This article discusses the division of the company on the basis of members or the basis of ownership or the control of these companies. It also studies about the concept of converting private companies into the public company.
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Introduction

An association or an organization of certain individuals merged for a common purpose for performing any kind of business is called a Company. It is a lawfully acceptable organisation that seizes in and for operating business whether it could be an enterprise or any commercial or any industrial or production. It is made by choice of those individuals who happen to join each other and support each other in any matter whether it is related to business or personal matter depending upon the partners[1]. According to the law, a company stated is a non-natural or an artificial legal entity which has the privileges to attain any possessions, to enter into agreements in its own name, and to litigate and be prosecuted by others. The companies are also differentiated into various kinds. This article explains kinds of companies in detail.

Statutory Definition

According to Sec. 2 (20) of the Companies Act 2013[2], means a company incorporated under the Companies Act, 2013 or under any preceding company law. A company or corporation comes into picture only when it is registered under the Companies Act, 2013[3]. A company before incorporating has to perform certain conditions and is under legal obligations for the preparation of Memorandum of Association and Article of Association. It is not like other non-registered business entities; it is a steady business organisation. Its life expectancy does not rest on the life of its shareholders, directors, or other individuals. Associates may stay or not, but the company goes on until the shares are down. Any article or document stating the mutual closure of the company will be lawfully binding on the company.

Classification of Companies

The classification of companies can be done according to various factors; it can be done on size, controlling and ownership.

On the basis of size or number of members

On the basis of size or number of members in a company, the classification can be done as:

  • Private Company: According to section 2(68) of the Companies Act, 2013[4], a company consuming or possess a smallest paid-up portion investment or assets as may be stipulated, and which by its laws or documents, limits or confines the right to shift its shares[5]. A private corporation must have the word Private in its name, and that is mandatory[6]. The maximum limit of the company members is 200 people and minimum of 2 people, as per section 42 of Companies Act, 2013[7]. Suppose the company experiences any economic problems due to some reasons then the private shares or properties of members will not be handed or taken to reimburse the debts of the company as the liability of the person is limited.

The creation of a separate legal entity helps them in business agreements. In a private company, a smaller number of individuals are to be referred to for making any decision. The essential individuals of the company who are to make results have an earlier joining and thus an improved joint understanding. Hence, gaining permission is frequently not problematic, and thus it takes decisions quicker. A private company is not obligatory to issue its financial records or other records. Therefore, it is in a much-improved location than a public limited corporation when it derives to the upkeep of business confidence.

  • Public Company: According to Section 2(71) of Companies Act, 2013[8], a public company has a minimum number of 7 members while having no limit on the maximum number of individuals, and that makes them different from a private company. The easy and better access to money from investors or stakeholders as well as the ability to purchase and trade their shares that is easily movable makes them unique. A public company should include the word Limited at the end of the name of the company[9].
  • One Person Company (OPC): Under section 2(62) of Indian Companies Act, 2013[10], one-person company has only one person as a member. The status of this company includes easy and independent legal entity and existence and sure and limited accountability. The One Person Company saves more than public or private companies. It is necessary to mention the nominee in the case of a one-person company.

On the basis of control

On the basis of control, there are two types of Companies:

  • Holding Company: A company which either directly or indirectly, or through another organization or medium, either grasps more than half of the impartial share amount of different company or handles the configuration of the board of directors of a different company[11]. A holding company does not produce any material, sell any products or services, or perform any other commercial actions. Instead, they ask other companies to hold the controlling material in other companies[12].
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A company is regarded as a holding company when they hold more than 50% of the registered equity amount of the company, or when they hold more than 50% of the voting rights in the company or when they have the authority to employ the majority of the directors of the firm.  

  • Subsidiary Company: A company which handles or operates its entire business under the leadership of a different company is termed as a Subsidiary Company. A subsidiary company include a corporation or Limited Liability Company or a government enterprise as well[13]. Here the main company is called a holding company, and it owns the subsidiary company. The holding or parent company must possess more than half of shares or the stakes of the subsidiary company. If it has ownership of 100%, the subsidiary company is called a fully owned subsidiary company.

On the basis of Ownership

On the basis of Ownership, there are two kinds of Companies:

  • Government Company: This category of Company is mentioned under section 2(45) of Indian Companies Act, 2013[14], the company having ownership of equal to or more than 51% of the paid-up share capital detained by the Central Government, or by any State Government or more than one State Governments or has limited ownership by the Central Government, or by any State Government or more than one State Governments and including the subsidiary Companies of Government Company[15]. Proper reports and meetings have to be organised, and the government has to show the annual profits in parliament. Companies like Steel Authority of India Limited, Bharat Heavy Electricals Limited are the Government Companies.
  • Non-Government Company: It is a non-government organisation which works independently to the government. It is mostly citizen-based and formed for specific political or economic purpose. The general committee analyses the reports of a non-government company. [16]

Associate Company

An associate company is a company in which a distinguished fraction of shares is owned by a parent company. The portion frequently lies between 20% and 50%. Possession of higher than 50% of the stock legally turns it into a subsidiary of the parent company[17].

The Doctrine of Ultra Vires

The particular section of the Memorandum of the Association (MOA) of the Company comprises the entity for which the corporation is formed. An act of the company must not be outside the object clause or else it will be ultra vires that is acting beyond the judicial authority and therefore, annulled and cannot be approved even if all the members demand to approve. This is called the doctrine of ultra vires[18], a Latin phrase meaning going beyond authority. It is an essential principle of the Company and tells us about the management and operation of the companies and has to be in relation to the sections stated in the memorandum of association.

Therefore, any act or agreement is said to be null and unlawful if the corporation is doing the act, and tries to purpose beyond its authority, as mentioned by its memorandum of association. So, it can be specified that for any agreement or any act to not fall under these principles, has to put efforts under the memorandum of association[19]. The main point to be noted that the company cannot be under any legal obligation by through this agreement.

Foreign Companies

The Section 2(42) of Indian Companies Act, 2013 which states that any company or a firm or any other organization which is established in foreign which either has a dwelling of business in India whether by itself or through a manager, either physically or through any other mode and behaviour of any business activity in India[20]. The Section 381 of Indian Companies Act, 2013[21] mentions about the accounting department and receiving the accounts where they can have meetings every year.

Conversion of Private Limited Company to Public Company

The Private Limited Companies are the first preferences of the superior freedoms enjoyed by them. Sometimes the capital also originates from close acquaintances, families and known individuals and not from the public.  In certain situations, a private company can be rehabilitated into public Companies through these ways.

  • By default: The limitation of the right to transfer shares. The limiting of a maximum number of individuals. The ban appeals to the public for payment of shares or amount overdue.
  • By law: When the shares of equal or more than 25 percent of paid-up amount of a private company are held by one or more public companies or when the average of complete revenue of a private corporation is more than or equal to Rs.25 crores for three successive years or when the private company holds more one-fourth of paid-up amount of any public company. 
  • Through Choice: Through people’s own choice or determination of the private company, they can have themselves converted to Public Limited Companies. The procedures are to be followed, and after successfully following the methods, it can be an easy conversion.
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Conversion of Public Company to Private Limited Company

An application should be filled, and certain obligations are to be fulfilled before such conversion happens. First, it must be guaranteed that the company was never registered on Stock Exchange and if it all it was registered, all necessary steps were accumulated for removal of the shares in relation with the appropriate internet laws, as mentioned by the Securities Exchange Board of India[22]. No money should be raised from a random public or through any means of Public Company. The limit of Shareholders has to be specific and maximum strength is taken care off.

Conclusion

The Companies are essential for the development of any country, and that is why the companies are asked strictly to follow the Companies Act, 2013. The said act provides more authority to stakeholders and other associates. These companies have a very definite proposition, as stated in the Companies Act, 2013. It delivers for the revolution of accountants and review corporates in case of widely imported companies. It forbids accountants from the accomplishment of these facilities to the company where they are to ensure individuality and responsibility of the person.

It can be further concluded that the Companies Act, 2013 is essential as it has brought some major changes according to the need of the time and society.


[1] Lynn S. Paine: Managing for Organizational Integrity, Harvard Business Review, March-April Issue (1994) available at https://hbr.org/1994/03/managing-for-organizational-integrity accessed on Sep18, 2020 at 04:47 pm.

[2] Notification of Sections and Rules under Companies Act , 2013, Notifications, Confederation of Indian Industry, p 1, available at https://cii.in/WebCMS/Upload/CompaniesActRepresentation.pdf  accessed on Sep18, 2020 at 05:11 pm.

[3] Companies Act, 2013; Section 3

[4]Company Law Compliances of Private Limited Company, Tax Guru, last updated on 1st October 2019, available at https://taxguru.in/company-law/company-law-compliances-private-limited-company.html#:~:text=Section%202(68)%20of%20Companies,large%20from%20subscribing%20to%20them accessed on Sep 18, 2020 at 09:12 pm

[5] Study Material of the Executive Programme for Company Law, The Institute of Company Secretaries of India, available at https://www.icsi.edu/media/webmodules/student/FUL_BOOK_EP_CL_2017_MARCH_2.pdf accessed on Sep 18, 2020 at 09:21 pm

[6] Private Companies, Toppr Website, available at https://www.toppr.com/guides/business-laws/companies-act-2013/private companies/#:~:text=%E2%80%9CPrivate%20Limited%E2%80%9D%3A%20All%20private,Ltd.%E2%80%9D%20in%20their%20names accessed on Sep 18, 2020  at 09:33 pm.

[7] Companies Act, 2013; Section 42

[8] Companies Act; Section 2 (71)

[9]Companies Act, 2013; Section 2 (71)

[10] Companies Act, 2013; Section 2(62) Also referred One Person Company under New Companies Act, 2013, TaxGuru, last updated on 12th July 2014, available at https://taxguru.in/company-law/person-company-companies-act2013.html#:~:text=As%20per%20provision%20of%20section,only%20one%20person%20as%20member.&text=%E2%80%93%20shall%20be%20eligible%20to%20incorporate,of%20a%20One%20Person%20Company  accessed on Sep 18, 2020 at10:22 pm

[11] Amy Fontinelle : Holding Company, Investopedia, last updated on 24th August 2020, available at https://www.investopedia.com/terms/h/holdingcompany.asp accessed on Sep 18, 2020 at 10:42 pm

[12] Ibid

[13] Classification and Registration of Companies, Ministry of Corporate Affairs, Government of India , available at http://www.mca.gov.in/MinistryV2/classification+and+registration+of+companies.html accessed on Sep 18, 2020 at 11:11 pm

[14]Companies Act, 2013; Section 2 (45)

[15] Divesh Goyal: Government Company under Companies Act, 2013, last updated on 19th August 2015, available at https://taxguru.in/company-law/government-company-companies-act-2013.html#:~:text=A%20Subsidiary%20of%20Government%20Company,and%20Private%20individuals%20are%20shareholders

[16] Jean Folger, what is NGO (Non-Government Organization), Investopedia, last updated on 18th February 2018, available at https://www.investopedia.com/ask/answers/13/what-is-non-government-organization.asp

[17] James Chen, Associate Company, Investopedia, last updated on 29th January 2020, available at https://www.investopedia.com/terms/a/associate-company.asp accessed on Sep 19, 2020 at 12:17 am

[18]Consequences of Ultra Vires Transactions, Chapter-5, Shodhganga, available at https://shodhganga.inflibnet.ac.in/bitstream/10603/9793/12/12_chapter%205.pdf accessed on Sep 19, 2020 at 12:32 am

[19] Shipra Sayal, Doctrine of Ultra Vires, Law times journal, available at http://lawtimesjournal.in/doctrine-of-ultra-vires/ accessed on Sep 19, 2020 at 1:01 am

[20] CS Lalit Rajput, Foreign Company Compliance under Companies Act, Tax Guru, last updated on 11th October 2019, available at https://taxguru.in/company-law/foreign-company-compliance-companies-act-2013.html accessed on Sep 19, 2020 at 1:31 am

[21] Companies Act, 2013; Section 381

[22] Uzair Khan: Conversion of Public Limited Company to Private Limited Company, Ipleaders, last updated on 10th January 2020,  available at https://blog.ipleaders.in/conversion-public-limited-company-private-limited-company/

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