Companies Act 2013

The Companies Act 2013 is the law covering incorporation, dissolution and the running of companies in India. The Act came into force across India on 12th September 2013 and has a few amendments to the previous act of 1956. It has also introduced new concepts like a One Person Company.

The Companies Act 2013 is an Act of the Parliament of India on Indian company law which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7 schedules. However, currently there are only 438 (470-39+7) sections remains in this Act. The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August 2013. The Act came into force on 12 September 2013 with few changes like earlier private companies maximum number of members were 50 and now it will be 200. A new term of “one-person company” is included in this act that will be a private company and with only 98 provisions of the Act notified. A total of another 184 sections came into force from 1 April 2014.

The Ministry of Corporate Affairs thereafter published a notification for exempting private companies from the ambit of various sections under the Companies Act.

The 2013 legislation has stipulations for increased responsibilities of corporate executives in the IT sector, increasing India’s safeguards against organized cyber crime by allowing CEO’s and CTO’s to be prosecuted in cases of IT failure.

Under the Companies Act, 2013, there are different types of Companies that can be formed in India. These can be broadly classified on the basis of incorporation, liability of the owners, transferability of shares and control. This article gives a brief about their specific details and help you decide which form of company will work best for you.

They are categorized as follows:

1. On the Basis of Incorporation

On the basis of incorporation, companies are classified into:

(i) Registered Companies

These companies come into existence only when they receive a Certificate of Incorporation from the Registrar of Companies (RoC), thereby, registering themselves under the Companies Act, 2013.

(ii) Statutory Companies

Such companies are formed by a special act passed by the Parliament or central/state legislation. They are independent and exercise control over a specified area or any commercial activity.

2. On the Basis of Liability

Companies can also be classified into three categories on the basis of liability of its members.

(i) Companies Limited by Guarantee

A company limited by guarantee refers to a company having the liability of its members limited by the memorandum to an amount the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.

(ii) Companies Limited by Shares

A company limited by shares means a company having the liability of its members limited by the memorandum to such amount, if any, unpaid on the shares respectively held by them. The company can enforce this liability either during the lifetime of the company or at the time of winding up.

(iii) Unlimited Liability Companies

Unlimited Company is a kind of a company which doesn’t have any limit on the liability of its members. The liability of the member’s will not cease until the final payment. Such a company may or may not have a share capital of its own.

3. On the Basis of Transfer of Shares

Companies can be classified into two types on the basis of the number of members.

(i) Private Companies

The Companies Act, 2013 define a ‘private company’ means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

• Restricts the right to transfer its shares;
• Except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
• Prohibits any imitation to the public to subscribe for any securities of the company;

(ii) Public Companies

The Companies Act, a ‘public company’ means a company which is not a private company. “public company” means a company which:

• Is not a private company;
• Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital.

(iii) Limited Liability Partnership

Such companies are governed by the provisions mentioned in the Limited Liability Partnership Act 2008.

This form of business enjoys the benefits of limited liability along with the flexibility of management for the partners as in the case of a partnership firm.

Limited Liability Partnership is beneficial for small or medium businesses due to its easy compliance formalities.

(iv) One Person Company

Section 2 (62) of the Companies Act, 2013 says “One person company means a company which has only one person as a member”. It has the benefits of a proprietorship and a company. The owner can run the company solely by fulfilling all the legal requirements and limiting the liability as well.

As per the Act,

(i) The person forming an OPC has to nominate a person with his/her written consent of agreeing to it.

(ii) The name of the company must have one person company mentioned in brackets.

(iii) It must have a maximum of 15 directors, however; a special resolution can be passed to increase this number.

(iv) The individual member will be considered as the first director of the company unless he/she appoints any director(s).

(v) For all legal formalities, it is treated as a private company.

4. On the Basis of Control

Companies can also be categorized into two types based on control –

(i) Holding Companies

The relationship of holding or subsidiary companies is established either with the control of Board of Directors or control of share capital. A company will be a holding company of another in the following scenarios:

Controls the composition of the Board of Directors of the other company.

Exercises or controls more than 50% of the total share capital either on its own or together with one or more of its subsidiary companies.

(ii) Subsidiary Companies

Such companies are owned by another company either partially or wholly. They are also known as sister companies.

Section 2 (88) (i) of the Act says:

A company in which the holding company controls the formation of the Board of Directors is called subsidiary.

(iii) Associate Companies

These companies are influenced by other companies which are not subsidiary companies, and, instead involve a joint venture company.

It has control over the total share capital of at least 20% or right to make business decisions under an agreement.

(iv) Foreign Companies

Companies which are incorporated outside India but, have an established business in India are known as Foreign Companies.

As per the Companies Act,

• The company must have a place of operation in India, either by itself or by an agent.
• Manage any business activity in India in any other manner.

5. On the Basis of Objects

This classification is based on objective of a firm.

(i) Not for Profit Company

These companies are not-for-profit companies having charitable objectives or want to promote commerce, art, science, sports, education, research, etc.

As per Section 8 of the Companies Act, 2013:

• These companies are registered as limited companies, however; they are exempted from using limited or private limited after their company name.
• They intend to use the profits or any other income for the benefits of people.
• The dividend is not paid to any of their members.

They enjoy all the benefits and provisions of a limited company.

The Central Government issues license according to the terms prescribed in the Act to subject them from certain restrictions.

On the basis of Holding of Shares:

Companies on the basis of Holding of Shares can be classified into:

• Government Company: A Government company is a kind of a company in which not less than 51% of the paid-up share capital is held by the Central or State Government, or partly by the Central and State Governments, and includes any company which is a subsidiary of a Government company.
• Foreign Company: A foreign company is any company or body corporate incorporated outside India which has a place of business in India, and conducts any business activity in India.