement of the business.

Management Notes

Companies Act 2013, Features, Important Definition

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Company

Company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise. It is created under the provisions of a law, such as the Companies Act, 2013 in India. A company has a distinct legal identity separate from its members, meaning it can own property, enter into contracts, sue and be sued in its own name. It continues to exist regardless of changes in ownership or management.

The word “company” is derived from the Latin term com (together) and panis (bread), indicating a group of people who share together. In modern terms, a company refers to an association of persons who contribute money or money’s worth to a common stock and employ it in a trade or business. The capital is generally divided into shares, and the owners of the shares are known as shareholders.One of the key features of a company is limited liability. Shareholders are liable only to the extent of the unpaid value of the shares they hold. This encourages investment since personal assets are protected. Additionally, a company has perpetual succession, meaning it is unaffected by the death, insolvency, or insanity of its members.Companies may be classified into various types such as private companies, public companies, government companies, and one-person companies. Each type is regulated with specific rules and conditions.

Companies Act, 2013

The Companies Act, 2013 is the primary legislation governing the incorporation, regulation, functioning, and dissolution of companies in India. It replaced the earlier Companies Act of 1956 and was enacted to simplify company law, promote corporate governance, and align Indian laws with global standards. The Act was passed by the Parliament of India and received Presidential assent on 29th August 2013. It came into effect in a phased manner starting from 1st April 2014.

The Act consists of 29 chapters, 470 sections, and several schedules. It introduced several significant changes such as the concept of One Person Company (OPC), Corporate Social Responsibility (CSR), enhanced disclosure norms, stricter audit and financial reporting provisions, and the establishment of regulatory bodies like the National Company Law Tribunal (NCLT) and National Financial Reporting Authority (NFRA).

One of the key features of the Act is the emphasis on transparency and accountability. It mandates the rotation of auditors, the appointment of independent directors in listed companies, and the constitution of audit committees. The Act also enhances the protection of minority shareholders and investor interests.

Another notable inclusion is CSR under Section 135, which requires certain companies to spend at least 2% of their average net profits on social development activities.

The Companies Act, 2013 ensures that Indian corporate entities operate with integrity and professionalism. It aims to foster a corporate environment conducive to fair practices, investor protection, and economic growth. Amendments and rules under this Act continue to evolve to address emerging needs.

Objectives of the Companies Act, 2013

  • Promotion of Good Corporate Governance

One of the primary objectives of the Companies Act, 2013 is to promote good corporate governance. The Act introduces provisions relating to independent directors, board committees, disclosure norms, and accountability of management. These measures ensure transparency, ethical conduct, and responsible decision-making by companies. Strong corporate governance helps build investor confidence and improves the credibility of the corporate sector.

  • Protection of Shareholders and Investors

The Act aims to protect the interests of shareholders and investors, especially minority shareholders. Provisions relating to class action suits, oppression and mismanagement, disclosure of information, and voting rights safeguard investors from unfair practices. By ensuring timely and accurate disclosure of financial and operational information, the Act empowers investors to make informed decisions and protects their legal rights.

  • Enhancement of Transparency and Disclosure

Another important objective of the Act is to enhance transparency and disclosure in corporate affairs. Companies are required to maintain proper books of accounts, prepare financial statements, and disclose material information. Mandatory audits and reporting standards ensure accuracy and reliability of information. Transparency reduces fraud, promotes accountability, and strengthens trust among stakeholders.

  • Prevention of Fraud and Corporate Misconduct

The Companies Act, 2013 seeks to prevent fraud, mismanagement, and unethical corporate practices. It introduces strict provisions relating to fraud reporting, auditor responsibilities, and penalties for non-compliance. Serious frauds are dealt with through specialized investigation mechanisms. This objective acts as a deterrent against corporate wrongdoing and promotes integrity in business operations.

  • Strengthening Regulatory Framework

The Act aims to strengthen the regulatory framework governing companies by establishing specialized bodies like the NCLT and NCLAT. These tribunals ensure speedy and expert resolution of corporate disputes. A strong regulatory framework reduces delays, avoids jurisdictional conflicts, and ensures uniform application of company law across the country.

  • Ease of Doing Business

A key objective of the Companies Act, 2013 is to promote ease of doing business. The Act simplifies incorporation procedures, introduces electronic filing, reduces unnecessary approvals, and provides flexibility in compliance. By balancing regulation with convenience, the Act encourages entrepreneurship, supports startups, and promotes business growth in a competitive environment.

  • Promotion of Corporate Social Responsibility (CSR)

The Act introduces Corporate Social Responsibility (CSR) as a statutory obligation for certain companies. This objective encourages businesses to contribute towards social, environmental, and economic development. CSR provisions ensure that companies play an active role in nation-building and sustainable development, aligning business goals with social responsibility.

  • Alignment with Global Standards

The Companies Act, 2013 aims to align Indian company law with international best practices. Provisions relating to governance, auditing, disclosures, and investor protection are designed to meet global standards. This objective enhances India’s global corporate image, attracts foreign investment, and integrates Indian companies into the global business environment.

Features of the Companies Act, 2013

  • Introduction of One Person Company (OPC)

One of the key features of the Companies Act, 2013, is the introduction of One Person Company (OPC). This allows a single individual to form a company, providing more flexibility to small businesses and startups. OPCs have fewer compliance requirements compared to private or public companies, making it easier for individual entrepreneurs to manage their operations.

  • Corporate Social Responsibility (CSR)

The Act makes it mandatory for companies meeting specific criteria (net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more) to spend at least 2% of their average net profits on Corporate Social Responsibility (CSR) activities. This provision was introduced to ensure that companies contribute to societal welfare and sustainable development.

  • Board of Directors and Independent Directors

Companies Act, 2013, mandates that certain companies must appoint a specified number of independent directors on their board. Independent directors provide an objective and unbiased perspective in decision-making, enhancing corporate governance and protecting minority shareholders’ interests.

  • Women Directors

To promote gender diversity, the Act requires certain classes of companies to appoint at least one woman director on their board. This feature aims to bring inclusiveness and diversity to the boardroom, encouraging the participation of women in corporate governance.

  • Stricter Governance Norms

The Act has introduced stricter governance norms by specifying the roles, duties, and responsibilities of directors, auditors, and key managerial personnel. The Act mandates greater accountability and transparency in financial disclosures and decision-making processes, ensuring that the company acts in the best interests of its stakeholders.

  • Fast Track Merger Process

The Companies Act, 2013, allows for a fast-track merger process for certain categories of companies, such as small companies and holding and subsidiary companies. This simplified process reduces the time and complexity involved in mergers and acquisitions, promoting business efficiency and growth.

  • Investor Protection and Class Action Suits

To protect the interests of minority shareholders and investors, the Act allows shareholders to file class action suits if they feel that the company’s activities are prejudicial to their interests. This feature provides a legal remedy to hold directors or management accountable for mismanagement or misconduct.

  • Financial Reporting and Auditing

The Act mandates strict financial reporting and auditing standards. Companies are required to prepare and file financial statements, including a balance sheet and profit & loss account, with the Registrar of Companies. The Act also mandates rotation of auditors every 5 years for listed companies, ensuring independence in auditing.

Important Definitions under the Companies Act, 2013

  • Company

As per Section 2(20) of the Act, a company is defined as a legal entity incorporated under the Companies Act, 2013, or under any previous company law. This definition establishes the concept of a company as a separate legal entity with perpetual succession, distinct from its shareholders and directors.

  • Private Company

According to Section 2(68), a private company means a company that, by its Articles of Association, restricts the right to transfer its shares and limits the number of its members to 200 (excluding employees). It also prohibits any invitation to the public to subscribe to its securities.

  • Public Company

As per Section 2(71), a public company is one that is not a private company. It has no restrictions on the transfer of shares, and it invites the public to subscribe to its shares or debentures.

  • Small Company

Section 2(85) defines a small company as a private company with paid-up capital not exceeding ₹50 lakh and turnover not exceeding ₹2 crore. This classification is aimed at simplifying compliance and governance for smaller entities.

  • One Person Company (OPC)

Defined under Section 2(62), a One Person Company (OPC) is a company that has only one person as a member. This concept was introduced to encourage entrepreneurship by allowing single individuals to form companies without the need for partners or co-owners.

  • Share Capital

According to Section 2(84), share capital refers to the capital raised by a company through the issuance of shares. It includes equity share capital and preference share capital.

  • Director

As per Section 2(34), a director refers to any person who is appointed to the board of a company. Directors are responsible for the management of the company’s affairs and are expected to act in the best interests of the company and its shareholders.

  • Prospectus

Section 2(70) defines a prospectus as any document issued to invite the public to subscribe for securities of a company. It includes advertisements, circulars, or any other communication inviting investment in the company’s securities.

Management Notes

Kinds of Companies, One Person Company, Company limited by Guarantee, Company limited by Shares, Holding Company, Subsidiary Company, Government Company-Associate Company, Small Company Foreign Company, Global Company, Body Corporate, Listed Company

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The term “kinds of companies” refers to the classification of companies based on various criteria such as incorporation, liability, ownership, and public interest. The Companies Act, 2013 provides a legal framework to recognize different types of companies, each serving specific purposes and functioning under distinct regulations.

Kinds of Companies:

1. One Person Company (OPC)

One Person Company (OPC) is a unique type of company introduced by the Companies Act, 2013 under Section 2(62). It allows a single individual to form a company with limited liability, combining the advantages of sole proprietorship and company structure. The OPC is a separate legal entity distinct from its owner, providing the benefit of limited liability protection.

The concept of OPC was introduced to encourage entrepreneurs and small business owners to formalize their business without the need for multiple members. An OPC can be incorporated with just one member, who is the sole shareholder and can also be the director. The member nominates a nominee who will take over the company in case of the member’s death or incapacity.

The key features of OPC include:

  • Single member and one director (though more directors can be appointed later).

  • Limited liability to the extent of shares held by the member.

  • Restricted from carrying out non-banking financial investment activities and cannot voluntarily convert into a public company unless it crosses a prescribed turnover or capital limit.

  • Simplified compliance and lesser regulatory burden compared to other companies.

2. Registered Company

The companies which are registered and formed under the Companies Act, 1956, or were registered under any of the earlier Companies Act are called Registered Company. These are commonly found companies.

They were of three types:

(i) Company Limited by Shares [Sec. 12(2)(a)]

In these companies, the liability of the shareholders is limited up to the extent of the face value of shares owned by each of them, i.e., the member is not liable to pay anything more than the fixed value of the shares, whatever may be the liability of the company.

It is interesting to note that the liability can be maintained either during the existence of the company or during the period of winding-up. Needless to mention, if the shares are fully paid, the liability of the shareholders are nil with the exception to the rule as laid down in Sec. 45. The type of company may be a Private Company or a Public Company.

(ii) Company Limited by Guarantee [Sec. 12(2)(b)]

In these companies, the liability of the shareholders is limited to a specified amount as provided in the memorandum, i.e., each member provides to pay a fixed sum of money in the event of liquidation of the company.

It has a legal entity distinct from its members. The liability of its members is limited. According to Sec. 27(2), the Article of Association of the company must express the number of members by which the company is actually registered.

It is interesting to note that these types of companies are not formed for the purpose of earning revenue/profit but for the purpose of promoting arts, sciences, commerce, culture, sports etc., and, as such, they may or may not have any share capital. So, the amount which has been guaranteed by the members is like reserve capital.

If the company has a share capital, it must conform to Table D in Schedule I, and, if it has no share capital, it must conform to Table C in Schedule I. It is also mentioned here that if it has a share capital, it is governed by the same provisions as governed by the company limited by shares. It cannot purchase its own shares [Sec. 77(1)]. This type of company may be a Private Company or a Public Company.

According to Sec. 426, if the company limited by guarantee is being wound-up, every member is liable to contribute to the assets of the company for:

  • Payment of the liabilities
  • Cost, charges and expenses of winding-up
  • For adjustment of rights of the contributories among themselves

(iii) Unlimited Company [Sec. 12(2)(c)]

In these companies, every shareholder is liable for all the liabilities of the company like ordinary partnership in proportion to his interest. According to Sec. 12, any seven or more persons (two or more in case of private company) may form a company with or without limited liability and a company without limited liability is actually known as unlimited company. It may or may not have any share capital. It will be a private or a public company if it has a share capital. Its Articles of Association will provide the number of members by which the company is registered.

3. Holding Company

According to the Companies Act, 1956, a holding company may be defined as “any company which directly or indirectly, through the medium of another company, holds more than half of the equity share capital of other companies or controls the composition of the board of directors of other companies. Moreover, a company becomes a subsidiary of another company in those cases where the preference shareholders of the latter company are allowed more than half of the voting power of the company from a date before the commencement of this Act”.

The concepts of Holding Company and Subsidiary Company are defined under Section 2(46) and Section 2(87) respectively, of the Companies Act, 2013.

Holding Company is a company that controls another company, known as its subsidiary. Control is usually established when the holding company holds more than 50% of the subsidiary’s voting power or has the power to appoint or remove a majority of the subsidiary’s board of directors. The holding company can also exert significant influence over the subsidiary’s management and policies.

4. Subsidiary Company

Subsidiary Company is a company that is controlled by another company, which is called the holding company. This control is generally exercised through ownership of the majority of the shares or voting rights.

The relationship between holding and subsidiary companies allows for consolidation of accounts and centralized management while maintaining separate legal identities. Both companies are registered independently but connected through shareholding and control.

The Companies Act mandates that the holding company prepare consolidated financial statements that reflect the financial position of both the holding company and its subsidiaries. This ensures transparency and provides a true picture of the group’s overall financial health.

5. Government Company

Government Company is defined under Section 2(45) of the Companies Act, 2013. As per this section, a Government Company is any company in which not less than 51% of the paid-up share capital is held by the Central Government, any State Government, or jointly by the Central and one or more State Governments. It also includes a company which is a subsidiary of such a government company.

Government companies are incorporated under the Companies Act just like private companies, but they function under greater control and supervision of the government. These companies are formed to carry out commercial activities while fulfilling certain public welfare objectives, such as industrial development, infrastructure, and service delivery in key sectors.

They are required to follow most provisions of the Companies Act, 2013, except in cases where the Central Government exempts them under special circumstances. Their accounts are audited by the Comptroller and Auditor General (CAG) of India, and they are subject to Parliamentary or Legislative oversight.

Examples of Government Companies include Bharat Heavy Electricals Limited (BHEL), Oil and Natural Gas Corporation (ONGC), and Steel Authority of India Limited (SAIL). In essence, a Government Company blends commercial efficiency with public accountability, supporting national economic goals while maintaining regulatory compliance.

6. Associate Company

Associate Company is defined under Section 2(6) of the Companies Act, 2013. According to the Act, an associate company is a company in which another company has a significant influence but does not have full control. Specifically, it means a company in which the investing company holds 20% or more of the share capital or where the investing company has the power to exercise significant influence over the management or policy decisions of the company.

Significant influence refers to the power to participate in the financial and operating policy decisions of the investee company but does not amount to control or joint control. This influence can be exercised by shareholding, representation on the board of directors, or other contractual agreements.

The concept of an associate company is important for accounting and consolidation purposes. While an associate company is not a subsidiary, the investing company must disclose its interest and account for its share of profits or losses in the associate in its financial statements under the equity method of accounting.

This classification helps in providing transparency about the relationship between companies that share influence but maintain separate legal identities and operational autonomy. It ensures that investors and stakeholders understand the extent of control and financial interest in related businesses.

7. Small Company

Small Company is defined under Section 2(85) of the Companies Act, 2013. According to this section, a small company means a company, other than a public company, whose paid-up share capital does not exceed ₹2 crore or such higher amount as may be prescribed (not exceeding ₹10 crore), and whose turnover as per its last profit and loss account does not exceed ₹20 crore or such higher amount as prescribed (not exceeding ₹100 crore).

Small companies are generally private companies that are smaller in scale compared to larger private and public companies. The definition excludes companies engaged in banking, insurance, and other regulated sectors.

The classification of small companies aims to provide relaxation in compliance requirements under the Companies Act, 2013. These companies benefit from simplified procedures such as fewer board meetings, reduced disclosure norms, and less stringent auditing requirements. This makes it easier and more cost-effective for small businesses to operate formally.

Small companies play a vital role in the Indian economy by contributing to employment and economic growth. The legal recognition of small companies encourages entrepreneurship by providing an easy entry point with regulatory support tailored to their scale and capacity.

8. Foreign Company

The companies which are incorporated outside India but which had a place of business in India prior to commencement of the new Companies Act, 1956, and continue to have the same or which establishes’ a place of business in India after the commencement of the Companies Act, 1956, is called a foreign company. These companies are registered in a country outside India and under the law of that country.

At present Sec. 591(2) added by the Companies (Amendment) Act, 1974, informs that where not less than 50% of the paid-up share capital (whether equity or preference or partly equity or partly preference) of a foreign company, (i.e., a company incorporated outside India having an established place of business in India) is held by one or more citizens of India and/or by one or more Indian companies, singly or jointly, such company shall comply with such provisions as may be prescribed as if it was an Indian company.

Foreign Company is defined under Section 2(42) of the Companies Act, 2013. According to this section, a foreign company is any company or body corporate incorporated outside India which:
(a) has a place of business in India—whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any manner.

This definition ensures that any overseas company engaging in commercial operations in India falls within the regulatory scope of the Act. The company must register with the Registrar of Companies (RoC) within 30 days of establishing its business presence in India. It is required to file specific documents such as its charter, list of directors, details of principal place of business, and financial statements.

Foreign companies must comply with provisions related to filing annual returns, financial statements, and corporate disclosures as prescribed under the Act. If more than 50% of its paid-up share capital is held by Indian citizens or companies, it is treated as an Indian company for regulatory purposes.

Examples include companies like Google India Pvt. Ltd., Microsoft Corporation (India), and Amazon India, which are incorporated outside India but operate within the country. Thus, the Act ensures that foreign companies functioning in India maintain transparency and accountability.

9. Global Company

Global Company is not specifically defined in the Companies Act, 2013. However, it generally refers to companies that operate on an international scale, having business operations, subsidiaries, or branches across multiple countries. These companies manage production, marketing, and sales worldwide and often influence global markets.

In the Indian context, a global company typically includes large multinational corporations (MNCs) that are registered under the Companies Act, 2013, but conduct business beyond India’s borders. They must comply with Indian laws as well as the regulations of the countries where they operate.

Although the Companies Act, 2013 does not provide a formal definition, provisions related to Foreign Companies (Section 2(42)) and Branches of Foreign Companies (Section 380) cover Indian operations of global firms incorporated abroad.

Global companies usually maintain a network of subsidiaries, associate companies, and joint ventures, integrating their global strategies with local market demands. They are required to file consolidated financial statements under the Act to present an accurate financial picture of the entire group.

These companies contribute significantly to the Indian economy by bringing in foreign investment, technology, and management expertise. They also face stricter regulatory and compliance requirements due to their scale and complexity.

10. Body Corporate

Body Corporate is defined under Section 2(11) of the Companies Act, 2013 as a company incorporated under the Companies Act, or any other company formed by or under any other law for the time being in force, or a body corporate incorporated outside India but having a place of business within India. Essentially, a body corporate is a legal entity recognized by law, capable of entering into contracts, owning property, suing, and being sued.

11. Listed Company

Listed Company is a company whose securities (shares, debentures, etc.) are listed on a recognized stock exchange in India or abroad. Listing provides the company’s securities a platform for trading in the public market, enhancing liquidity and access to capital. Listed companies must comply with stringent regulatory requirements prescribed by the Securities and Exchange Board of India (SEBI) and the Companies Act, 2013.

Listed companies are subject to continuous disclosure requirements, including periodic financial reporting, corporate governance norms, and shareholder protection mechanisms. They must appoint independent directors, form audit and nomination committees, and adhere to strict transparency standards.

12. Chartered Company

Chartered companies are business entities formed under a special charter granted by a monarch or sovereign authority, rather than being established under general company law. These companies were historically prevalent in countries governed by a monarchy, especially during the colonial and mercantile periods. The charter provided by the monarch served as a legal document conferring specific rights, privileges, and obligations to the company and its members.

Under the Companies Act, 2013, there is no explicit provision for the formation of chartered companies. However, the term “chartered company” has historical significance and is understood as a type of company formed under a royal charter rather than a general company law. These companies were typically established in the colonial era when a monarch granted a charter to a group of individuals, authorizing them to undertake business ventures, often with exclusive rights and privileges.

Chartered companies were distinct from companies registered under the Companies Act. They were not formed by filing documents with the Registrar of Companies but through a special grant of powers by a sovereign authority. The charter served as the company’s constitution, defining its objectives, powers, and governance structure. Such companies often carried out trade, exploration, or colonial administration with sovereign-like authority. Examples include the British East India Company and the Hudson’s Bay Company.

While chartered companies are not recognized as a form of incorporation under the Companies Act, 2013, the Act does acknowledge companies formed under special legislation or charters in its definitions. These are categorized as companies not registered under the Act but governed by special provisions, and they may continue their operations as per their founding documents unless contrary to Indian law.

In contemporary India, all companies must be registered under the Companies Act, 2013, or under special statutes enacted by Parliament. Therefore, chartered companies, as traditionally understood, do not exist under current Indian corporate law, though their concept remains relevant for academic and historical reference.

13. Statutory Company

Statutory Company is a type of company that is established through a special Act passed by the Parliament or a State Legislature, rather than being incorporated under the Companies Act, 2013. These companies are governed by the provisions of their respective Acts, and not by the general provisions of the Companies Act, except where specifically mentioned.

The Companies Act, 2013 recognizes the existence of statutory companies under its definition of companies, but such companies are not registered with the Registrar of Companies under this Act. They operate under their own special laws, which define their powers, structure, functions, and governance. These laws override the provisions of the Companies Act in case of any conflict.

Statutory companies are typically formed for public utility services, such as finance, insurance, transportation, or infrastructure development, where government control and regulation are essential. Examples of statutory companies in India include the Reserve Bank of India (RBI), Life Insurance Corporation of India (LIC), State Bank of India (SBI), and Airports Authority of India (AAI).

These companies are required to follow the audit and accountability norms prescribed by their respective Acts and may be subject to oversight by the Comptroller and Auditor General of India (CAG). In summary, a statutory company is a legal entity formed by a special statute, playing a crucial role in delivering national and public-interest services.

14. Private Company

According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a private company is one which, by its Articles:

(i) Restricts the rights to transfer its shares, if any;

(ii) Limits the number of the members to fifty not including

  • Persons who are in the employment of the company
  • Persons who, having been formerly in the employment of the company, were members of the company while in that employment, and have continued to be members after the employment ceases

(iii) Prohibits any invitation to the public to subscribe for any shares in or debentures of, the company.

A private company must have its own Articles of Association which will contain the provisions laid down in Sec. 3(1)(iii).

This type of company is in the nature of partnership with mutual confidence among them.

15. Public Company

Public Company is a type of company defined under Section 2(71) of the Companies Act, 2013. According to the Act, a public company is a company that is not a private company and has a minimum paid-up share capital as prescribed (currently ₹5 lakhs or as notified). It may invite the general public to subscribe to its shares or debentures, and its securities can be listed on a stock exchange.

The key features of a public company include:

  • No restriction on the transfer of shares, ensuring free trading of ownership.

  • Minimum of seven members and no limit on the maximum number of members.

  • It must have at least three directors.

  • It can raise capital from the public through the issue of shares, debentures, and public deposits, subject to regulatory norms.

Public companies must follow stringent disclosure, compliance, and corporate governance norms, including regular audits, board meetings, and filing with the Registrar of Companies. They are also required to appoint independent directors and form key committees like the Audit Committee and Nomination & Remuneration Committee if listed.

Examples of public companies include Tata Steel Ltd, Infosys Ltd, and Reliance Industries Ltd. In essence, a public company serves as a transparent and regulated form of business, enabling broader public participation in ownership.

Management Notes

One Person Company Concept, Definition and Features

indiafreenotesby indiafreenotes1

One Person Company (OPC) is a significant concept introduced in the Companies Act, 2013, designed to cater to small entrepreneurs by allowing a single person to form a company. This concept recognizes the need for a business structure that bridges the gap between sole proprietorship and private limited companies. OPC offers the advantages of a company, such as limited liability, while simplifying the compliance requirements for a single business owner.

Definition of One Person Company:

As per Section 2(62) of the Companies Act, 2013, a One Person Company (OPC) is a company that has only one person as its member. Unlike traditional companies that require a minimum of two or more members, OPC allows a single individual to incorporate and operate a company as both the sole shareholder and director. However, the company must nominate another individual as a nominee to take over the company’s responsibilities in the event of the sole member’s death or incapacity.

In essence, OPC is a Corporate entity with the same legal recognition as a private limited company, but with the flexibility and control typically associated with sole proprietorship. This concept provides a significant boost to individual entrepreneurs by offering the benefits of limited liability and the legal structure of a company without needing multiple partners.

Features of One Person Company:

  1. Single Shareholder Structure

The most defining feature of an OPC is that it has only one shareholder. This feature makes OPC suitable for individuals who want full control over their business operations without the need for partners or co-owners. The sole member owns the entire share capital of the company. However, the member must appoint a nominee who will assume ownership if the member is unable to run the company due to death or incapacity.

  1. Limited Liability Protection

Like other types of companies, an OPC offers limited liability protection to its sole shareholder. The personal assets of the shareholder are safeguarded, and the liability is limited to the unpaid amount on shares held. This protection encourages entrepreneurs to take risks without fear of losing their personal wealth in case the business faces financial difficulties.

  1. Separate Legal Entity

A One Person Company is considered a separate legal entity from its sole member. It has its own legal identity, distinct from the individual shareholder. This means the OPC can own property, enter into contracts, sue, and be sued in its own name, just like any other company. The existence of the OPC is independent of its member, ensuring business continuity.

  1. Nominee for Continuity

One unique feature of an OPC is the requirement to appoint a nominee at the time of incorporation. The nominee takes over the responsibilities of the OPC if the sole member dies or becomes incapacitated. The nominee must give their consent in writing, and their name is registered with the Registrar of Companies. This provision ensures continuity of the business, even in unforeseen circumstances.

  1. Less Compliance Compared to Private Limited Companies

One of the significant advantages of OPC is its simplified compliance structure. The regulatory requirements for OPCs are less stringent compared to other types of companies, especially private limited companies. For instance, OPCs are exempt from holding Annual General Meetings (AGMs), and their financial statements do not need to be filed with the same level of detail as other companies. This makes it easier for a single entrepreneur to manage compliance without excessive administrative burdens.

  1. No Minimum Paid-Up Capital Requirement

Initially, the Companies Act, 2013, prescribed a minimum paid-up capital requirement for OPCs, but this requirement has been removed in subsequent amendments. Now, there is no prescribed minimum paid-up capital for forming an OPC, making it accessible for entrepreneurs with limited capital. The flexibility of capital structure allows businesses to start small and scale as needed.

  1. Conversion into Private or Public Company

An OPC can be converted into a private or public company if the need arises. Once the paid-up capital exceeds ₹50 lakh or the annual turnover exceeds ₹2 crore, the OPC is required to convert itself into a private or public limited company. The conversion process is relatively straightforward and provides the option for entrepreneurs to scale their businesses as they grow.

  1. Exemption from Certain Provisions of the Companies Act

OPCs are granted exemptions from some of the more complex provisions of the Companies Act, 2013. For example, OPCs are not required to prepare a cash flow statement as part of their financial statements. Additionally, OPCs do not need to hold board meetings if there is only one director, and the director can sign resolutions without needing a physical meeting.

  1. Restrictions on Business Activities

An OPC cannot engage in Non-Banking Financial Activities (NBFCs), including investing or acquiring securities of other body corporates. Additionally, an OPC cannot voluntarily convert into any other kind of company unless it has been in existence for at least two years, or its paid-up share capital or turnover exceeds the prescribed limits. These restrictions ensure that OPCs remain small in scale and serve their intended purpose of supporting small businesses and individual entrepreneurs.

Management Notes

Private Company Concept, Definition and Features

indiafreenotesby indiafreenotes3

Private Company is a specific type of business entity that offers many benefits, especially to small and medium-sized businesses. Under the Companies Act, 2013, the concept of a private company plays a critical role in India’s corporate structure. Private companies are distinct from public companies and offer a more controlled and flexible environment for conducting business, with less public scrutiny and fewer regulatory obligations.

Definition of a Private Company:

According to Section 2(68) of the Companies Act, 2013, a Private Company is defined as a company that has a minimum paid-up share capital as prescribed, and by its Articles of Association (AOA):

  1. Restricts the Right to Transfer its Shares.
  2. Limits the number of its Members to 200, excluding current and past employees who are members.
  3. Prohibits any invitation to the Public to Subscribe to any Securities of the company.

In essence, a private company is a corporate entity that operates in a closed environment, with ownership typically confined to a select group of individuals such as family members, friends, or business partners. It is characterized by limited shareholder participation and the restriction of public trading in its shares.

Concept of a Private Company:

Private company is ideal for businesses that want to maintain close control over operations and ownership while still benefiting from the advantages of limited liability and separate legal entity status. This business structure is commonly used for small to medium enterprises (SMEs), startups, and closely-held businesses that do not require public investment but still want the formal structure and legal protections of a corporation.

Private companies operate within a more intimate ownership framework. Shareholders in a private company typically have close relationships, and the company’s activities are not subject to the same level of public scrutiny or regulatory oversight as public companies.

Features of a Private Company:

  1. Limited Number of Members

One of the key features of a private company is that it limits the number of members to a maximum of 200. This number excludes current employees or former employees who were members during their employment. This feature ensures that ownership remains within a tight-knit group, making it easier to manage and control the company.

  1. Restricted Transferability of Shares

Private company restricts the transfer of its shares, as outlined in its Articles of Association (AOA). Unlike public companies, where shares can be freely traded on the stock exchange, a private company’s shares can only be transferred with the consent of existing shareholders. This restriction ensures that ownership remains confined to a select group, preventing outside interference or unwanted investors.

  1. No Public Invitation for Subscription

Private company is prohibited from inviting the public to subscribe to its shares or debentures. This means that private companies cannot raise capital by offering shares to the general public, unlike public companies. The company relies on internal sources of funding, such as investments from shareholders or loans, rather than public capital markets.

  1. Separate Legal Entity

Private company is a separate legal entity from its owners. This means that the company has its own legal identity and can own property, enter into contracts, sue, and be sued in its own name. This separation between the company and its owners protects the shareholders’ personal assets from being affected by the company’s liabilities.

  1. Limited Liability

One of the most significant benefits of forming a private company is the concept of limited liability. Shareholders in a private company are only liable for the amount of unpaid capital on their shares. In case the company faces financial difficulties or insolvency, the personal assets of shareholders are not at risk, providing them with significant financial protection.

  1. Less Stringent Regulatory Requirements

Private companies enjoy less stringent regulatory and compliance requirements compared to public companies. For instance, private companies are not required to file their financial statements with the same level of detail as public companies. They are also exempt from several provisions of corporate governance that apply to listed companies, such as the requirement for independent directors or the need for quarterly financial disclosures.

  1. Perpetual Succession

Private company has perpetual succession, meaning that it continues to exist irrespective of changes in its ownership or management. The company is not affected by the death, bankruptcy, or incapacity of any shareholder or director. This ensures business continuity, making the company a stable and long-term entity that can survive beyond its original founders.

  1. Minimum Number of Members and Directors

Private company must have a minimum of two members and two directors. In the case of a One Person Company (OPC), the company can operate with just one director and one shareholder. However, in a typical private company, there must be at least two individuals involved in its governance. Directors are responsible for managing the company’s affairs and making decisions in the best interests of the company.

  1. Articles of Association

The Articles of Association (AOA) play a critical role in a private company, as they outline the company’s internal rules, including the restriction on share transfers and shareholder rights. The AOA provides flexibility to private companies to draft rules that suit their specific needs, as long as they comply with the Companies Act, 2013.

  1. No Requirement for Minimum Paid-Up Capital

One of the key amendments introduced in the Companies Act, 2013, is the removal of the requirement for a minimum paid-up capital. Earlier, companies had to meet specific capital requirements to incorporate. Now, private companies can be formed without any minimum paid-up capital, making the incorporation process more accessible for small businesses and startups.

  1. Involvement of Promoters

Promoters play a vital role in the formation and incorporation of a private company. Promoters are the individuals who conceive the idea of starting a company, take the initiative to form it, and perform all necessary legal formalities. They draft the Memorandum of Association (MOA) and Articles of Association (AOA), and ensure the company is registered with the Registrar of Companies.

  1. Taxation and Dividend Distribution

Private companies are subject to corporate taxation. The company’s profits are taxed at the corporate rate, and any dividend distributed to shareholders is subject to dividend distribution tax. Unlike sole proprietorships and partnerships, where profits are directly taxed in the hands of the owners, a private company is taxed as a separate entity.

Management Notes

Public Company Concept, Definition, Features and Formation

indiafreenotesby indiafreenotes2

Public Company is a vital part of a country’s economic framework, offering a broader platform for raising capital and facilitating large-scale businesses. In contrast to private companies, public companies can offer shares to the general public, making them an integral component of capital markets. The Companies Act, 2013, defines public companies and outlines the requirements for their formation, governance, and operation.

Definition of a Public Company:

According to Section 2(71) of the Companies Act, 2013, a Public Company is a company that is not a private company and:

  1. Has a minimum paid-up share capital as prescribed under the law.
  2. Offers its shares to the public through a stock exchange or other means.
  3. Allows for free transferability of its shares.

Public company can invite the general public to subscribe to its shares or debentures, making it a key player in capital markets. It can have an unlimited number of shareholders and enjoys higher visibility and access to large-scale funding through initial public offerings (IPOs) and subsequent offers.

Concept of a Public Company

Public Company is typically formed to cater to large-scale business ventures that require substantial capital. By issuing shares to the public, the company can accumulate significant resources for growth, expansion, and diversification. Public companies are often subject to higher regulatory scrutiny and must adhere to strict compliance guidelines, ensuring transparency in operations and protecting the interests of investors.

In a public company, the ownership is shared among the shareholders, and the company’s activities are governed by a board of directors. The company’s shares are freely transferable, and shareholders can buy or sell their shares on the stock market, making it easier for investors to liquidate their investments.

Features of a Public Company:

  1. Unlimited Number of Shareholders

A public company can have an unlimited number of shareholders, which is one of the key distinguishing factors from private companies, where the number of shareholders is capped at 200. This feature allows public companies to access a wide pool of capital by offering shares to the general public.

  1. Free Transferability of Shares

In a public company, shares are freely transferable. Shareholders can buy or sell their shares on the stock exchange without any restrictions. This liquidity makes public companies attractive to investors who seek flexibility in their investments. It also facilitates the entry and exit of shareholders, contributing to a dynamic ownership structure.

  1. Raising Capital from the Public

One of the primary features of a public company is its ability to raise capital by offering shares to the public. Through initial public offerings (IPOs) and follow-on public offerings (FPOs), a public company can accumulate large sums of money from individual and institutional investors. This capital is often used for business expansion, research and development, infrastructure, and other large-scale projects.

  1. Strict Regulatory Oversight

Public companies are subject to stringent regulatory oversight by authorities such as the Securities and Exchange Board of India (SEBI). They must comply with various rules and regulations regarding disclosure, financial reporting, corporate governance, and investor protection. This regulatory framework ensures transparency and accountability, protecting the interests of the shareholders and the general public.

  1. Mandatory Compliance with Listing Requirements

To list on a stock exchange, a public company must meet the listing requirements specified by the exchange and regulatory authorities. These requirements include minimum capital thresholds, disclosure of financial statements, corporate governance standards, and adherence to other operational rules. Once listed, the company must regularly update shareholders on its financial health, management decisions, and business strategy.

  1. Separate Legal Entity

Like other types of companies, a public company is a separate legal entity. This means that the company exists independently of its shareholders and management. It can own assets, incur liabilities, sue, and be sued in its own name. This separate legal existence also ensures perpetual succession, meaning the company continues to exist even if shareholders or directors change.

  1. Corporate Governance and Board of Directors

Public companies are required to have a board of directors responsible for making critical decisions related to the company’s management, strategy, and operations. Corporate governance practices are strictly regulated, with provisions for independent directors and committees such as the audit and remuneration committees. These measures are designed to ensure the company is managed in the best interests of the shareholders.

Formation of a Public Company:

The formation of a public company in India involves a structured process that must comply with the provisions of the Companies Act, 2013.

  1. Minimum Requirements

Before forming a public company, certain minimum requirements must be fulfilled:

  • A public company must have a minimum of 7 members (shareholders).
  • It should have at least 3 directors.
  • The company should have a minimum paid-up share capital, as prescribed under the Companies Act.

  1. Name Approval

The first step in the formation of a public company is to apply for the name approval of the company with the Registrar of Companies (ROC). The name must be unique and not resemble the name of an existing company. It must also end with the words “Limited” to indicate that it is a public limited company.

  1. Drafting Memorandum of Association (MOA) and Articles of Association (AOA)

Once the name is approved, the promoters must prepare the Memorandum of Association (MOA) and the Articles of Association (AOA). The MOA defines the company’s objectives, scope, and powers, while the AOA outlines the internal regulations governing the company’s management and operations.

  1. Filing with Registrar of Companies

The next step is to file the incorporation documents with the ROC, including the MOA, AOA, and the details of the company’s directors, shareholders, and registered office. The prescribed forms, such as Form SPICe+, must be submitted along with the necessary fees.

  1. Obtaining Certificate of Incorporation

Once the ROC verifies the documents, the company is issued a Certificate of Incorporation. This certificate serves as official proof of the company’s legal existence. The date mentioned in the certificate is considered the company’s incorporation date.

  1. Commencement of Business

Before the company can begin operations, it must file a declaration with the ROC confirming that the paid-up share capital has been deposited. This is a crucial step, as no company can commence business activities without meeting this requirement.

  1. Listing on a Stock Exchange

If the public company intends to list its shares on a stock exchange, it must comply with the listing requirements of the chosen exchange, such as the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). This process involves filing additional documents, such as the prospectus, which provides detailed information about the company’s business, financial health, and the terms of the share offer.

  1. Appointment of Auditors and Corporate Governance

Once the company is incorporated, it must appoint auditors within 30 days of its registration. The auditors are responsible for reviewing the company’s financial statements and ensuring compliance with accounting standards. The company must also establish its corporate governance framework, including the appointment of independent directors, if required.

Management Notes

Company Limited by Guarantee, Definition and Features, Formation, Types

indiafreenotesby indiafreenotes1

Company Limited by Guarantee is defined under the Companies Act, 2013 in Section 2(21) as a company in which the liability of its members is limited by the company’s memorandum of association to such an amount as the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.

In simpler terms, the members of the company do not have shares, but they agree to pay a specific sum (called a “guarantee”) if the company is liquidated. The amount of this guarantee is specified in the memorandum of association and represents the member’s maximum financial responsibility.

Features of a Company Limited by Guarantee:

  1. No Share Capital

Company Limited by Guarantee typically does not have share capital, meaning it does not issue shares to its members. Instead, it functions on the basis of members’ guarantees. However, in some cases, a company limited by guarantee may also have a share capital, but this is less common.

  1. Liability of Members Limited to Guarantee

The most important feature of a company limited by guarantee is that the liability of the members is limited to the amount they have agreed to guarantee. This means that members are not personally liable for the company’s debts beyond the amount specified in their guarantee. This feature provides financial protection to the members, similar to the concept of limited liability in other types of companies.

  1. Non-Profit Objective

Most companies limited by guarantee are non-profit organizations. They are typically established for charitable, educational, cultural, or social purposes. Any surplus profits generated are generally reinvested into the company to further its objectives, rather than being distributed to members as dividends.

  1. No Dividends

Since the company is generally established for non-profit purposes, members do not receive dividends. The company’s income is used to achieve its stated objectives, such as funding charitable projects or educational initiatives.

  1. Separate Legal Entity

Like other types of companies, a Company Limited by Guarantee is a separate legal entity from its members. This means that the company can enter into contracts, own property, sue, and be sued in its own name. This separation also ensures the perpetual existence of the company, which continues even if the members or directors change.

  1. No Ownership by Members

In a Company Limited by Guarantee, the members do not “own” the company as shareholders do in a company limited by shares. Instead, the members are simply guarantors who contribute financially if the company is wound up. This structure is ideal for organizations that prioritize their mission or purpose over generating profit for owners.

  1. Control by Members

Members of a Company Limited by Guarantee have the power to elect directors, who are responsible for managing the company’s operations. Members also have a say in important decisions, such as changes to the company’s constitution, by voting at general meetings. However, their control is not based on shareholding but on their role as guarantors.

  1. Flexible Governance Structure

The governance structure of a Company Limited by Guarantee is flexible, allowing it to be tailored to the organization’s needs. The Memorandum of Association (MOA) and Articles of Association (AOA) define the rules for managing the company, the role of members and directors, and the company’s objectives. This flexibility makes it suitable for a wide range of non-profit and charitable activities.

  1. Filing and Compliance Requirements

A Company Limited by Guarantee must comply with the provisions of the Companies Act, 2013, including filing annual returns, holding meetings, and maintaining proper financial records. These companies are subject to the same legal requirements as other companies, ensuring transparency and accountability in their operations.

Formation of a Company Limited by Guarantee:

The process for forming a Company Limited by Guarantee is similar to that of any other company under the Companies Act, 2013, but with certain unique considerations due to its non-profit nature.

  1. Minimum Number of Members and Directors

A Company Limited by Guarantee requires:

  • A minimum of two members (for private companies) or seven members (for public companies).
  • A minimum of two directors (for private companies) or three directors (for public companies).
  • Members must agree to the amount they will guarantee in the event of the company’s winding up.

  1. Memorandum of Association (MOA) and Articles of Association (AOA)

The company’s Memorandum of Association (MOA) must specify the amount of the guarantee each member agrees to contribute. The MOA also outlines the company’s objectives, particularly its non-profit nature, if applicable. The Articles of Association (AOA) set out the rules governing the company’s internal management, such as how directors are appointed, how meetings are conducted, and how decisions are made.

  1. Application for Name Approval

The promoters of the company must apply for name approval with the Registrar of Companies (ROC). The proposed name must comply with the naming guidelines under the Companies Act and must not be similar to any existing company’s name. The name should reflect the company’s non-profit or guarantee-based structure, often ending with the words “Limited by Guarantee.”

  1. Filing Incorporation Documents

After the name is approved, the incorporation documents must be filed with the ROC, including:

  • Form SPICe+ (Simplified Proforma for Incorporating a Company Electronically).
  • The MOA and AOA, outlining the company’s objectives, rules, and member responsibilities.
  • Details of members and directors.
  • The address of the company’s registered office.
  • Payment of the required fees.

  1. Obtaining the Certificate of Incorporation

Upon verification of the documents, the Registrar of Companies will issue a Certificate of Incorporation, which officially establishes the company as a legal entity. The certificate includes the company’s Corporate Identification Number (CIN) and the date of incorporation.

  1. Commencement of Business

Before starting business activities, the company must meet any additional compliance requirements, such as opening a bank account, filing the necessary declarations with the ROC, and registering with relevant authorities if it is a charitable organization (e.g., obtaining tax exemptions under Section 80G of the Income Tax Act).

  1. Compliance and Ongoing Obligations

Once incorporated, the company must maintain proper records and comply with legal obligations, including:

  • Holding annual general meetings (AGMs).
  • Filing annual returns and financial statements.
  • Adhering to audit requirements.
  • Ensuring that the company’s activities are in line with the objectives outlined in the MOA, especially if it operates as a non-profit organization.

Types of Company Limited by Guarantee

  1. Company limited by Guarantee having Share capital

Company will be set in motion with some initial capital or working funds from its members as initial working capital is not available through grants, subscriptions, fees, endowments or any other sources. But later, once the operation is started, normal working funds can be received from the services rendered in the form of fees, charges and subscriptions. Voting power in guarantee company having share capital is determined by the shareholding.

  1. Company limited by Guarantee not having Share capital

Such type of guarantee companies do not obtain initial capital or working funds from its members. Instead, the company raise the working funds through various other sources like endowments, grants, subscriptions and fees etc. For example, non-profit companies or charitable institutes started by public donations or government grants. Voting power in guarantee company not having share capital is determined by the guarantee.

Management Notes

Company Limited by Shares, Definition, Features, Formation, Types

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Under Section 2(22) of the Companies Act, 2013, a Company Limited by Shares is defined as a company in which the liability of its shareholders is limited to the amount, if any, unpaid on their shares. This means that shareholders are only liable for the unpaid portion of their shares, and beyond that, their personal assets are not at risk if the company incurs debt or is liquidated.

For example, if a shareholder has purchased 100 shares at ₹10 each but has paid only ₹7 per share, their liability is limited to ₹3 per share. The company can ask the shareholder to pay the remaining ₹3 if the company faces liquidation.

Features of a Company Limited by Shares:

  1. Limited Liability of Shareholders

The most significant feature of a company limited by shares is that the liability of shareholders is limited to the amount unpaid on their shares. This means that shareholders are not personally liable for the company’s debts or obligations, providing them with protection from financial risk beyond their investment in the company.

  1. Separate Legal Entity

Company limited by shares is considered a separate legal entity from its shareholders. It can own property, enter into contracts, sue, and be sued in its own name. This separation provides the company with a distinct identity, independent of its shareholders or directors.

  1. Perpetual Succession

Company enjoys perpetual succession, meaning that it continues to exist even if shareholders or directors change or pass away. The company’s existence is not affected by the death, insolvency, or retirement of its members, and it continues to operate as long as it is legally dissolved.

  1. Free Transferability of Shares

In the case of a public company limited by shares, shares are freely transferable, allowing shareholders to sell or transfer their shares without any restrictions. This feature provides liquidity to shareholders, enabling them to exit their investment easily. However, private companies may have restrictions on the transfer of shares as per their Articles of Association.

  1. Capital is Divided into Shares

The capital of a company limited by shares is divided into shares of fixed value. Each share represents a unit of ownership in the company, and the shareholders are issued a share certificate as proof of their ownership. Shareholders receive a portion of the company’s profits in the form of dividends, proportional to the number of shares they own.

  1. Corporate Governance and Board of Directors

Company limited by shares is governed by a board of directors, who are responsible for making key decisions and managing the company’s affairs. The shareholders elect the board of directors, who, in turn, appoint senior management to run the day-to-day operations of the company. This governance structure ensures that the company operates efficiently and in the best interest of its shareholders.

  1. Raising Capital Through Shares

One of the key advantages of a company limited by shares is its ability to raise capital by issuing shares. Companies can issue equity shares to investors, providing them with ownership rights in the company. Additionally, the company can issue preference shares or debentures to raise further capital. This feature enables companies to accumulate substantial funds for expansion and growth.

  1. Compliance and Legal Framework

Companies limited by shares must comply with the regulations outlined in the Companies Act, 2013, which governs their formation, operation, and dissolution. These companies are required to file annual financial statements, hold general meetings, and adhere to rules related to corporate governance and disclosure.

Formation of a Company Limited by Shares:

The process of forming a company limited by shares in India involves a number of steps and is governed by the Companies Act, 2013. Below are the key steps involved in the formation process:

  1. Minimum Members and Directors

To form a company limited by shares:

  • A Private Company requires a minimum of 2 members and 2 directors.
  • A Public Company requires a minimum of 7 members and 3 directors.

There is no upper limit on the number of shareholders in a public company, but a private company can have a maximum of 200 members.

  1. Name Reservation

The first step in forming a company is to apply for name reservation with the Registrar of Companies (ROC). The proposed name must comply with the guidelines under the Companies Act and should not be similar to the name of any existing company. The name must end with “Private Limited” for a private company or “Limited” for a public company.

  1. Drafting the Memorandum and Articles of Association

The Memorandum of Association (MOA) and Articles of Association (AOA) are key documents that must be drafted during the incorporation process. The MOA outlines the company’s objectives, while the AOA governs the internal management of the company.

  1. Filing Incorporation Documents

The next step is to file incorporation documents with the ROC, including:

  • Form SPICe+ (Simplified Proforma for Incorporating a Company Electronically).
  • The MOA and AOA.
  • Details of the directors and members, including their identification documents.
  • The company’s registered office address.

  1. Obtaining Certificate of Incorporation

Once the ROC reviews and approves the documents, the company is issued a Certificate of Incorporation. This certificate serves as proof that the company has been legally formed and includes details such as the company’s Corporate Identification Number (CIN) and the date of incorporation.

  1. Capital Subscription

After incorporation, the company can begin issuing shares to its subscribers, who must pay for their shares. This capital is used to finance the company’s operations and expansion.

  1. Commencement of Business

The company must file a declaration with the ROC confirming that the paid-up share capital has been deposited in the company’s bank account. Only after this declaration can the company legally commence its business operations.

  1. Compliance with Post-Incorporation Requirements

Once formed, the company must comply with various post-incorporation requirements, such as:

  • Holding an Annual General Meeting (AGM).
  • Filing annual financial statements and annual returns with the ROC.
  • Appointing an auditor within 30 days of incorporation.
  • Ensuring compliance with other applicable regulations under the Companies Act, 2013.

Types of Companies Limited by Shares:

  1. Private Limited Company

Private Limited Company is a company that restricts the transfer of its shares and limits the number of shareholders to 200. Private limited companies are commonly used for smaller businesses that want to limit the liability of their members while maintaining control over ownership.

  1. Public Limited Company

Public Limited Company is a company that can offer its shares to the public and has no restriction on the number of shareholders. These companies are typically listed on stock exchanges and have to comply with more stringent disclosure and regulatory requirements. Public companies can raise substantial capital by issuing shares to the public.

  1. Listed Company

Listed Company is a public limited company whose shares are listed and traded on a recognized stock exchange. These companies are subject to additional regulations by stock exchanges and regulatory bodies such as the Securities and Exchange Board of India (SEBI).

  1. Unlisted Company

Unlisted Company is a public limited company that has not listed its shares on a stock exchange. While it can still raise capital from the public, it does so without the benefits and obligations of being listed on a stock market.

Management Notes

Holding Company, Types, Benefits, Functions, Legal Requirements

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Holding Company is an entity that has control over one or more companies, known as subsidiaries. Control is typically exercised by owning more than 50% of the subsidiary’s equity share capital or by having the power to appoint or remove a majority of its directors. The holding–subsidiary structure allows the parent entity to influence strategic decisions, manage resources, and oversee operations without being directly involved in day-to-day activities.

Under the Companies Act, 2013, the definition is provided in Section 2(46). A holding company may be incorporated in India or abroad. It must comply with specific legal provisions relating to subsidiary relationships, financial reporting, corporate governance, and restrictions on layers of subsidiaries. This structure is often used for group companies, diversification, risk management, and regulatory benefits, while enabling centralized control over multiple business entities.

Types of Holding Companies

  1. Pure

A holding company is described as pure if it was formed for the sole purpose of owning stock in other companies. Essentially, the company does not participate in any other business other than controlling one or more firms.

  1. Mixed

A mixed holding company not only controls another firm but also engages in its own operations. It’s also known as a holding-operating company.

Holding companies that take part in completely unrelated lines of business from their subsidiaries are referred to as conglomerates.

  1. Immediate

An immediate holding company is one that retains voting stock or control of another company, in spite of the fact that the company itself is already controlled by another entity. Put simply, it’s a type of holding company that is already a subsidiary of another.

  1. Intermediate

An intermediate holding is a firm that is both a holding company of another entity and a subsidiary of a larger corporation. An intermediate holding firm might be exempted from publishing financial records as a holding company of the smaller group.

Benefits of a Holding Company

  1. Greater control for a smaller investment

It gives the holding company owner a controlling interest in another without having to invest much. When the parent company purchases 51% or more of the subsidiary, it automatically gains control of the acquired firm. By not purchasing 100% of each subsidiary, a small business owner gains control of multiple entities using a very small investment.

  1. Independent entities

If a holding company exercises control over several companies, each of the subsidiaries is considered an independent legal entity. It means that if one of the subsidiaries were to face a lawsuit, the plaintiffs have no right to claim the assets of the other subsidiaries. In fact, if the subsidiary being sued acted independently, then it’s highly unlikely that the parent company will be held liable.

  1. Management continuity

Whenever a parent company acquires other subsidiaries, it almost always retains the management. It is an important factor for many owners of subsidiaries-to-be who are deciding whether to agree to the acquisition or not. The holding firm can choose not to be involved in the activities of the subsidiary except when it comes to strategic decisions and monitoring the subsidiary’s performance.

It means that the managers of the subsidiary firm retain their previous roles and continue conducting business as usual. On the other hand, the holding company owner benefits financially without necessarily adding to his management duties.

  1. Tax effects

Holding companies that own 80% or more of every subsidiary can reap tax benefits by filing consolidated tax returns. A consolidated tax return is one that combines the financial records of all the acquired firms together with that of the parent company. In such a case, should one of subsidiary encounter losses, they will be offset by the profits of the other subsidiaries. In addition, the net effect of filing a consolidated return is a reduced tax liability.

Functions of a Holding Company

Successful entrepreneurs with multiple small businesses are typically concerned with limiting liability, streamlining management and retaining ownership control over each entity. Using a holding company can sometimes be the solution to all three concerns. The company works as an umbrella to give you centralized control over your endeavors while maintaining the liability firewall between each business.

  1. Parent Company

A holding company is a corporation or limited liability company that holds a controlling ownership interest in other companies or the assets that those companies use. Typically, a holding company simply holds equity interests or assets, rather than actively engaging in business, such as selling goods or services. Another name for a holding company is a parent, and the companies under it are called operating companies or subsidiaries.

  1. Centralized Control

Entrepreneurs who want to open multiple small businesses can use a holding company to centralize control. The entrepreneur can set up the holding company and designate himself as the sole owner. Each business can be set up separately with the holding company as the owner. In this way, the holding company is the central repository of the equity interests in those companies, and the entrepreneur can select executive management for each company while retaining the ability to direct each entity.

  1. Limiting Investment

Using a holding company also enables you to raise money and create partnerships for each individual entity without losing overarching control of the business conglomerate. An equity investor can invest in one of the companies under the holding company without interfering with any of the others. If you had simply created a single company with multiple divisions or projects, an investor would take an interest in your whole business empire instead of just a single project that is set up as its own business.

  1. Limiting Liability

One of the best uses of a holding company for small-business owners is to further limit liability. Creditors of a corporation or an LLC can go after anything that the entity owns. If you’re in a high-risk business, you can use a holding company to own all of the assets that your business needs to operate, such as real property, vehicles and equipment. The holding company leases those assets to the operating company, so if the operating company gets sued, it owns very little that can be used to satisfy a judgment. The operating company can easily be closed and declared bankrupt, and you can set up another business that leases the exact same assets from the holding company.

  1. Considerations

Creating an interlocking ownership structure for multiple small businesses using a holding company is a sophisticated endeavor with significant tax consequences that are tied to your legal structure choices and tax elections. For example, special personal holding company tax rules apply to corporations but not necessarily LLCs that are used as holding companies. Consult with qualified legal and tax professionals before setting up your businesses.

Holding Companies Legal Requirements under Companies Act, 2013:

The Companies Act, 2013 lays down the following legal requirements:

  1. Definition (Section 2(46)): A holding company includes any body corporate controlling a subsidiary.

  2. Restriction on Layers (Section 2(87) & Rules): A holding company cannot have more than two layers of subsidiaries, except in certain cases (e.g., foreign subsidiaries).

  3. Consolidated Financial Statements (Section 129): Must prepare and present consolidated accounts for itself and all subsidiaries.

  4. Disclosure in Accounts: Details of subsidiaries’ performance must be disclosed in the Board’s Report.

  5. Restriction on Loans & Investments (Section 186): Compliance required for inter-corporate loans, guarantees, and investments.

  6. Related Party Transactions (Section 188): Deals with subsidiaries are treated as related party transactions, requiring approvals.

  7. Annual Return (Section 92): Must include details of subsidiaries, associates, and joint ventures.

  8. Audit Requirements: Subsidiaries’ accounts must be audited and considered in consolidated reports.

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