COMPANY LEGISLATION IN INDIA

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COMPANY LEGISLATION IN INDIA

				By: DR.MARIAPPAN GOVINDARAJAN
				December 31, 2024
All Articles by: DR.MARIAPPAN GOVINDARAJAN View Profile

Contents

Introduction

‘Company’ is one of the types of business entity.
The legislation of company in India has its history since 1856.
In the earlier periods the Indian laws mainly adopted the United Kingdom laws.
The laws relating to company is not an exception to this.
The legislation relating to company since 1856 has travelled till date facing many amendments and challenges.

Company law in England

In the 14th century, the word ‘Company’ was adopted by certain merchants for trading overseas in England.
The first company formulated in England is the East Indian Company in the year 1600 under a Royal Charter, giving monopoly to trade to members of the company over certain territories.
In 1653 a permanent subscribed fund was introduced, called ‘joint fund’ or ‘stock’ of the company. The term joint stock came into use.
In England, during the earlier 18^th century the business associations were the ‘merchant guilds’.
These guilds were called as ‘regulated companies’.
These guilds obtained charters from the Crown mainly to secure for their members, a monopoly in respect of particular trade or commodity.
These associations were either formed a ‘Commenda’ or ‘Societas‘. ‘Commenda’ operated in the form of partnership, the financier being a sleeping partner with limited liability.
The liability was basically borne by the working partners. In ‘Societas’, all the members took part in the management of the trade and had unlimited liability, more in line with the present-day partnership.
In 1844, the Joint Stock Companies Act was passed for the first time. This Act provided for the registration of Companies with more than 25 members or with shares transferable without the consent of all the members. It also provided for incorporation by registration.
The Act for the first time created the office of the Registrar of Companies and required particulars of the Company‘s constitution, changes therein and annual returns to be filed with the Registrar so that there would be full record retained officially.
In the year 1855 the United Kingdom passed an Act called the ‘Limited Liability act, 1855’.
Under this Act companies registered under Joint Stock Companies Act, 1844 had to limit the liability of its members for its debts and obligations generally to the amount unpaid of their shares.
However the said Act was repealed within a few months from its enactment.
The 1844 Act and 1855 Act were repealed by the English Companies Act, 1856. This Act was otherwise called as the ‘Joint Stock Companies Act, 1856’.
This Act enabled seven or more persons to form a company into an incorporated company with or without limited liability.
Memorandum of Association was to be signed by the members of the company. The Companies Act, 1856 was repealed by the Companies Act, 1862 which was amended seventeen times.
This Act provided for the reduction of the share capital, to alter the objects of the companies, imposing liability on directors for false statements inviting public subscription to shares debentures.
The concept of private company was introduced by having only two members.
In the year 1908 the law relating to company was consolidated. This Act was amended in the year 1929 and 1948.
The Companies Act, 1948 was amended in the year 1967, 1976, 1980, 1981, and 1983.
In the year 1985 again the laws relating to company were consolidated and the Companies Act, 1985 was enacted which is the present law governing companies in England.

1.3. Company legislation in India

1.3.1. From 1850 to 1956

As already noted the England Law is the main source for the Company Law in India. The first Act passed in India was for the registration of Joint Stock Companies in the year 1850 which was based on the Joint Stock Companies Act, 1844 of England.
This Act provides that the recognized companies are distinct legal entities.
The Companies Act, 1857 was passed which is followed by English Companies Act, 1856.
This Act recognized the concept of limited liability.
This limited liability was extended to banking companies only in the year 1857.
In the year 1866, the Companies Act, 1866 was passed.
This consolidated and amended the laws relating to incorporation, regulation and winding up of trading companies and Associations.
This Act was enacted based on the English Companies Act, 1862. This Act was replaced by the Companies Act, 1913. This Act underwent many amendments.

1.3.2. Companies Act, 1956

The Government of India, after independence, appointed a Committee in the year 1950. This Committee was headed by H.C. Bhaba.
The object of the Committee is to revise the Companies Act for the development of Indian trade and industry.
The Committee submitted its report to the government in March 1952.
Based on the recommendations of the Committee and following the English Companies Act, 1948, the Indian Government enacted the Companies Act, 1956 which existed till the enactment of Companies Act, 2013.
This Act came into effect from 1^st April 1956.
This Act also met many amendments.
The chacteristic features of the Companies Act, 1956 are-

incorporated association;
company is a separate legal entity distinct from its members;
artificial judicial person;
limited liability to shareholders;
company can sue and can be sued;
shares can be freely transferred;
perpetual succession;
common Seal;

In the wake of economic reforms processes initiated from July, 1991 onwards, the Government recognized the many provisions of the Companies Act had become anachronistic and were not conducive to the growth of the Indian corporate sector in the changing environment.
Consequently, an attempt was made to recast the Act, which was reflected in the Companies Bill, 1993.
The said Bill, however, was subsequently withdrawn. As part of continuing reforms process and in the wake of enactment of the Depositories Act, 1996, certain amendments were, however, incorporated by the Companies (Amendment) Act, 1996.
A working Group was constituted for rewriting the provisions of the Companies Act to facilitate healthy growth of the corporate sector under the liberalized, fast changing and highly competitive business environment.
The Working Group submitted its report. Based on the recommendations of the report and also considering the development that had taken place in structure, administration and the regulatory framework, the world over the Companies Bill, 1997 was introduced to replace the Companies Act, 1956.
But it could not be passed.
Later the Companies (Amendment) Act, 1999 was enacted to surge the capital market by boosting morale of national business houses besides encouraging FIIs as well as FDI in the country.
Buy back of shares are allowed by this amendment.
The provisions relating to the investments and loans were rationalized and liberalized. The compliance of Indian Accounting Standards was made mandatory.
The provisions relating to setting up of Investor and Education and Protection Fund were made.

Amendments to Companies Act, 1956

The Companies (Amendment) Act LXV, 1960;
The Companies (Amendment) Act XLIII, 1962;
The Companies (Amendment) Act LIII, 1963;
The Companies (Amendment) Act XXXII, 1964;
The Companies (Amendment) Act LII, 1964
The Companies (Amendment) Act XXXI, 1965;
The Companies (Amendment) Act XXXIV, 1966;
The Companies (Amendment) Act XXXVII, 1966;
The Companies (Amendment) Act XVII,1967;
The Companies (Amendment) Act XVII, 1969;
The Companies (Amendment) Act LXXX, 1971;
The Companies (Amendment) Act XLI, 1974;
The Companies (Amendment) Act 46 of 1977;
The Companies (Amendment) Act 35 of 1985;
The Companies (Amendment) Act, 31 of 1988;
The MRTP (Amendment) Act, 1991;
The Depositories Act, 1996;
The Companies (Amendment) Act, 1996;
The Depositories Related Laws (Amendment) Act, 1997;
The Companies (Amendment) Act, 1999;
The Trade Marks Act, 1999;
The Companies (Amendment) Act, 2000;
The Companies (Amendment) Act, 2001;
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
The Companies (Amendment) Act, 2002;
The Companies (Second Amendment) Act, 2002;
The Election and other Related Laws (Amendment) Act, 2003;
The Enforcement of Security Interest and Recovery of Debt Loans (Amendment) Ordinance,2004;
The Companies (Amendment) Act, 2006.

Rules framed under Companies Act, 1956

The following are the rules framed for the purposes of Companies Act, 1956 by the Government of India by virtue of powers conferred under various sections in Companies Act, 1956:

Due to the amendment of Companies (Amendment) Act, 2000 some rules, such as ‘Companies (Public Trustee) Rules, 1973 became redundant.

Companies Act, 2013

The Central Government, after due deliberations, decided to repeal the Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the changed national and international economic environment and further accelerate the expansion and growth of our economy.
The Lok Sabha passed the Companies Bill, 2012 on 18^th December, 2012. Rajya Sabha passed the bill on 08^th August, 2013.
The Companies Act, 2013 has been notified on 30^th August 2013 after getting the assent of the President.
The Act is having 29 Chapters, 470 sections and 7 schedules.
The new Act does not contain provisions, timeliness etc., but provide the same will be prescribed.
Section 2(66) of the new Act defines the term ‘prescribed’ as prescribed in the rules made under this Act.
Therefore, more rules may be expected from Government of India in regard to carry out the provisions of Companies Act, than in the previous regime besides instructions, clarifications, circulars etc., which may be more complex and may require high competence for proper compliance of the law.

Salient features of Companies Act, 2013

The following are the salient features of Companies Act, 2013-

The maximum number of private companies is increased from 50 to 200;
The minimum paid up share capital requirements for private companies and public companies are dispensed with;
One person company – a new concept is introduced;
Corporate Social Responsibility is made mandatorily;
Provisions for registered valuers;
Concept of key managerial personnel;
Class action suit – a new concept is introduced;
Formation of National Company Law Tribunal and National Company Law Appellate Tribunal replacing the powers of the Company Law Board and the powers of High Courts;
Formation of Special Courts;
More powers to shareholders;
Women empowerment in the corporate sector;
Fast Track mergers;
Cross Border mergers;
Entrenchment of Articles of Association;
Scope for independent directors;
One director must be an Indian resident;
Rotation of Auditors;
Prohibits Auditors from performing non audit services;
Rehabilitation and liquidation process;
Increasing the scope of e-governance;
Prohibition on forward dealings and insider trading

Amendments to Companies Act, 2013-

The Companies Act, 2013 has accommodated the following amendments in it-

Rules framed under Companies Act, 2013

Section 468 and 469 of the Companies Act, 2013 give powers to Central Government for making rules.
Section 468(1) provides that the Central Government shall make rules consistent with the Code of Civil Procedure, 1908 providing for all matters relating to winding up of companies, which by this Act, are to be prescribed, and may make rules providing for all such matters, as may be prescribed.
Section 468 (2) provides that in particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:-

as to the mode of proceedings to be held for winding up of a company by the Tribunal;
for the voluntary winding up of companies, whether by members or by creditors;
for the holding of meetings of creditors and members in connection with proceedings under Section 230;
for giving effect to the provisions of this Act as to the reduction of capital;
generally for all applications to be made to the Tribunal under the provisions of this Act;
the holding and conducting of meetings to ascertain the wishes of creditors and contributories;
the settling of lists of contributories and the rectifying of the register of members where required, and collecting and applying the assets;
the payment, delivery, conveyance, surrender or transfer of money, property, books or papers to the liquidator;
the making of calls; and
the fixing of a time within which debts and claims shall be proved.

Section 468(3) provides that all rules made by the Supreme Court on the matters referred to in this section as it stood immediately before the commencement of this Act and in force at such commencement, shall continue to be in force, till such time the rules are made by the Central Government and any reference to the High Court in relation to winding up of a company in such rules shall be construed as reference to the Tribunal.
Section 469 gives powers to the Central Government for making rules.
Section 469 (1) of the Act provides that the Central Government may by Notification make rules for carrying out the provisions of this Act. Section 469 (2) of the Act provides that without prejudice to the generality of the provisions contained in Section 469 (1), the Central Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provision is to be or may be made by rule.
Section 469 (3) provides that any rule made under Section 469 (1) may provide that a contravention thereof shall be punishable with fine which may extend to ₹ 5000/- and where the contravention is a continuing one, with a further fine which may extend to ₹ 500/- for every day after the first during which such contravention continues.
Section 469 (4) provides that every rule made under this section and every regulation made by SEBI under this Act, shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of 30 days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under the rule or regulation.
The new Rules were framed by the Government of India after taking into considerations of the comments/suggestions of the stakeholders. The following shows the rules made by the Central Government: