Tag: Intellectual Property Rights

The formation of a public company is a long and arduous process. First, the company is floated by its promoters, and the process of gathering financial backing begins. The promotion of a company is the very first step in this long process.

Promotion of a Company

It is the first stage in the formation of a company. It begins with a person or a group of persons having thought of or conceived a possible future business opportunity and then taking an initiative to give it a practical shape by way of forming a company. Such a person or a group of persons who proceed to form a company are known as promoters of the company.

Promoters not only conceive a business opportunity but also analyze its prospects and bring together the men, materials, machinery, managerial abilities and financial resources that are necessary for the formation and existence of the company.

Functions of a Promoter 

(i) Identification of Business Opportunity

The promoter first identifies a potential business opportunity. This opportunity may be regarding the production of a new product or service or making a product available through a different channel than before or production of an old product with new updated features or any other such opportunity having an investment potential.

(ii) Feasibility Studies

The promoter after having conceived a business opportunity analyzes the opportunity to see whether it is feasible, technically as well as economically. All identified business opportunities cannot be converted into real projects.

Therefore, the promoters undertake detailed feasibility studies so as to investigate all aspects of the business that they intend to begin with the help of various tools like a study of the market trend, industry trend, market survey, etc. and with the help of specialists like engineers, chartered accountants etc. A venture is only feasible when it passes all the three below mentioned tests.

• Technical feasibility: Sometimes an idea may be good and unique but technically not possible to execute because the required raw material or technology may not be easily available. Every business requires funds.
• Financial feasibility: Sometimes it may not be feasible to arrange a large amount of funds needed for the business in the limited available means. Also, financial institutions may hesitate to grant huge amounts of loan for the new businesses.
• Economic feasibility: A business opportunity may be technically and financially feasible but not economically feasible. It may not be a profitable venture or may not yield enough profits. In such a case, the promoters refrain from starting the business.

(iii) Name Approval

Once the promoters have decided to launch a company next step is to select a name for the company and get it registered with the registrar of companies of the state in which the registered office of the company is to be situated. An application with three names, in the order of their priority, is filed with the registrar to get the name approved.

(iv) Fixing up Signatories to the Memorandum of Association

The promoters decide upon the members who will be signing the Memorandum of Association of the proposed company. Usually, the signatories of the memorandum are the first Directors of the Company. However, the written consent of the persons signing the memorandum is required to act as Directors and to take up the qualification shares in the company.

(v) Appointment of Professionals

Promoters are also required to appoint certain professionals. These professionals help them in the preparation of necessary documents that are required to be filed with the Registrar of Companies such as mercantile bankers, auditors, lawyers, etc.

(vi) Preparation of Necessary Documents

The promoters are required to prepare necessary legal documents that have to be submitted to the Registrar of the Companies for getting the company registered. These documents are return of allotment, Memorandum of Association, Articles of Association, consent of Directors and statutory declaration.

Stages of Promotion

1. Discovery of an Idea:

When a person or persons get an idea that there is the possibility of starting a new business to take advantage of the untapped natural resources or a new invention, discovery of some business opportunities begins.

Such an idea may also be to start a business unit to supply the product at a lower price by breaking the monopoly of existing concern in a particular line of business or to expand an existing concern by converting partnership into private limited company or into public limited company or by combining some going concerns.

But the promoter cannot go ahead immediately after such an idea strikes him. When a person or persons called promoters, understand that there is a possibility of starting some business concern, the idea is said to have been conceived.

2. Detailed Investigation:

Before money is invested to exploit the idea conceived through a detailed investigation of commercial feasibility of idea with reference to sources of supply, extent of demand, present and potential competition, the amount of capital necessary etc. is absolutely essential. The idea must be put to “the rigid test of cold fact of costs and inflexible law of supply and demand.”

For this purpose, promoters have to acquire the services of experts like engineers, values, accountants, statisticians, marketing experts etc. who prepare a report on the position of the market, present and potential competition, amount required for the fixed assets like land, building, machinery, furniture etc.

The report would also include the survey of supply positions of raw material, labour, transport facilities and other relevant items of expenditure. Such an investigation gives the critical appraisal of the idea conceived and reveals whether the idea is commercially feasible or not.

3. Assembling:

After a detailed investigation of the proposition has been made, the promoter decides whether he wants to take the risk of promotion and decide upon a plan of capitalisation. After this he starts to assemble the proposition.

By assembling we mean projecting the fundamental idea, securing all the property needed by enterprise and making contract with all those who are selected to file the chief management positions.

4. Financing the Proposition:

The promoter decides about the capital structure of a company. First of all the requirements of finances are estimated and after that the sources from which this money will come are determined. The financial requirements of short period and long period are estimated so that capital figures may be presented in the Memorandum of Association of a company.

Bond is a fixed-income financial instrument that represents a loan made by an investor to a borrower, typically a corporation or government. It is essentially a contract in which the issuer agrees to pay periodic interest (coupon payments) and return the principal amount (face value) to the bondholder at the bond’s maturity date. Bonds are used by companies, municipalities, states, and governments to finance projects or operations.

Features of Bonds:

1. Fixed Income Instrument

Bonds are fixed-income securities, meaning they offer regular interest payments to investors. These payments, known as coupons, are typically made at fixed intervals (annually or semi-annually). The interest rate is predetermined, providing a predictable stream of income for bondholders throughout the bond’s tenure.

2. Maturity Date

Each bond has a specified maturity date, which marks the end of the bond’s life. On this date, the issuer is required to repay the bond’s face value or principal to the bondholder. Maturity periods can range from a few months to several decades, and the duration influences the bond’s interest rate and risk profile.

3. Face Value

Also known as par value, the face value is the principal amount of the bond that the issuer agrees to repay at maturity. Bonds are typically issued in denominations such as $1,000. The face value is distinct from the bond’s market price, which can fluctuate based on factors like interest rates and credit ratings.

4. Coupon Rate

The coupon rate is the interest rate that the bond issuer agrees to pay the bondholder. It is expressed as a percentage of the bond’s face value. For example, a bond with a face value of $1,000 and a coupon rate of 5% would pay $50 in interest annually. The coupon rate is fixed for the bond’s duration unless the bond has floating rates.

5. Market Price

The market price of a bond fluctuates based on interest rates, demand, and credit risk. Bonds may trade at a premium (above face value) or at a discount (below face value). If interest rates rise, bond prices usually fall, and vice versa. The market price impacts an investor’s yield.

6. Yield

Yield refers to the overall return an investor can expect from holding a bond. It is influenced by the bond’s purchase price, interest payments, and time to maturity. Yield to maturity (YTM) is a commonly used measure, representing the total return expected if the bond is held until maturity.

7. Credit Rating

Bonds are assigned credit ratings by rating agencies such as Moody’s, S&P, and Fitch. These ratings indicate the issuer’s ability to meet its debt obligations. Higher-rated bonds (AAA or AA) are considered safer, while lower-rated bonds (BB or below) are riskier but may offer higher yields.

8. Callable or Non-callable

Some bonds come with a callable feature, allowing the issuer to redeem them before the maturity date. This is often done when interest rates drop, allowing the issuer to refinance the debt at a lower rate. Non-callable bonds, on the other hand, cannot be redeemed early, providing more stability to investors.

Issues of Bonds:

Issuing bonds is a common way for governments, corporations, and other entities to raise capital. Bonds are debt instruments where the issuer borrows money from investors and agrees to pay interest periodically, with the principal repaid at maturity. The process of issuing bonds involves several important steps and considerations.

1. Purpose of Issuing Bonds

Entities issue bonds to raise funds for various purposes, such as:

• Government Bonds: Governments issue bonds to finance budget deficits, public projects (infrastructure, education, healthcare), or to manage national debt.
• Corporate Bonds: Companies issue bonds to fund expansion, acquisitions, operational needs, or to restructure debt.
• Municipal Bonds: Local governments or municipalities issue bonds to fund public infrastructure projects like schools, roads, or hospitals.

2. Bond Offering Process

The process of issuing bonds typically involves several steps:

• Board Approval and Regulatory Compliance: For corporations, the issuance of bonds must first be approved by the company’s board of directors. Additionally, regulatory approvals (such as from the Securities and Exchange Commission, or SEC, in the U.S.) must be obtained before proceeding.
• Engaging Underwriters: Issuers often work with investment banks or underwriters to manage the bond issuance. These underwriters help determine the terms of the bond, the interest rate, and market conditions.
• Pricing the Bond: The bond’s interest rate (coupon) is determined based on factors like market interest rates, the credit rating of the issuer, and the economic environment. The price of the bond is adjusted accordingly to reflect its yield.
• Credit Rating: Before issuing bonds, companies and governments typically seek credit ratings from rating agencies like Moody’s, S&P, or Fitch. A higher credit rating generally leads to lower interest rates, as the risk of default is lower. Lower-rated bonds, or “junk bonds,” must offer higher interest rates to attract investors.

3. Bond Issue Documents

Several legal documents are required for bond issuance, including:

• Prospectus: This document outlines the terms of the bond offering, including the interest rate, maturity date, and risk factors.
• Indenture Agreement: A legal document that specifies the obligations of the issuer, the rights of the bondholders, and details such as interest payments and covenants.

4. Issuance Methods

There are different methods to issue bonds:

• Public Offering: Bonds are offered to the public, often through an underwriting syndicate. In a public offering, bonds are sold to a wide range of institutional and retail investors.
• Private Placement: Bonds are sold directly to a small group of institutional investors. Private placements are often faster and involve less regulatory scrutiny than public offerings.

5. Book Building Process

In a bond issuance, especially corporate or municipal bonds, issuers often use a book-building process. Here, the underwriters gauge investor interest in the bond by soliciting bids from institutional investors. Based on demand, the final price and interest rate of the bond are determined. This process ensures that the bond is priced competitively for both the issuer and investors.

6. Risk and Yield Considerations

The interest rate offered on the bond is often related to the issuer’s creditworthiness. Higher credit ratings (AAA) indicate lower risk, resulting in lower interest rates. Conversely, lower-rated bonds (junk bonds) carry higher risk, so they must offer higher yields to attract investors.

7. Issuance Costs

Issuing bonds involves costs such as underwriting fees, legal expenses, and rating agency fees. These costs must be factored into the overall financial planning of the bond issuance.

8. Market Conditions

Bond issuers must assess current market conditions, including prevailing interest rates, inflation expectations, and investor demand for fixed-income securities. Timing the issuance when market conditions are favorable can lead to more successful bond sales and better terms for the issuer.

Types of Bonds:

1. Government Bonds

Issued by national governments, these bonds are considered one of the safest investments since they are backed by the government’s credit. In the U.S., these are called Treasury bonds, while other countries have their equivalents. They typically offer lower returns due to their safety.

2. Corporate Bonds

Issued by companies to raise capital for operations, expansion, or acquisitions. Corporate bonds carry more risk than government bonds but offer higher yields. The risk level depends on the company’s creditworthiness, ranging from investment-grade to high-yield (junk) bonds.

3. Municipal Bonds

Issued by local governments or municipalities to fund public projects like infrastructure development, schools, or hospitals. Municipal bonds offer tax advantages in many countries, such as tax-free interest income in the U.S. These bonds are relatively low risk but not as safe as government bonds.

4. Convertible Bonds

These are corporate bonds that can be converted into a pre-specified number of the company’s shares. Convertible bonds provide the safety of a bond with the potential upside of equity if the company’s stock performs well.

5. Zero-Coupon Bonds

These bonds do not pay periodic interest. Instead, they are issued at a discount to their face value, and investors receive the face value at maturity. The difference between the purchase price and the face value represents the interest earned. These bonds can be more sensitive to interest rate changes.

6. Callable Bonds

Callable bonds give the issuer the right to repay the bond before its maturity date. Companies typically call bonds when interest rates fall, allowing them to refinance at a lower rate. These bonds carry reinvestment risk for investors, as they may not find another investment with similar returns when the bond is called.

7. Floating Rate Bonds

Unlike fixed-rate bonds, floating-rate bonds have interest rates that adjust periodically based on a benchmark, such as the LIBOR (London Interbank Offered Rate). This makes them less sensitive to interest rate fluctuations and inflation.

8. Inflation-Linked Bonds

These bonds are designed to protect investors from inflation. The principal amount of the bond increases with inflation, as measured by a specific index like the Consumer Price Index (CPI). Interest is paid on the inflation-adjusted principal.

Debenture is a type of debt instrument that is unsecured by physical assets or collateral. Debentures are issued by companies to borrow money for a fixed term at a fixed interest rate. Debenture holders are not owners of the company but are creditors. The company promises to pay the debenture holder a fixed interest at predetermined intervals (typically annually or semi-annually) and return the principal on the maturity date.

Debentures can either be convertible or non-convertible, and they often have specific terms outlining the interest rate, payment schedule, and maturity date. If the company defaults on its payments, debenture holders may have legal recourse to recover their investment.

Types of Debentures:

1. Convertible Debentures:

These debentures can be converted into equity shares after a specified period or at the discretion of the debenture holder. This type allows investors to gain potential equity ownership in the company.

2. Non-Convertible Debentures (NCDs):

These debentures cannot be converted into equity shares. They remain purely a debt instrument throughout their tenure. NCDs typically offer higher interest rates since they don’t provide the opportunity to convert to equity.

3. Secured Debentures:

Although most debentures are unsecured, some may be secured by the company’s assets. In the event of default, secured debenture holders have a claim on specific company assets.

4. Unsecured Debentures:

These are not backed by any collateral, making them riskier for investors compared to secured debentures. Unsecured debentures rely entirely on the company’s creditworthiness.

5. Redeemable Debentures:

These are debentures that the company agrees to repay after a specific period. They can be redeemed at the maturity date, ensuring that investors get back their principal.

6. Irredeemable (Perpetual) Debentures:

These debentures do not have a fixed maturity date. The company is not obligated to repay the principal but must continue to pay interest to debenture holders indefinitely.

7. Registered Debentures:

These are debentures issued in the name of the holder, meaning that the company keeps a register of the debenture holders. They can only be transferred by signing a transfer deed.

8. Bearer Debentures:

These are not registered in the name of any specific holder and are transferable by mere delivery. The holder of the physical certificate is considered the owner of the debenture.

Advantages of Debentures:

• Fixed Interest Payments:

Debenture holders are entitled to a fixed rate of interest, providing a regular and predictable income stream. This makes debentures an attractive investment for individuals seeking consistent returns.

• Non-Dilutive Financing:

By issuing debentures, a company can raise capital without diluting the ownership structure. Shareholders do not lose any control over the company as they would with issuing additional equity shares.

• Priority in Payments:

In the event of liquidation, debenture holders have a higher claim on the company’s assets compared to equity shareholders. They are paid before shareholders in case of insolvency, reducing the risk of total loss.

• Tax Deductibility:

The interest paid on debentures is typically considered a business expense for the issuing company and is tax-deductible, reducing the company’s taxable income.

• Flexibility:

Companies can choose different types of debentures (secured, unsecured, convertible, etc.) depending on their financial needs and the preferences of investors. This flexibility allows companies to structure debentures in a way that aligns with their financial strategies.

• Cost-Effective:

Issuing debentures may be less expensive than issuing new equity shares or taking out a traditional bank loan. Interest rates on debentures may also be lower compared to the returns that would need to be offered to attract equity investors.

• Convertible Options:

Convertible debentures give investors the option to convert their debentures into equity shares, offering them the potential to benefit from share price appreciation in the future, in addition to regular interest payments.

Disadvantages of Debentures:

• Fixed Financial Obligation:

Debentures create a fixed financial liability for the company, as interest payments must be made regardless of the company’s profitability. If the company faces financial difficulties, it still has to meet these payment obligations, which can strain cash flow.

• Risk of Default:

If a company is unable to meet its interest payments or repay the principal amount upon maturity, it defaults on the debenture. This can damage the company’s reputation and lead to legal proceedings initiated by the debenture holders.

• Interest Rate Sensitivity:

Debenture holders receive a fixed interest rate, but market interest rates can fluctuate. If interest rates rise, debentures may become less attractive as other investment options offering higher returns become available.

• No Voting Rights:

Debenture holders do not have any voting rights in the company, unlike equity shareholders. They cannot influence the company’s management or participate in key decision-making processes.

• Inflation Risk:

Debentures provide fixed returns, which may be eroded by inflation over time. If inflation rises, the purchasing power of the fixed interest payments may decrease, making debentures less appealing to investors.

• Callable Debentures:

Some debentures may be callable, meaning the company has the right to repay the debentures before their maturity date. This can be disadvantageous for investors if the debenture is called during a period of falling interest rates, as they may have to reinvest their funds at a lower rate.

• Creditworthiness Risk:

The security of debentures depends largely on the issuing company’s financial health. If the company’s credit rating is downgraded or it experiences financial difficulties, the value of the debentures can decrease, making them riskier for investors.

Section 2(62) of Companies Act defines a one-person company as a company that has only one person as to its member. Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders. So, an OPC is effectively a company that has only one shareholder as its member.

Such companies are generally created when there is only one founder/promoter for the business. Entrepreneurs whose businesses lie in early stages prefer to create OPCs instead of sole proprietorship business because of the several advantages that OPCs offer.

The Companies Act, 2013 completely revolutionized corporate laws in India by introducing several new concepts that did not exist previously. On such game-changer was the introduction of One Person Company concept. This led to the recognition of a completely new way of starting businesses that accorded flexibility which a company form of entity can offer, while also providing the protection of limited liability that sole proprietorship or partnerships lacked.

Several other countries had already recognized the ability of individuals forming a company before the enactment of the new Companies Act in 2013. These included the likes of China, Singapore, UK, Australia, and the USA.

Features of a One Person Company

• Private company: Section 3(1)(c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies.
• Single-member: OPCs can have only one member or shareholder, unlike other private companies.
• Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.
• Company may be a One Person Company (OPC) which requires only one person as a subscriber to form a company and such a company will be treated under the Act as a private company.
• A person, who registers one-person company, is not eligible to incorporate more than one one-person company
• The memorandum of OPC must indicate the name of a person (other than the subscriber), with his prior written consent in the prescribed form, who will become a member of the OPC when the subscriber dies or is incapacitated to contract.
• The nominee to the memorandum of one person company shall not be eligible to become a nominee for more than one such company.
• No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
• Minimum one director: OPCs need to have minimum one person (the member) as director. They can have a maximum of 15 directors.
• No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as minimum paid-up capital for OPCs.
• Special privileges: OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess.

Privileges of One Person Companies

• They do not have to hold annual general meetings.
• A company secretary is not required to sign annual returns; directors can also do so.
• Provisions relating to independent directors do not apply to them.
• Their financial statements need not include cash flow statements.
• Their articles can provide for additional grounds for vacation of a director’s office.
• Several provisions relating to meetings and quorum do not apply to them.
• They can pay more remuneration to directors than compared to other companies.

Membership in One Person Companies

Only natural persons who are Indian citizens and residents are eligible to form a one-person company in India. The same condition applies to nominees of OPCs. Further, such a natural person cannot be a member or nominee of more than one OPC at any point in time.

It is important to note that only natural persons can become members of OPCs. This does not happen in the case of companies wherein companies themselves can own shares and be members. Further, the law prohibits minors from being members or nominees of OPCs.

Formation of One Person Companies

A single person can form an OPC by subscribing his name to the memorandum of association and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum must state details of a nominee who shall become the company’s sole member in case the original member dies or becomes incapable of entering into contractual relations.

This memorandum and the nominee’s consent to his nomination should be filed to the Registrar of Companies along with an application of registration. Such nominee can withdraw his name at any point in time by submission of requisite applications to the Registrar. His nomination can also later be canceled by the member.

Advantages

• Compliance Burden:

The One-person Company includes in the definition of “Private Limited Company” given under section 2(68) of the Companies Act, 2013. Thus, an OPC will be required to comply with provisions applicable to private companies. However, OPCs have been provided with a number of exemptions and therefore have lesser compliance related burden.

• Organized Sector of Proprietorship Company:

OPC will bring the unorganized sector of proprietorship into the organized version of a private limited company. Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The organized version of OPC will open the avenues for more favorable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited.

Minimum Requirements:

• Minimum 1 Shareholder
• Minimum 1 Director
• The director and shareholder can be same person
• Minimum 1 Nominee
• No Need of any Minimum Share Capital
• Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies

Limited Liability Protection to Directors and Shareholder:

• The most significant reason for shareholders to incorporate the ‘single-person company’ is certainly the desire for the limited liability.
• All unfortunate events in business are not always under an entrepreneur’s control; hence it is important to secure the personal assets of the owner, if the business lands up in crises
• While doing business as a proprietorship firm, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur.
• If the business is unable to pay its liabilities, the individual has to pay such liabilities off in the case of sole proprietorship; and the individual is not responsible for such liabilities in the case of a one-person company.
• An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.

Legal Status and Social Recognition For Your Business

One Person Company is a Private Limited Structure; this is the most popular business structure in the world. Gives suppliers and customers a sense of confidence in business. Large organizations prefer to deal with private limited companies instead of proprietorship firms. Pvt. Ltd. business structure enjoys corporate status in society which helps the entrepreneur to attract quality workforce and helps to retain them by giving corporate designations, like directorship. These designations cannot be used by proprietorship firms.

Adequate Safeguards:

In case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.

Easy to Get Loan from Banks

Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm into a Private Limited company before sanctioning funds. So, it is better to register your startup as a One Person private limited rather than proprietary firm.

Perpetual Succession:

An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. The OPC is an artificial entity distinct from its owner. Creditors should therefore be warned that their claims against the business cannot be pressed against the owner.

Tax Flexibility and Savings

In an OPC, it is possible for a company to make a valid contract with its shareholder or directors. This means as a director you can receive remuneration, as a lessor you can receive rent, as a creditor you can lend money to your own company and earn interest. Directors’ remuneration, rent and interest are deductible expenses which reduces the profitability of the Company and ultimately brings down taxable income of your business.

Ownership limitations:

As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company.

Thus, the person incorporating the OPC must be a natural person implying that it cannot be formed by a juristic person or an artificial person e.g. any type of company incorporated under Companies Act 2013.  This restricts the ownership of only individuals and not corporations.

This provision also discourages foreign direct investment by disallowing foreign companies and multinational companies to incorporate their subsidiaries in India as a One Person Company. Hence, an OPC will have to change their legal status to a private limited company to bring in investors. Foreigners and NRIs are allowed to invest in a Private Limited Company under the Automatic Approval route where 100% FDI is available in most sectors.

Restrictions on conversion

An OPC cannot be incorporated under Section 8 (Formation of companies with charitable objects etc) of Companies Act 2013. An OPC is also not allowed to carry out Non-Banking Financial Investment activities. This includes investing in securities of any body corporate.

An OPC can only convert into either a private or public company once the following conditions are met:

1. The OPC must have been in existence for a minimum of two years; or
2. It must have a paid up share capital which has increased beyond Rs. 50,00,000/- (rupees fifty lakh); or
3. Its average turnover must have exceeded Rs. 2,00,00,000/- (rupees two crore).

Such restrictions stifle an entrepreneur’s desire for diversity and expansion.

ESOPs

Since an OPC can have only one shareholder, there can be no sweat equity shares or ESOPs to incentivize employees. ESOPs can only be implemented if OPC converts into a private or public limited company. A private or public limited company can easily expand by an increase of authorized capital and further allotment of shares to even third parties.

Hence, a private company is a preferable option for start-ups who want to encourage their employees by way of stock options.

One of the major issues that gained attention after the 2007 and 2009 financial crisis due to Wall Street movement was the unduly high compensation being paid to executives of financial institutions even when the corporations were in a state of collapse. This movement against the executive remuneration gained momentum throughout the world. In U.S and many other countries there was a lot of hue and cry about excessive compensation being paid to top executives. Even though in India the situation regarding excessive executive remuneration has not reached alarming levels yet this issue needs to be taken seriously at this stage itself. If not given proper attention then it is not long enough when this problem would be quite glaring in India too.

Many recent corporate frauds such as Satyam fraud, Kingfisher’s fraud and many others have brought into light the dark side of Indian corporate governance practices. In almost all these frauds the executives were drawing a huge salary from the company at the expense of other stakeholders of the company be it shareholders or creditors etc.They used tricks to defraud the investors as well as creditors. Thus, this issue needs adequate attention else it would lead to more such frauds.

Various studies on remuneration schemes of executives in Indian Companies have reflected majorly 3 issues:

1. The remuneration is not strictly based on performance. The highest paid executives are usually not from the best performing companies and many a times even when the value of shares is declining constantly there is no major effect on the remuneration of top executives.
2. There is a huge gap in the compensation level of executives and median employees. The supports for high remuneration state that this is due to the dearth of talent at the top level but even then such a glaring difference in the basic pay as well as in the % increase in pay as compared to median employees is not justified.
3. Also, the studies have found that the promoter CEOs are paid much more in comparison to Non promoter CEOs.

In this paper I would basically study the reasons behind the above findings and would majorly focus on efficiency of current regime in curbing the same and also the role of other interested entities which can serve as a control mechanism on executive remuneration.

For this purpose firstly, analyze the context of executive remuneration and the issues associated with it wherein will focus on agency problem and also the role of ownership structure in enhancing the problem. Then would annalyse the efficacy of checks provided by the current regime on Executive remuneration i.e. Shareholders say on pay, Remuneration committee and linking Remuneration to performance. Lastly, examine the role of Institutional investors as a control mechanism against executive remuneration.

Meaning of Remuneration

Remuneration has been described in section 2(78) of the Companies Act 2013.As per this definition any payment in the form of money or its equivalent would be counted as remuneration. Perquisites would also be included in determining total remuneration. Perquisites in this case are those as defined under the Income tax Act, 1961.

Remuneration can be paid in various forms like cash, medical benefits, retirement benefits, share options, shares, sitting fee and perks and allowances like contribution to provident fund, rent free accommodation, travelling expenses, car etc. It is usually a combination of various forms. Certain perquisites and compensations are explicitly exempted from being counted as a part of remuneration

Role of Executive Remuneration

The role of executive remuneration is to attract and retain top talent at executive position and incentivize them in the way that they work for the benefit of the company while furthering the objective of the company and increasing the value of the firm.

Interplay Between Fixed and Variable Component

The role of fixed component is to fulfill the immediate needs of the employees. All types of companies are open to certain sector specific risks and fixed component reduces the effect of this risk by assuring certain determined amount of income.

On the other hand, variable component can be used to align the interest of executives to the interest of company. For example, if the executives are provided with certain number of shares as a part of remuneration then better performance would lead to increase in the share value of the company and would also increase executive’s compensation.

If the executives receive just fixed remuneration with no variable component then instead of working as incentive, it would actually dilute its effect and if the compensation would include only variable component then this would also frustrate the employee.

Thus, there must be combination of fixed as well as variable component wherein the fixed component work as an incentive to work and the variable component makes sure that the work is done in the interest of the company. Also, it is necessary that there must be interaction between various forms of compensation and the remuneration scheme must be arranged in a way that it is incentive based.

The income from capital gains is not an income which accrues or arises from day-to-day during a specific period but it arises at fixed point of time, namely, on the date of the transfer of a capital asset. Specifically, the income from capital gains is the amount by which the sale price of a capital asset, net of any expense incurred in connection with the sale of the asset, exceeds the acquisition cost of the capital asset. The taxation of capital gains is justified by the taxation policy and law on the premise that capital gains increases the ‘ability to pay’ capacity of the person receiving such a gain.

The provisions related to taxation of capital gains were first introduced in 1947 and then in 1956 and then said section 12B in Income tax Act, 1922 was retained as such in the relevant provisions in Income tax Act, 1961.

Charging sections – Sections 45, 46 and 46A

The charging section explains the subject matter of taxation. Thus, there is one charging section for each head of income for salaries, income from house property, business income and income from other sources. However, for capital gains, there are three independent and separate charging sections:

(i) Section 45: Capital gains

(ii) Section 46: Capital gains on distribution of assets by companies in liquidation

(iii) Section 46A: Capital gains on purchase by company of its own shares or other securities

Section 45 is the general provision while sections 46 and 46A are special provisions.

Incomes to be taxed under the head, ‘Capital Gains’

Thus, the following incomes are taxable as ‘capital gains’:

The situs/location of capital asset matters only for non-resident assessees and not to others. In the cases of Non-resident assessees, if capital asset located outside India is transferred outside India and sale proceeds are received outside India, no taxability to capital gains arises in view of section 5 of the Act. Such assessees will be liable to be taxed under section 9(1) (i) in respect of capital gains accruing or arising “through the transfer of any capital asset situate in India”.

Important Definitions in capital gains

Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

Transactions which are not regarded as transfer [Section 47]

Following transactions shall not be regarded as transfer (subject to certain condition). Hence, following transaction shall not be charged to capital gains:

Full Value of Consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of consideration.

However, in the following cases “full value of the consideration” shall be determined on notional basis as per the relevant provisions of the Income-tax Act, 1961:

Cost of Acquisition

Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property.

However, in cases given below, cost of acquisition shall be computed on notional basis:

* Terminal Depreciation/Balancing Charge:

1. a) Balancing Charge = Sales Consideration – WDV of the depreciable asset
2. b) Terminal Depreciation = WDV – Sales Consideration

Demat System (short for Dematerialization system) refers to the process of converting physical share certificates into electronic form, enabling investors to hold and trade shares digitally through a dematerialized account. Introduced in India in 1996, the dematerialization process revolutionized the stock market by eliminating the need for physical certificates, streamlining the trading process, and making securities transactions safer, faster, and more efficient. The demat system is managed by depositories such as the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), which function under the regulation of the Securities and Exchange Board of India (SEBI).

Key Features of the Demat System

• Electronic Form of Securities:

In the demat system, shares, bonds, debentures, and other securities are held in electronic form, eliminating the need for physical certificates. This offers ease of access and ensures that investors can quickly buy, sell, and transfer securities.

• Demat Account:

Similar to a bank account for money, a demat account is an electronic account where securities are stored. Each investor must open a demat account with a Depository Participant (DP), such as a bank, brokerage firm, or financial institution. The DP acts as an intermediary between the investor and the depository (NSDL or CDSL).

• Speed and Efficiency:

Dematerialization process allows for faster trading and settlement of securities. Before dematerialization, the physical transfer of shares took weeks or even months, involving paperwork and delays. Now, transactions are completed in a few days, with real-time updates.

• Safety and Security:

Holding securities in dematerialized form reduces the risk of theft, loss, forgery, and damage associated with physical certificates. The electronic form ensures greater transparency, and investors can track their holdings online through their demat account.

• No Stamp Duty:

No stamp duty is charged on the transfer of dematerialized securities, reducing transaction costs for investors.

• Nomination Facility:

Investors can assign a nominee to their demat account, ensuring that in the event of the account holder’s death, the securities are smoothly transferred to the designated individual.

• Multiple Securities in One Account:

In a demat account, an investor can hold various types of securities, such as shares, bonds, mutual funds, and government securities, in a single account, which offers greater convenience.

Process of Dematerialization:

Dematerialization is the process of converting physical share certificates into electronic form.

1. Opening a Demat Account:

An investor must first open a demat account with a Depository Participant (DP) by filling out an account opening form and submitting the required Know Your Customer (KYC) documents such as proof of identity, proof of address, and a PAN card.

DP provides the investor with a unique Beneficiary Owner Identification (BO ID) number, which is used to identify the account holder in all transactions.

2. Submission of Physical Certificates:

   • After opening a demat account, the investor submits the physical share certificates they wish to dematerialize to the DP along with a Dematerialization Request Form (DRF).
   • The DRF includes details such as the company’s name, the number of shares, and the certificate numbers.

3. Verification and Approval:

   • The DP sends the physical certificates to the relevant company’s Registrar and Transfer Agent (RTA) for verification.
   • Once verified, the RTA approves the dematerialization request, and the physical certificates are canceled.

4. Credit to the Demat Account:

   • After the RTA’s approval, the depository (NSDL or CDSL) credits the corresponding number of shares to the investor’s demat account.
   • The investor receives a notification confirming that the shares have been successfully dematerialized and credited to their account.

5. Trading of Dematerialized Securities:

After dematerialization, the shares can be bought, sold, and transferred electronically through the stock exchanges. Investors can monitor their holdings and transactions online, with settlement occurring in a shorter time frame (T+2 days, where T is the trading day).

Advantages of the Demat System:

• Elimination of Physical Risks:

In the physical form, share certificates were vulnerable to theft, forgery, loss, and damage. The demat system eliminates these risks by holding securities electronically, ensuring safety and security.

• Reduction in Paperwork:

Demat system removes the need for paperwork related to the issuance, transfer, and maintenance of share certificates. This reduces administrative burdens and streamlines the entire process for companies and investors alike.

• Faster Settlement of Trades:

In the pre-demat era, transferring shares involved a lengthy process of physical delivery, verification, and approval, taking several weeks. Now, trades are settled electronically within two days (T+2 settlement), ensuring faster and more efficient transactions.

• Lower Transaction Costs:

By eliminating physical transfers, the demat system reduces costs associated with paperwork, stamp duties, courier charges, and handling fees. Investors benefit from lower transaction costs, making trading more cost-effective.

• Enhanced Liquidity:

Dematerialization has enhanced liquidity in the stock market. Shares held in electronic form can be quickly and easily traded, increasing market efficiency and providing investors with greater flexibility.

• Access to a Broader Range of Securities:

Through a demat account, investors can hold a variety of securities, such as equity shares, bonds, debentures, government securities, mutual funds, and exchange-traded funds (ETFs), all in one place, offering convenience and diversification.

• Transparency and Monitoring:

Investors can easily monitor their holdings, transactions, and portfolio through online access to their demat account. Real-time updates ensure transparency in the management of securities.

• Simplified Pledging of Securities:

Securities held in a demat account can be pledged for loans, offering liquidity to investors. The dematerialized form makes it easier to pledge shares with financial institutions for credit or loan purposes.

Disadvantages of the Demat System:

• Technological Dependency:

Demat system relies on technology, and any system failures or glitches can disrupt trading and access to accounts. Cybersecurity threats and hacking risks are also present in the digital environment.

• Charges and Fees:

While the demat system reduces some costs, investors must pay account maintenance fees, transaction charges, and other service fees to the DP. These charges can add up over time, especially for small investors.

• Loss of Paper Certificates:

Some investors may still prefer holding physical certificates for sentimental reasons or for tangible proof of ownership. The transition to a demat system eliminates the physical representation of ownership.

• Fraud Risks:

Although the Demat system reduces physical fraud risks, it is not immune to other types of fraud, such as unauthorized access to demat accounts, hacking, or insider fraud.

Legal Framework for the Demat System in India

• Depositories Act, 1996:

This act provides the legal framework for the establishment of depositories and facilitates the dematerialization of securities.

• SEBI (Depositories and Participants) Regulations, 1996:

These regulations lay down the rules for the functioning of depositories and DPs.

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Companies listed on stock exchanges must ensure that their securities are available for trading in dematerialized form.