Tag: Transparency

Promoter is an individual or a group of individuals responsible for bringing a company into existence. They are the pioneers who conceive the idea of a business and take the initial steps toward its incorporation. Although the term “promoter” is not explicitly defined in the Companies Act, 2013, it refers to anyone who plays a key role in setting up the company, organizing its resources, and ensuring that all legal formalities for incorporation are completed.

Promoters are not agents or employees of the company, as the company does not exist during the promotion stage. They occupy a fiduciary position, which means they must act in good faith and in the best interests of the company they are forming. Their role is crucial in laying the foundation for the company, securing resources, and handling preliminary contracts and agreements.

Promoters play a foundational role in the company’s incorporation, arranging for the necessary documents, funds, and legal formalities required for registration. They undertake tasks such as preparing the Memorandum and Articles of Association, appointing the first directors, securing initial capital, and filing incorporation documents.

Six Key Functions of a Promoter:

1. Conceiving the Idea of the Business

Promoter is to conceive the business idea. This involves identifying a market opportunity or a gap in existing services or products, and creating a business model around it. The promoter develops a clear vision for the company’s objectives and determines the type of business structure, whether a private limited company, public limited company, or partnership, depending on the nature of the business.

2. Conducting Feasibility Studies

Before proceeding with the incorporation of a company, the promoter must conduct various feasibility studies to assess the viability of the business idea. These studies cover different aspects, such as:

• Financial Feasibility: Evaluating the potential for raising funds, expected returns, and financial risks.
• Technical Feasibility: Ensuring that the necessary technology or infrastructure is available for the business operations.
• Market Feasibility: Analyzing market demand, competition, and customer preferences to ensure the business can sustain itself.

Based on these studies, the promoter decides whether the business idea is worth pursuing.

3. Securing Capital

Promoter is to arrange the initial capital required for the company’s incorporation and early-stage operations. This may involve investing their own money, raising funds from venture capitalists, angel investors, or securing loans from financial institutions. The promoter is also responsible for preparing financial projections to present to potential investors or lenders.

4. Negotiating and Entering into Preliminary Contracts

Promoter may need to negotiate and sign preliminary contracts on behalf of the company before it is formally incorporated. These contracts might involve purchasing land, acquiring machinery, or hiring key personnel. These contracts are provisional and only become binding on the company after it is incorporated, provided the company chooses to adopt them.

5. Drafting Legal Documents

Another critical function of the promoter is preparing essential legal documents required for company incorporation. This includes drafting the:

• Memorandum of Association (MoA), which outlines the company’s objectives and scope of activities.
• Articles of Association (AoA), which governs the internal management of the company, including rules regarding shareholders, directors, and meetings.

The promoter is also responsible for choosing the company’s name and ensuring it complies with naming regulations under the Companies Act.

6. Filing Incorporation Documents

Promoter must file the necessary documents with the Registrar of Companies (RoC) to legally incorporate the company. This involves submitting the MoA, AoA, details of directors and shareholders, and other relevant forms like SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus). Once the Registrar approves the incorporation, the company is officially registered, and the promoter’s role transitions to other stakeholders or management.

Types of Promoters:

• Professional Promoters

Professional promoters are specialists who engage in the promotion of companies for a fee. They are not involved in the day-to-day management or ownership of the company once it is formed. These individuals or firms possess expertise in legal, financial, and procedural aspects of company formation. Their main task is to complete all formalities necessary for incorporation. After setting up the business, they usually exit and do not retain any controlling interest. They are commonly hired for startups, joint ventures, or specific project-based companies.

• Occasional Promoters

Occasional promoters are individuals who promote a company only once or occasionally. They do not make a regular profession or business out of promoting companies. These promoters are usually individuals with a specific business idea or project in mind. After forming the company and setting up its initial operations, they may hand over management to professionals and step back. They are temporary promoters who become involved due to opportunity or necessity rather than a long-term commitment to business promotion activities.

• Financial Promoters

Financial promoters are usually financial institutions, investment banks, or venture capitalists that promote companies as part of their investment strategy. They provide the initial capital and resources required to incorporate and launch a company. These promoters often retain some control over the company to safeguard their investments. Their main interest lies in financial returns rather than running the business. Financial promoters play a crucial role in startup ecosystems by funding, guiding, and promoting high-potential business ideas into successful companies.

• Entrepreneurial Promoters

Entrepreneurial promoters are individuals who conceive a business idea and promote the company to execute that idea. They are both the founders and the owners and continue to manage the business even after incorporation. These promoters are deeply involved in all aspects of the company, including financing, marketing, operations, and strategic planning. Examples include startup founders and small business owners. Entrepreneurial promoters are motivated by innovation, profit, and long-term vision, and they usually retain control as directors or key decision-makers in the company.

• Institutional Promoters

Institutional promoters are government bodies, public sector undertakings (PSUs), or large corporate entities that promote companies for specific industrial, social, or developmental objectives. In India, institutions like the Industrial Development Bank of India (IDBI) and State Industrial Development Corporations (SIDCs) have acted as institutional promoters. They often promote joint ventures, public-private partnerships, and sector-specific companies. Their primary goal is not profit but economic growth, employment generation, or regional development. Institutional promoters often provide technical support, funding, and operational guidance during the company’s early stages.

• Technical Promoters

Technical promoters are experts with deep technical or industry-specific knowledge, such as engineers, scientists, or technocrats, who promote a company based on their inventions, technologies, or innovations. They may collaborate with financial investors or business managers to bring their technical ideas to commercial reality. These promoters usually continue in advisory or leadership roles, such as Chief Technology Officers (CTOs). Their strength lies in R&D and innovation, and they are crucial in knowledge-driven industries like IT, pharmaceuticals, and manufacturing.

Legal Position of Promoters:

• Not an Agent

A promoter cannot be considered an agent of the company because the company does not exist legally until its incorporation. Since agency requires the principal (the company) to exist at the time the agent acts, this relationship is not valid during the promotion stage. Therefore, any contracts or actions taken by the promoter prior to incorporation are personally binding on the promoter. The company is not liable for these acts unless it adopts or re-executes the contract after incorporation, subject to legal provisions.

• Not a Trustee

Promoters are also not trustees in the traditional legal sense, as a trust relationship requires an existing principal or beneficiary (the company) which doesn’t exist before incorporation. However, courts recognize that promoters are in a fiduciary relationship with the company they are forming. This means they are expected to act in good faith and in the best interest of the company. If they gain any secret profits or breach this trust, they can be compelled to return such profits or compensate the company.

• Fiduciary Position

Promoters occupy a fiduciary position with respect to the company they form. They are expected to act honestly, avoid conflicts of interest, and not make secret profits at the company’s expense. If a promoter makes undisclosed profits or benefits by selling personal property to the company, they are legally bound to disclose such dealings to independent directors or shareholders. Failure to do so can lead to legal consequences. Courts hold promoters to a high ethical standard due to their control over early decisions.

• Duty of Disclosure

Promoters have a legal duty to disclose all material facts regarding the formation of the company, especially about any transactions in which they may personally benefit. Such disclosures must be made to the company’s board of directors, to independent investors, or through the company’s prospectus. If the promoter fails to disclose any interest or profit in a transaction and the company incurs a loss, the promoter may be held liable. This duty ensures transparency and protects shareholders and creditors from fraud.

• Liability for Pre-Incorporation Contracts

Since a company does not exist before incorporation, it cannot enter into any legal contract. Therefore, promoters are personally liable for any contracts made on behalf of the proposed company before it is legally registered. These contracts may not bind the company unless it formally adopts them after incorporation, and even then, specific legal procedures must be followed. Promoters should ideally enter such contracts in their own name and make it clear they are acting as promoters to avoid personal legal disputes.

• No Right to Remuneration

Promoters do not have a statutory right to claim any remuneration for the services they render during company formation. Any payment or benefit must be explicitly mentioned in the company’s Articles of Association or agreed upon by the company after its incorporation. If the company decides to pay them, it can only be done through a resolution passed by the Board or shareholders. In the absence of such approval, a promoter cannot sue the company for compensation, even if the services were valuable.

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.

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.

Key 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.

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.

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.

Articles of Association or (AOA) are the legal document that along with the memorandum of association serves as the constitution of the company. It is comprised of rules and regulations that govern the company’s internal affairs.

The articles of association are concerned with the internal management of the company and aims at carrying out the objectives as mentioned in the memorandum. These define the company’s purpose and lay out the guidelines of how the task is to be carried out within the organization. The articles of association cover the information related to the board of directors, general meetings, voting rights, board proceedings, etc.

The articles of association are the contracts between the shareholders and the organization and among the shareholder themselves. This document often defines the manner in which the shares are to be issued, dividend to be paid, the financial records to be audited and the power to be given to the shareholders with the voting rights.

The articles of association can be considered as the user manual for the organization that comprises of the methodology that can be used to accomplish the company’s day to day operations. This document is a binding on the shareholders and the organization and has nothing to do with the outsiders. Thus, the company is not accountable for any claims made by any external party.

The articles of association is comprised of following provisions:

• Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of shares, share warrant, surrender of shares, etc.
• Directors, their qualifications, appointment, remuneration, powers, and proceedings of the board of directors meetings.
• Voting rights of shareholders, by poll or proxies and proceeding of shareholders general meetings.
• Dividends and reserves, accounts and audits, borrowing powers and winding up.

It is mandatory for the following types of companies to have their own articles:

• Unlimited Companies: The article must state the number of members with which the company is to be registered along with the amount of share capital, if any.
• Companies Limited by Guarantee: The article must define the number of members with which the company is to be registered.
• Private Companies Limited by Shares: The private company having the share capital, then the article must contain the provision that, restricts the right to transfer shares, limit the number of members to 50, prohibits the invitation to the public for the further subscription of shares in the form of shares or debentures.

Contents of Articles of Association:

• Share Capital and Variation of Rights

This section defines the company’s authorized share capital, types of shares issued (equity or preference), rights attached to each class of shares, and the procedure for altering these rights. It also includes provisions regarding the issue of shares, calls on shares, forfeiture, surrender, transfer, and transmission. Any variation in shareholder rights must be approved through a special resolution. The AoA ensures transparency and consistency in managing share-related matters and safeguards the interests of shareholders by clearly outlining how capital-related decisions are to be handled.

2. Legal Provision (Section 14 of Companies Act, 2013)

The procedure and legality of altering Articles of Association are governed by Section 14 of the Companies Act, 2013. According to this section, a company may alter its articles by passing a special resolution in a general meeting. In case of a conversion (e.g., private to public), prior approval from the Tribunal or other regulatory authorities may be needed. The altered articles must be filed with the Registrar of Companies (RoC) within a specified period. These changes come into effect only after due compliance.

3. Methods of Alteration

Alteration of Articles can be carried out in several ways: (i) Addition of new clauses to address emerging needs, (ii) Deletion of outdated provisions, (iii) Substitution of existing clauses with new ones, or (iv) Modification of existing language to clarify or expand the scope. These methods allow companies to ensure their internal governance aligns with current business requirements. The altered document must be coherent, legally valid, and not conflict with the company’s Memorandum or the Companies Act provisions.

4. Procedure for Alteration

The general procedure includes:

• Convening a Board Meeting to approve the proposed alteration and fix the date for a general meeting.

• Issuing notice to shareholders with details of the special resolution.

• Passing the special resolution with at least 75% approval in the general meeting.

• Filing Form MGT-14 with the RoC within 30 days of passing the resolution.

• Updating the altered AoA with the RoC.
  The changes become legally effective after this filing. Compliance with procedural formalities is crucial to avoid legal complications.

5. Restrictions on Alteration

Though companies have the power to alter their articles, there are certain legal restrictions:

• The alteration must not contravene or alter any provisions of the Memorandum of Association (MoA).

• It should not be illegal, fraudulent, or against public interest.

• It must not increase the liability of any existing member without their written consent.

• Changes that convert a public company to a private company require approval from the Tribunal (NCLT).These restrictions ensure the alteration power is not misused and protects shareholder rights.

6. Effects of Alteration

Once altered and filed with the RoC, the revised Articles of Association become legally binding on the company, its shareholders, and directors. All stakeholders are required to comply with the new provisions from the effective date. Any non-compliance with the altered articles may lead to legal consequences. The altered articles provide an updated governance framework, enhancing operational clarity, compliance, and alignment with business goals. However, previous actions taken under the old articles remain valid unless specifically repealed or overwritten by the new version.

Prospectus is a formal legal document issued by a company to invite the public to subscribe to its shares, debentures, or other securities. It is a disclosure document required by the Companies Act, 2013 in India, aimed at providing potential investors with adequate information to make an informed investment decision. The prospectus serves as a public invitation to raise capital from the public, and it contains comprehensive details about the company’s business, financial status, risks, and management.

A company must issue a prospectus when offering its shares to the public, particularly when going public through an initial public offering (IPO). For private companies, which do not invite public subscription, the issuance of a prospectus is not mandatory. A company cannot issue securities without filing a prospectus with the Registrar of Companies (RoC).

Contents of Prospectus:

A prospectus must include specific information as required by the Companies Act, 2013, ensuring that the document provides full disclosure of material facts. Some key contents are:

• Name and Registered Office of the Company

The prospectus must clearly mention the legal name of the company and the address of its registered office. This ensures transparency and helps potential investors identify the issuing company. The registered office is the official communication address of the company and indicates its legal jurisdiction. It is also important for verifying the company’s legitimacy. Including this information gives investors confidence and a clear point of reference for communication and legal correspondence.

• Details of the Directors and Promoters

The prospectus must disclose the names, addresses, DINs (Director Identification Numbers), and professional backgrounds of all directors and promoters involved in the company. It should also mention their experience, shareholding, and any legal proceedings against them. This information helps investors evaluate the credibility and reliability of the management. Transparency regarding the promoters and directors is essential to building trust among potential investors and providing insight into who will manage and control the company.

• Capital Structure of the Company

A detailed breakdown of the company’s capital structure is mandatory. It must include information on authorized, issued, subscribed, and paid-up capital, as well as the face value and types of shares (equity or preference). Any existing or proposed debt instruments must also be disclosed. This section gives investors a clear view of the company’s financial foundation and how much of the capital has already been raised or will be raised through the offer.

• Purpose of the Issue (Objects Clause)

The prospectus must state the purpose or objects of the public issue, i.e., why the company is raising funds. It could be for expansion, debt repayment, working capital, or acquiring assets. This clause ensures that investors understand how their money will be used. It enhances accountability, and funds raised must be strictly used for the stated purpose. Misutilization of funds can lead to legal consequences and loss of investor confidence.

• Terms of the Issue

The prospectus must include all terms and conditions related to the securities being offered, such as the price of shares, minimum subscription, mode of payment, opening and closing dates, allotment procedures, and refund policies. These terms help potential investors make informed decisions about participation. The clarity in issue terms also ensures fair dealings, reduces misunderstandings, and helps in smooth and transparent execution of the public offer process under regulatory norms.

• Financial Information and Auditor’s Report

A company must present audited financial statements, including the profit and loss account, balance sheet, cash flow statement, and significant accounting policies. Additionally, the auditor’s report must be attached to ensure credibility. These financial disclosures help investors assess the company’s past performance, profitability, and financial stability. Accurate financial reporting is crucial for risk assessment and aids in predicting future growth and sustainability. It also fulfills statutory requirements under the Companies Act and SEBI guidelines.

• Risk Factors

Every prospectus must include a comprehensive list of risk factors associated with the investment. These may include industry-specific risks, regulatory risks, competition, technological changes, and internal management issues. Listing these risks helps investors make well-informed decisions. This section is essential to fulfill legal obligations of full and fair disclosure and protects the company from future liabilities by informing investors about potential uncertainties and threats before they commit to the investment.

• Dividend Policy

The company must disclose its past dividend record (if any) and its future dividend policy. This helps investors assess the company’s profitability and potential return on investment. Companies that consistently declare dividends are often viewed as financially stable. The dividend policy also provides insights into management’s approach toward profit distribution versus reinvestment, which can significantly influence investment decisions based on an investor’s preference for income versus capital gains.

• Underwriting and Subscription Details

A prospectus must mention whether the issue is underwritten and provide details of the underwriters involved. Underwriting assures investors that the issue will be subscribed even if the public does not fully participate. It also builds confidence in the offer. The names, addresses, and liability of underwriters must be disclosed. Information on minimum subscription and oversubscription handling should also be included to provide clarity on how the issue is supported and safeguarded.

Types of Prospectus:

• Red Herring Prospectus

Red Herring Prospectus is a preliminary version of the prospectus filed with the Registrar of Companies before a public issue. It includes most of the information about the company, except for the issue price. The term “red herring” refers to the bold disclaimer printed in red on the cover page, indicating that the document is not a final offering. This type is often used during the book-building process, allowing companies to gauge investor interest and gather feedback before finalizing the details of the offering.

• Final Prospectus

Final Prospectus is the definitive document issued by a company after the Red Herring Prospectus. It contains comprehensive information about the company, including the final issue price, terms and conditions of the offer, and complete financial details. The final prospectus must be filed with the Registrar of Companies and is provided to all investors before they subscribe to shares. This document serves as a binding agreement between the company and the investors.

• Shelf Prospectus

Shelf Prospectus allows a company to offer securities in multiple tranches over a specified period without needing to issue a separate prospectus for each offering. It is particularly useful for companies planning to raise capital in stages. The shelf prospectus includes general information about the company and its offerings but does not specify the price or the number of securities being issued at the time of filing. Companies can then issue a Tranche Prospectus for each specific offering under the shelf prospectus.

• Abridged Prospectus

Abridged Prospectus is a concise version of the full prospectus that includes key information and highlights about the company and the offering. It is typically issued to facilitate easy understanding for potential investors. The abridged prospectus must contain essential details like the company’s objectives, financial statements, and risk factors but omits extensive data found in the full prospectus. This type is often used in conjunction with a full prospectus to ensure investors can quickly grasp the essential information.

• Statement in Lieu of Prospectus

While not a traditional prospectus, the Statement in Lieu of Prospectus is used when a company does not issue a formal prospectus, typically in private placements. It serves as an alternative document to disclose essential information about the company, ensuring compliance with legal requirements.

Statement in Lieu of Prospectus

Statement in Lieu of Prospectus is a document required when a company does not issue a formal prospectus for inviting public subscription, but still needs to file certain disclosures with the Registrar of Companies. This typically applies to private placements or when a public limited company decides to raise capital without issuing a prospectus, such as through a private subscription or from existing shareholders.

This document must be filed under Section 70 of the Companies Act, 2013, and acts as an alternative to the prospectus. It ensures that the company complies with basic disclosure requirements even when it is not raising capital through a public offering.

Contents of Statement in Lieu of Prospectus:

The contents of a Statement in Lieu of Prospectus are similar to those of a prospectus, though not as comprehensive. Some of the key contents:

• Company’s Name and Registered Office: Basic information about the company, including its name, address, and registration details.
• Directors and Promoters: A declaration about the company’s directors and promoters, including their personal details, qualifications, experience, and any interest in the company’s affairs.
• Authorized Capital: Information about the company’s capital structure, including authorized, issued, and subscribed capital.
• Business Description: A description of the company’s business activities, its purpose, and any key projects or expansions planned.
• Financial Information: Basic financial statements, including the company’s balance sheet, profit and loss account, and any recent financial performance highlights.
• Shares and Debentures: Details of the shares or debentures being issued, including the price, terms of payment, and rights attached to the securities.
• Directors’ Contracts: Information about any contracts involving the directors, particularly those related to management services or business agreements.
• Minimum Subscription: Details on the minimum amount required to be subscribed for the issue to proceed.
• Legal Matters: Any material legal proceedings or potential liabilities the company may be facing.
• Declaration: A formal statement from the directors, affirming that the statement contains true and fair disclosure of the company’s financial position and that all material facts have been presented.

Statement in Book Building

A “Statement in Book Building” is a mandatory disclosure made in the Red Herring Prospectus (RHP) when a company raises capital through the book building process for a public issue. It clarifies that the price of the securities is not fixed at the time of filing the RHP and will be determined through investor bidding.

Standard Statement Format (as per SEBI guidelines):

“This issue is being made through the Book Building Process wherein not more than 50% of the Net Issue shall be allocated on a proportionate basis to Qualified Institutional Buyers (QIBs), not less than 15% to Non-Institutional Bidders and not less than 35% to Retail Individual Bidders, subject to valid bids being received at or above the Issue Price. The price band and the minimum bid lot will be decided by the company and the lead managers and advertised at least two working days prior to the bid opening date.”

Key Points Covered in the Statement:

• Issue is being made via Book Building.

• Price band and final price will be determined after bidding.

• Allocation percentages to QIBs, NIIs, and RIIs.

• Subject to valid bids received at or above the Issue Price.

• Price band and lot size will be advertised before bidding starts.

Memorandum of Association (MoA) is a fundamental legal document required for the incorporation of a company. It serves as the company’s constitution, defining its relationship with the external world and outlining the scope of its operations. Every company in India, whether public or private, must have a Memorandum of Association to be registered under the Companies Act, 2013. The MoA sets the foundation for a company’s legal existence and binds the company, its shareholders, and all those who interact with the company to the terms contained within it.

Meaning of Memorandum of Association:

Memorandum of Association is essentially a charter or a framework that outlines the objectives, powers, and scope of the company. It defines the company’s boundaries and specifies what the company can and cannot do. The MoA acts as a contract between the company and the shareholders, as well as between the company and the external parties it deals with.

The purpose of the MoA is to ensure that the company operates within its defined objectives, and it provides clarity to shareholders, creditors, and third parties regarding the nature and scope of the company’s business. Any action taken by the company beyond the scope of the MoA is considered ultra vires (beyond the powers) and may be deemed invalid.

Contents of the Memorandum of Association:

Companies Act, 2013, specifies the mandatory contents of the MoA, and each clause plays a significant role in determining the company’s structure and operational framework. The key components of a Memorandum of Association are:

1. Name Clause

The name clause specifies the name of the company. The name must be unique and not identical or similar to any existing registered company. The name must also comply with naming guidelines under the Companies Act:

• For a Private Limited Company, the name must end with “Private Limited.”
• For a Public Limited Company, the name must end with “Limited.”

Additionally, the name should not infringe on any trademarks or offend public morality.

2. Registered Office Clause

This clause specifies the registered office of the company, which serves as its official address. It is the location where legal documents, notices, and other communications can be sent. The company must provide the complete address of the registered office upon incorporation, and any changes to the address must be notified to the Registrar of Companies (RoC).

3. Object Clause

The object clause is one of the most critical sections of the MoA, as it outlines the main objectives for which the company is formed. The object clause is divided into:

• Main Objects: The primary activities the company will undertake. Any business conducted by the company must be aligned with these objects.
• Ancillary or Incidental Objects: Activities necessary to achieve the main objects.

The object clause restricts the company’s activities to those mentioned in the MoA. Any business conducted outside the scope of this clause is considered ultra vires.

4. Liability Clause

This clause defines the extent of the liability of the company’s shareholders. In a company limited by shares, the liability of shareholders is limited to the unpaid amount on their shares. If the company is limited by guarantee, the liability is limited to the amount each member agrees to contribute in the event of liquidation.

5. Capital Clause

The capital clause specifies the company’s authorized share capital. It mentions the total amount of capital with which the company is registered and the division of this capital into shares of a fixed value. This clause sets a limit on the amount of share capital that the company can issue unless it is altered through a formal process.

6. Subscription Clause

Subscription clause lists the names of the initial subscribers to the Memorandum, who agree to take up shares in the company. It also indicates the number of shares each subscriber agrees to take. Each subscriber must sign the MoA in the presence of at least one witness.

7. Association or Declaration Clause

This clause includes a declaration by the original members, stating their intent to form the company and agree to become its first shareholders. The subscribers to the MoA declare that they wish to associate themselves with the company.

Forms of Memorandum of Association:

Under the Companies Act, 2013, companies can be formed in various categories, and the MoA must reflect the company’s type. The MoA can be drafted in different forms depending on the type of company:

• Table A: For companies limited by shares.
• Table B: For companies limited by guarantee but not having share capital.
• Table C: For companies limited by guarantee and having share capital.
• Table D: For unlimited companies.
• Table E: For unlimited companies having share capital.

Each form provides a template for the drafting of the MoA according to the specific type of company being incorporated.

Alteration of Memorandum of Association:

Although the MoA is a rigid document that outlines the company’s operational limits, it can be altered under specific circumstances. The process for altering the MoA is governed by the provisions of the Companies Act, 2013. The alteration is allowed only if it is approved by a special resolution of the shareholders and is registered with the RoC.

1. Alteration of the Name Clause

The name of the company can be changed by passing a special resolution in the general meeting. However, if the company is changing its status from a private company to a public company or vice versa, it must also obtain approval from the National Company Law Tribunal (NCLT). The change must be registered with the RoC, and a fresh certificate of incorporation must be issued.

2. Alteration of the Registered Office Clause

The registered office can be changed:

• Within the same city or town: By passing a board resolution and informing the RoC.
• From one city or town to another within the same state: By passing a special resolution and informing the RoC.
• From one state to another: Requires approval from both the shareholders and the Regional Director, and a special resolution must be passed. After approval, the RoC must be notified, and the alteration registered.

3. Alteration of the Object Clause

The object clause can be altered by passing a special resolution in the general meeting. Additionally, if the alteration affects the rights of existing creditors, their consent is required. The revised object clause must be filed with the RoC within 30 days of passing the resolution.

4. Alteration of the Liability Clause

The liability clause can be altered only if the company is converting from an unlimited liability company to a limited liability company, or vice versa. Such a change requires the approval of shareholders through a special resolution and must be registered with the RoC.

5. Alteration of the Capital Clause

The authorized share capital of the company can be increased by passing an ordinary resolution at the general meeting. The company must file the relevant forms with the RoC and pay the requisite fees. The change is effective once the alteration is registered.