INCORPORATION OF COMPANIES - Proposed Amendments in the Companies Act, 2013

Memorandum

2.1 Section 4 of the Act requires a company to have a ‘Memorandum of Association’ (MOA), which has to be subscribed to by the persons incorporating a company. The Companies Act, 2013 has done away with the bifurcation of objects into ‘main’ and ‘other’ objects. Instead, Section 4(1)(c) and Schedule I require the MOA of every company to state “the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.” While the new Act has liberalised the manner of specifying the objects in the MoA, certain problems in implementation were reported, such as, for the approval of name of a company, and the allotment of Corporate Identity Number for a company with multiple objects. The English Companies Act, 2006 provides that a company’s objects will be unrestricted, unless the articles specifically restrict them. With annual reporting on the major activities undertaken by a company, there are adequate provisions for disclosures on the current objects of a company. Sectoral regulators can always prescribe restrictive criteria to suit their requirements. The Committee, therefore, recommended for a more liberal operational regime for companies. To provide for this, the Committee recommended that Section 4(1)(c) should be amended appropriately, to allow companies the additional option to have a generic object clause, i.e., “to engage in any lawful act or activity or business as per the law for the time being in force” in the MOA.

2.2 Suggestions were received from the stakeholders that the period of currency of name approved be sixty days from the date of approval and not from the date of application. However, considering the ground realities, the fact that a changed process for centralised processing of name reservation/approval has already been implemented, as well as the fact that only one re-submission is allowed, the Committee felt that there is a case for building in efficiency in the system and reduce misuse by reducing the period of reservation to 20 days by amending Section 4(5)(i). The Committee, therefore, recommended that the period of name reservation should be reduced from 60 days to 20 days from the date of approval, and simultaneously, the fees for such reservation be reduced to Rupees Five Hundred.

Incorporation of companies

2.3 Section 7 of the Act provides for requirements in relation to the incorporation of companies. Section 7(1)(c) requires affidavits to be given by directors and the first subscribers regarding their not being convicted of offences indicated therein. Section 7(1)(b) also requires a declaration to be given by a professional, and by the proposed director, or manager, or secretary of the company, with respect to compliance with the applicable provisions of the Act, regarding the incorporation of a company. Suggestions received by the Committee had indicated that both of these requirements caused additional documentary burden, and could, at times, lead to a delay in the

incorporation of companies. It was also suggested that certification under Section 7(1)(b) could be either from directors/managers/secretaries or from professionals, and not from both. The Committee felt that the requirements with respect to affidavits under Section 7(1)(c) could be replaced with self-declarations, as a wrong declaration carries a stiff punishment under the Act. Regarding certification under Section 7(1)(b), the Committee felt that a certificate by both the parties stated therein ought to be retained as an additional check at the stage of incorporation of the company.

Registered Office of Company

2.4 Section 12 of the Act governs the provisions relating to the registered office of a company. Section 12(1) seems to require that a company shall, on and from the fifteenth day of its incorporation, and at all times thereafter, have a registered office. Technically, this interpretation would not allow a company to have its registered office immediately on incorporation, or earlier than the fifteenth day of its incorporation, whereas a company could have its office from the day of its incorporation. The Committee felt that this sub-section may be amended to provide for a company to have its registered office within thirty days of its incorporation.

2.5 Section 12(4) provides for the recording of the change of the registered office of a company by the Registrar, after being given notice of the same by the company within fifteen days of such change. The Committee noted the concern expressed by stakeholders that in respect of certain documents like lease deeds, rent agreements and other related documents that are required to be submitted, the prescribed time period of fifteen days is insufficient, especially where various approvals may have to be obtained. The Committee recommended that the time limit for registering change in registered office be increased to thirty days.

Authentication of documents, proceedings and contracts

2.6 Section 21 of the Act provides that a document requiring authentication by a company, or contracts made by, or on behalf of a company, may be signed by any key managerial personnel or an officer of the company duly authorized by the Board in this behalf. It was stated before the Committee that since the definition of “officer” under Section 2(59) included top level management persons in a company, it would be practically very difficult for only such top level persons to sign the documents, without providing for any other employee to sign, even with a board resolution. Suggestions were made for such authentication to be allowed under the signature of ‘any employee of the company duly authorised by the Board’. The Committee noted that since any authorization for employees would be backed by a board resolution, it would be expected of the Board to exercise due care while authorizing any such employee. Accordingly, the Committee recommended an amendment to Section 21, to allow authorizations, on the signature of ‘any employee of the company duly authorised by the Board’.

Effect of number of members falling below the minimum requirement

2.7 Section 3(1) of the Act provides for the minimum number of persons required for formation of a company. However, the minimum number of persons required for continuation of a company after it is formed and legal consequences of number of members falling below the minimum number is not provided in section 3 of the Act. The Committee felt that suitable provisions should be made in the Act/rules to provide for consequences of number of members falling below the prescribed minimum i.e. fastening the continuing members with the liability for all the debts incurred by the company till the prescribed minimum is restored. Further, provision may also be made for the maximum period of 6 months within which the default shall be made good failing which the violation of the law is triggered. Similar provision was there in Section 45 of the 1956 Act.