FEATURES OF THE COMPANIES ACT, 2013

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INTRODUCTION

The Companies Act, 1956 (The 1956 Act) was enacted with a view to consolidate and amend the pre-independence laws relating to companies and certain other associations. It had to undergo several amendments with time but to achieve global competitiveness in a fast-changing economy, it was required to revise the Company Law in India (JJ Irani Report). Pursuant to this, the Indian Parliament approved the long-awaited legislation governing companies on 9 August 2013 called “The Companies Act, 2013 (The Act). The new law is aimed at easing the process of doing business in India and improving corporate governance by making companies more accountable. The 2013 Act introduced new concepts such as One Person Company, small company, dormant company and corporate social responsibility (CSR) etc. The Act also introduces significant changes in the provisions related to governance, management, compliance and enforcement, disclosure norms, auditors, mergers and acquisitions, class action suits etc.

SALIENT FEATURES OF COMPANIES ACT, 2013

Key definitions: The Act has defined certain important terms which were not defined earlier in the 1956 Act like officer, Key Managerial Personnel (KMP), Promoter, Independent director etc. As per the Act “Officer” means any director, manager or KMP or any person in accordance with whose directions or instructions the Board of Directors or any one of the directors is bound to act.[1] The term “KMP” includes Chief executive director, managing director, Company Secretary, Whole-time director, chief financial officer or any other person as may be prescribed.[2] The Act defines “promotor” as a person who has been named such, or who exercises control over the affairs of the company, or on whose advice, directions or instructions the Board of Directors of the company is accustomed to act.[3]

  • Class-action suit: The Act has introduced a new concept of class action suits[4] which can be initiated by shareholders against the company and auditors. The aim of this provision is to safeguard the interests of the minority shareholders. A class Action suit is a lawsuit initiated by a group of people representing common interest. Under the Act, it empowers the shareholders to address numerous prejudicial and abusive acts committed by the Board of Directors and other managerial personnel. It can be filed to restrain the company from acting ultravires or in breach of its AoA or MoA, or to declare a resolution void if passed by suppression of material facts, or to restrain KMP from acting against any resolution, or any other order as may be prescribed or deemed fit by the Tribunal. The said provision is not applicable on banking companies.
  • Women Participation: The Act has mandated to appoint atleast one woman director for a listed company with one hundred crore or more as paid-up capital and turnover of three hundred crores or more.[5] In order to ensure women safety at workplace the company is required to make disclosure under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 in its annual reports.[6] Non-compliance of any of these may attract penal provisions.
  • Introduced One Person Company: The Act introduced a new type of Company apart from Private & Public Company i.e., One person Company (OPC). It is a company which has only one person as its member.[7] Essentially OPC is a company that has only one shareholder as its member. This kind of company is generally created when there is only one promoter of the company. There is a distinction between OPC & sole-proprietorship. OPC is a separate legal entity thus its members have limited liability while a sole-proprietorship business & its owner is single entity & has unlimited liability. Section 3(1)(c) states that an OPC is a private company & cannot be incorporated as public company with a single person as its member. Its member can only be a natural person who is a citizen as well as resident of India. While registering an OPC it is important for company to mention a nominee. The Act provides for certain exemptions from disclosures & governance requirements to this type of Company.
  • Concept of Dormant Company: The act introduces the concept of dormant company as a company which is formed and registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed, for obtaining the status of a dormant company[8]
  • Concept of Small Company: Small Company is a company whose paid-up share capital does not exceed two crore rupees and turnover is not exceeding twenty crore rupees. This provision is not applicable on holding or subsidiary company, company registered under Section 8 of the Act, or a body corporate governed by special Act. The Act further prescribes for certain exemptions from disclosures to the said type of company.
  • Nidhi Company: The concept of Nidhi Company has been introduced by the Act. The object of such companies is cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit, and which complies with such rules as are prescribed by the Central Government for regulation.[9] Certain limitation on declaration of dividend & exemptions pertaining to sec. 62 or other provisions is provided to such companies by the Act.
  • Resident Director: The Act provides thatevery company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days during the financial year.[10]
  • Independent Director: A new criterion has been introduced for the company that is to have an Independent director.He is a non-executive director i.e., not a managing director or a whole-time director or a nominee director, but who possesses expertise & experience, who is not a promotor of the company or its holding or subsidiary company, and any other such requirements as prescribed by the Act. [11] He does not have any kind of relationship with the company that may affect the independence of judgment. Every Listed Public Company must have atleast one-third of a total number of directors as independent directors & every unlisted company having paid-up share capital of more than ten crore rupees or turnover exceeding hundred crore rupees or the aggregate outstanding loans, debentures, and deposits, exceeding fifty crore rupees, are required to appoint two independent directors. No such director may hold the office for over two terms of five years consecutively.
  • Duties of Directors: The Act prescribes the duties of directors of the company under section 166. It states that the director is bound to act as per articles of the company, in good faith, with due care, avoid conflict of interest, not make undue gain & not assign his office.
  • Loans/advances to directors: Section 185 of the Act has restricted application as compared to section 295 of the 1956 Act, the new provision provides that no company can offer loan to its directors except in case such director is an MD or whole-time director (WTD) and such proposed loan is either a part of the conditions of service extended by the company to all its employees; or pursuant to any scheme approved by members vide special resolution, or such company is in the business of extending loans. The provisions of Section 185 of the Companies Act, 2013 does not provide any exemption to a private company as provided in the provisions of Section 295 earlier.
  • Limit on maximum partners: The Act has increased the limit of number of maximum partners or persons to hundred in partnership or association, unless it is registered as a company under this Act or is formed under any other law for the time being in force. The section is not applicable on HUF & in case of professionals.[12]
  • Entrenchment of Articles of Association: The 1956 Act did not provide for the provision of entrenchment but the new Act has laid down this concept though it has not defined it. The Company is entitled to entrench the AoA provided it is in conformity with the Act and with the MoA of the Company. Any Article which overrides the Act or MOA is void and not enforceable.
  • Rotation of Auditors: The Act mandates the rotation of auditors after the specified time period.[13] This provision is applicable on all listed companies, unlisted public companies having paid up share capital of rupees ten crore or more, private limited companies having paid up share capital of rupees fifty crore or more & companies having public borrowings from financial institutions, banks or public deposits of rupees fifty crore or more. It is not applicable on OPC & Small Company.
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The said companies shall not appoint or re-appoint an individual as an auditor of the company for more than one term of five consecutive years. Similarly, an audit firm shall not be appointed or re-appointed as an auditor of the company for more than two terms of five consecutive years. If any firm/LLP which has one or more partners who are also partners in the outgoing audit firm/ LLP cannot be appointed as auditors during that five-year period.

  • Auditors performing non-audit services: The objective of introducing this is to ensure the enhanced independence and accountability of the auditors.[14]
  • Financial statements: Financial statements are required to be prepared in the form as mentioned in Schedule III[15] as opposed to section 211 of the 1956 Act. It provides for disclosure requirements prescribed in addition to accounting standards. It also provides for mandatory consolidated financial statements. It is required to be laid in the annual general meeting of that financial year.
  • E-governance: In e-governance era, there is a facility for inspection of charge through internet in order to bring about Simple, Moral, Accountable, Responsive and Transparent (SMART) Governance. The Act provides that the company must keep a safe account of all business and management related documents, records, registers, minutes, etc., preferably in the electronic forms, in such a manner that these could easily be inspected or reproduced whenever necessary.[16] The notices of the Board Meetings and the General Meetings, are also to be sent by electronic means and in the prescribed manner.[17] Dividend can also be remitted in electronic mode. Electronic voting system has also been introduced.
  • Corporate Social Responsibility: India has become first country to mandate Corporate Social Responsibility for companies to incur a given minimum expenditure on social activities through statutory provisions. It is mandatory for companies having net worth of rupees five hundred crore or more, or having turnover of rupees one thousand crore or more, or having a net profit of rupees five crore or more during immediately preceding financial year to form a CSR committee to formulate and monitor the CSR policy of a company.[18] Schedule VII of the Act provides for activities which may be included by companies in their CSR Policies.
  • Minority Shareholder’s role: Rights have been granted to protect the interests of minority shareholders from majority shareholders. Listed Companies are now required to appoint directors who are elected by the small shareholders.[19] The Act has also taken various crucial steps to safeguard the interest of the minority rights of the shareholders in the company irrespective of existence of oppression and mismanagement of the company affecting the rights of the minority shareholders which were also mention in the 1956 Act..
  • Mergers & Amalgamation: The Act simplifies the overall process of acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers and acquisitions, thereby, making Indian firms relatively more attractive to investors. The Act has defined “merger” unlike its predecessor as a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business. The Act also provides for fast-track mergers & facilitates easy approvals for cross-border mergers. This arrangement has widen the scope for Indian Companies as now they have both options of arrangement.[20]
  • Prohibits Insider Training: The Act prohibited insider trading by director or key managerial person.[21] But this provision has now been omitted by way of 2017 amendment as now the concept of insider trading is regulated by SEBI (Prohibition on Insider Trading) Regulation, 2015. It had a short span but was effective because no corresponding section under previous Act was provided.
  • Relaxations to Private Limited Company: Certain exemptions pertaining to type of share capital, Rights issue offer period, time period of Employee stock option, Power to purchase own shares, Loans to directors, Board Resolution filings, Eligibility of Auditors and other relaxations other relaxations or privileges pertaining to meetings, proxies, quorum, appointment & remuneration of management, Board powers etc. are also provided to private companies.
  • National Financial Reporting Authority (NFRA): The Central Government has introduced a new regulatory authority known as National Financial Reporting Authority (NFRA) with wide powers to recommend, enforce and monitor the compliance of accounting and auditing standards.[22] The 1956 Act provided for National Advisory Committee on Accounting Standards (NACAS) which is now renamed.
  • It is responsible for monitoring and enforcing compliance of auditing and accounting standards and for that purpose, oversee the quality of professions associated with ensuring such compliances. It shall also investigate professional and other misconducts which may be committed by Chartered Accountancy members and firms. There is also a provision for appellate authority. It is a quasi – judicial body to regulate matters related to accounting and auditing. It provides recommendations on accounting standards and auditing standards to Central Government.
  • NCLT & NCLAT: The setting up of National Company Law Tribunal (NCLT) as a specialized institution for corporate justice is based on the recommendations of the Justice Eradi Committee on Law Relating to Insolvency and Winding up of Companies. It has substituted Company Law Board as provided under previous Act. The Government constituted NCLT to exercise and discharge the powers and functions as are, or may be, conferred on it by or under the Act with effect from the 1st day of June, 2016. The National Company Law Appellate Tribunal (NCLAT) has been formed to hear & dispose appeals against orders of NCLT and under Insolvency & Bankruptcy Code, 2016.
  • Serious Fraud Investigation Office: The Act has provided for establishing an office called the Serious Fraud Investigation office (SFIO) to investigate fraud relating to Company. SFIO can investigate into the affairs of the company or on receipt of report of Registrar or inspector or in the public interest or request from any department of Central or State Government.[23]
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CONCLUSION

It can be concluded that, in order to attune the Indian Company Law with the global standards, the Report of the JJ Irani Committee had sought to bring in multifarious visionary concepts. The objectives of Companies Act, 2013 provides for developing economy by encouraging entrepreneurship, creating flexibility & simplicity in the maintenance & formation of company, take strict action against fraud etc. It can be noted that by introducing above-mentioned provisions it is working towards that direction but certain drawbacks & loopholes in provisions are still needed to be addressed by the government.


[1] Section 2(59).

[2] Section 2(51).

[3] Section 2(69).

[4] Section 245.

[5] Section 149(1) read with Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014.

[6] Section 134.

[7] The Companies Act, 2013, §2(62).

[8] Section 455.

[9] Section 406.

[10] Section 149(3).

[11] Section 149(6).

[12] Section 464.

[13] Section 139.

[14] Section 144.

[15] Section 129.

[16] Section 120.

[17] Section 173(3) and Section 101

[18] Section 135.

[19] Section 151.

[20] Section 230-240.

[21] Section 195.

[22] Section 132.

[23] Section 211.

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