TYPES OF COMPANIES UNDER THE COMPANIES ACT, 2013 BY - DHOBALE SANKET NARAYAN
TYPES OF COMPANIES UNDER THE
COMPANIES ACT, 2013
AUTHORED BY
- DHOBALE SANKET NARAYAN
LL.M 2nd Year
Progrgressive
Education Society
Modern Law
College, Pune
Abstract
The company of any nature is formed
with the common purpose and common trade or common business in order to share
profit and loss arising therefrom. As we know company is a legal entity as per
legislation provided. Certain characteristics are there related with company
that has to be expressly discussed. There are different kinds of companies
provided under the companies act, 2013. There is specific procedures and rules
for the formation of each kinds of company. There are certain beliefs and
behaviours that determine how employees of the company?s interact and transact
with each other. The culture of company may vary from company to company. The
present study is about the nature of company alongwith its characteristics. The
kinds of companies and also the rules for formation of companies are discussed.
Keywords: Act,
Certain, Company, Kinds, Nature
1. Introduction
In India, there are different kinds
of businesses, each with its own set of rules. These rules are set by Indian
Company Law. Whether a person is starting a small or big business, it is very
essential to know about the types of companies covered by Indian law. These
types decide things like who owns the business, who is responsible if something
goes wrong, how the company is managed, and what rules it must follow.
According to Section 2(20) of the
Companies Act, 2013, a "company" means a company incorporated under
the Companies Act, 2013 or under any previous company law. The Companies Act of
2013 replaced the Companies Act, 1956. The Companies Act, 2013 makes provisions
to govern all listed and unlisted companies in the country. The Companies Act
2013 implemented many new sections and repealed the relevant corresponding
sections of the Companies Act 1956. This is landmark legislation with
far-reaching consequences for all companies incorporated in India.
It is needless to say that we have a
multitude of companies of various kinds. From corporate companies to one-person
companies, we have so many kinds of companies. Mainly, these companies can be
classified on the basis of size of the company, number of members, control,
liability, and manner of access to capital. This article shall be talking in-
depth about all such companies and various other kinds of companies too.
2. Types of companies in Company Law
2.1. Types of companies on the basis of size or number of members in a
company
2.1.1. Private company
According to Section 2(68) of the
Companies Act, 2013 (as amended in 2015), "private company" is
defined as a company having a minimum paid-up share capital as may be
prescribed and which, by its articles, restricts the right to transfer its
shares. It can have a maximum of 200 members. As per this Section, the private
company consists of the following rules:
1) A private company needs to have a
certain minimum amount of money invested in its shares. This amount is
determined by the Act, but previously it was specified as one lakh rupees or a
higher amount as prescribed by the government, but after the amendment made in
the year 2015, it was omitted.
2) In a private company, the rules
called Articles of Association (AoA) restrict how shares can be sold or
transferred to others. This means shareholders cannot freely sell their shares
to anyone outside the company without following specific procedures outlined in
the company's AoA.
3) Typically, a private company can have
a maximum of 200 members. However, there is an exception for one-person
companies, which can have only one member. If multiple people jointly own
shares, they count as a single member.
4) Employees and former employees who
still hold shares are not counted in this limit.
5) Private companies cannot publicly
invite people to buy their shares or other securities. They cannot advertise or
solicit the general public to invest in their company. These rules are designed
to provide certain benefits and protections to shareholders while also
regulating the operations of the company. They ensure that private companies
operate within a controlled environment and maintain a close-knit structure.
2.1.1.1. Advantages of private company
A private limited company enjoys the
following advantages:
1) Owners have more control over decision-making
and operations since there are fewer shareholders.
2) Private companies have greater
flexibility in terms of management structure, business strategies, and
financial decisions.
3) There is less public scrutiny
compared to public companies; therefore, it allows for greater privacy in
financial matters and business operations.
4) Private companies can often act more
swiftly in response to market changes or business opportunities without the
bureaucratic processes required by public companies.
5) Private companies can focus on
long-term growth strategies without the pressure of meeting short-term
quarterly earnings expectations.
6) A private company can be formed
merely by two persons. It can start its business just after incorporation and
doesn't have to wait for the certificate of commencement of business.
7) There are comparatively fewer legal
formalities that are to be performed by a private company as compared to a
public company. It also enjoys special exemptions and privileges under the
company law. Thus, it can be concluded that there is greater flexibility in
operations in a private company.
8) In a private company, fewer people
are to be consulted. The core people of the company who are to make decisions
have a closer relationship (so to speak) and thus a better mutual
understanding; hence, obtaining consent is usually not a problem, therefore
making the process of making decisions faster.
9) A private company is not required to
publish its accounts or file several documents. Therefore, it is in a much
better position than a public company when it comes to the maintenance of
business secrets.
10) The same core people with close
relations continue to manage the affairs of a private company. Due to their
close relations, the continuity of policy can be maintained, as there is mutual
trust and a low dispute attitude.
11) There is a greater personal touch
with employees and customers in a private company. There is also a
comparatively greater incentive to work hard and to take initiative in the
management of business.
2.1.1.2. Disadvantages of private companies
1) Private companies may find it
challenging to raise capital since they cannot sell shares to the public. They
rely on personal savings, bank loans, or investments from a smaller pool of
investors.
2) Without access to public markets,
private companies may face constraints in expanding their operations or
undertaking large-scale projects.
3) Private companies may have limited
access to specialised skills and resources compared to larger public companies.
4) Since private companies often have
limited resources and access to capital, they may face a higher risk of
failure, especially during economic downturns or market disruptions.
5) Exiting or selling shares in a
private company can be more difficult and may require the agreement of all
shareholders. Thus, it makes it more challenging for investors to realise their
investment.
2.1.2. Public company
Section 2(71) of the Companies Act,
2013 defines a "public company" as a company that is not classified
as a private company and has a minimum paid-up share capital as prescribed by
law. As per this Act, a public company consists of the following aspects:
1) As per Section 3(1) of the Companies
Act 2013, a public company must have a minimum of seven members, and there is
no restriction on the maximum number of members. As per Section 149(1) of the
Act, a public company consists of a minimum of 3 directors.
2) As per Section 4(1)a of the Act, a
public company having limited liability must add the word "limited"
at the end of the name. The shares of a public company are freely transferable.
3) A public company differs from a
private company in various ways. Unlike private companies, which have
restrictions on share transfers, public companies have more flexibility in
trading their shares and can have a larger number of shareholders. This
distinction impacts how the company operates, its governance structure, and its
obligations to shareholders and regulatory authorities.
4) Earlier, public companies were
required to have a certain minimum amount of money invested in their shares.
This is known as the paid-up share capital. The law sets the minimum threshold
at five lakh rupees, but the government may prescribe a higher amount. This
requirement ensures that public companies have sufficient financial backing and
stability to operate on a larger scale. However, the minimum requirement of
paid capital of five lakh was omitted in the Amendment Act of 2015.
5) If a company is owned by another
company that is not private, such as a public company, even if it is still considered
private according to its own rules, it is treated as a public company.
2.1.2.1. Registration of public company
In order to register the public
company, the following aspects need to be considered:
1) There must be at least 7 shareholders
and 3 directors to start a public limited company. Shareholders can be
individuals, other companies, or Limited Liability Partnerships (LLPs), while
directors must be individuals.
2) Directors need a Director
Identification Number (DIN), which can be obtained by applying online through
the Ministry of Corporate Affairs. Indian nationals need a PAN card for this.
3) All promoters and directors must have
a digital signature certificate for online document submission. These
certificates are obtained from certifying authorities in India. For the
Director Identification Number (DIN), a copy of a PAN card self-attested for
Indian nationals and proof of address utility bills not older than 2 months, or
a passport for foreign nationals, are required.
4) Choose a location for the registered
office and decide on the authorised capital of the company. The registered
office can be any identifiable address, and there is no minimum capital
requirement for a public limited company.
5) The company's name should end with
'Limited'. Apply for name approval from the Registrar of Companies (ROC)
through the Ministry of Corporate Affairs website. Submit multiple names in
order of preference, and ensure they comply with the guidelines.
6) Once a company name is approved, one
needs to prepare the Memorandum of Association (MOA) and Articles of
Association (AOA) in the prescribed format. These documents are now prepared
electronically (eMoA and eAOA). Submit the eMoA and eAOA to the ROC for
registration of the company.
7) After due verification, the ROC will
register the company and issue a Certificate of Incorporation (COI). After the
issuance of the COI, a Corporate Identification Number (CIN) will be allocated
to the company. For the Digital Signature Certificate (DSC), application forms
need to be filled out and signed, and ID proof (passport, driving licence, PAN
card, etc.), and address proof (passport, driving licence, utility bills, etc.)
are required.
8) Within a period of approximately six
months, that is, 180 days from the official date of incorporation, a newly
established company is required to complete and submit a form.
2.1.2.2. Advantages of a public company
1) Public companies can easily raise
funds by selling shares to the public through the stock market; this will
facilitate their ability to expand and undertake activities like research.
Thus, investors can easily buy and sell parts of a public company on the stock
market. Hence, this makes it easier for investors to get in and out whenever
they need.
2) Public companies have more
opportunities to team up with or buy other companies, which helps them to
expand and do different things.
3) Public companies are usually bigger
and more noticeable, so they can offer better jobs and pay.
4) They have greater access to mergers,
acquisitions, and partnerships, which can help them grow and diversify their
business.
5) Public companies are more visible;
hence, they can offer better job opportunities and pay.
2.1.2.3. Disadvantages of a public company
1) It's harder to start a public company
because one needs to create and file a detailed document called a prospectus,
and rules must also be followed when giving out shares.
2) Public companies have many directors
and managers. Decisions are made in meetings, which can take a long time.
3) Public companies must share lots of
documents with the government. Their financial information is made public. So,
keeping business secrets is tough.
4) Public companies must follow many
rules. The government controls them a lot. This will limit the flexibility.
5) In public companies, the owners and
managers are often different. Paid managers may not have a strong reason to
work hard. Further, it's hard to maintain close relationships with customers
and employees. Sometimes, there are conflicts between shareholders, lenders,
and managers.
6) Shares of public companies are traded
every day. Some people may try to make quick money by gambling on these shares.
This may have an impact on smaller shareholders.
7) The people who own parts of the
company, called shareholders, often want quick financial growth. They might
push for quick profits, even if it means sacrificing long-term growth.
8) When a company goes public, it loses
some control. Shareholders and market expectations start to affect decisions,
and the original owners might have less opportunity.
9) Public companies might get sued by
shareholders or government regulators, which can cost a lot and impact the
company's reputation.
10) Public companies might face lawsuits
from shareholders or regulators; this will be more costly and adversely impact
the company's reputation.
11) Some investors might try to influence
the company's decisions to serve their own interests; this can create conflicts
and cause disruptions in how the company operates.
2.1.3. Small company
Section 2(85) of the Act defines
'small company' as a type of company that is not a public company. There are
two main things that determine a small company, which include:
1) Paid-Up Share Capital: This is the total value of shares paid to shareholders. This
amount should not be too high. It used to be fifty lakh rupees, but now it can
be higher, up to ten crore rupees or five crore rupees.
2) Turnover: This
is the total revenue a company makes from its business activities. In small
companies, the turnover for the previous year should not be too high. It used
to be two crore rupees, but now it can be up to four crore rupees or forty
crore rupees.
2.1.3.1. Exceptions
There are some exceptions to the
above mentioned amount criteria. The companies stated below are exempt from such
requirements, which include:
1.
Holding or
Subsidiary Companies: These are companies owned or controlled by another
company, known as a holding company, which manages and controls its
subsidiaries.
2.
Section 8
Companies: These are non-profit companies formed for specific purposes.
3.
Companies
Governed by Special Acts: These are companies governed by special laws for
particular sectors.
2.1.3.2. Recent changes in the definition of small company
The definition of a small company
changed recently. The Companies Act of 2013 introduced the idea of small
companies based on their paid-up share capital and turnover. Recently, the
Ministry of Corporate Affairs made changes to the definition of a small company
through an amendment on September 15, 2022. Previously, the threshold for
categorising a company as small based on turnover and paid-up share capital was
two crore rupees and twenty crore rupees, respectively. However, with this
amendment, the limit was increased to four crore rupees for paid-up capital and
forty crore rupees for turnover. Now, the threshold for being small based on
turnover and paid-up share capital is higher.
2.1.3.3. Effect of amendment
The changes in the definition of a
small company reduce the certification requirements for e-forms submitted to
the Register of Companies (ROC) by practising professionals such as Chartered
Accountants, Company Secretaries, and Cost Accountants. However, holding a
Certificate of Practice (COP) opens up various opportunities beyond ROC
compliance, including areas lik intellectual property rights, litigation, and
investment banking.
2.1.3.4. Role of small companies
Small companies are important for the
economy. They contribute to the growth and development of the economy. They are
registered similarly to private limited companies, but their status is
determined by their paid-up share capital and turnover, not by a separate
registration process.
2.1.4. One Person Company
The Companies Act, 2013 also provides
for a new type of business entity in the form of a company in which only one
person makes the entire company. It is like a one man-army. Under Section
2(62), One Person Company (OPC) means a company that has only one person as a
member. Features of OPC include:
1. One person dan set up and run the
whole company as both the owner and director.
2. While an OPC can have up to 15
directors, only one person can own it.
3. At least one director must be an
Indian resident who has lived in India for at least 182 days in the last
financial year.
4. No minimum capital is needed to
register an OPC. The owner can invest as much as they want, and government fees
are based on this.
5. The owner's liability is limited to
the capital they have invested. This means their personal belongings are safe
if the business faces losses or debts.
6. OPCs are great for small businesses
and startups with turnover below Rs. 2 crores and capital investment under Rs.
50 lakhs.
7. Only Indian citizens can register an
OPC. Foreign investment is not allowed, ensuring full ownership by Indian
residents.
8. The company's name should include
"One Person Company" in brackets as per Section 3(1)(c) of the law.
2.1.4.1. Members and directors
1. As per Section 3(1) (c), OPC can have
only one member.
2. As per Section 152(1), the individual
member is deemed the first director until other directors are appointed.
3. As per Section149 (7), an OPC can
have a minimum of one director and a maximum of fifteen directors, and a
special resolution must be passed by the OPC in order to exceed fifteen
directors.
An OPC must select one
person as a 'Nominee' who will take over in case the sole member is unable to
run the OPC due to reasons like death or incapacity. The nominee will:
1. Become a new member of the OPC.
2. Receive all the shares in the OPC
3. Be responsible for all the
liabilities of the OPC.
The nominee's consent to act as a
nominee must be obtained and submitted to the Registrar of Companies (RoC) at
the time of incorporation, along with the Memorandum of Association (MoA) and
Articles of Association (AoA).
2.1.4.2. Withdrawal and replacement of nominee
1. The nominee can withdraw their
consent by giving written notice to both the sole member and the OPC.
2. Upon withdrawal, the sole member must
nominate another person as the new nominee within 15 days.
3. The OPC must inform the RoC about the
withdrawal of consent, name the new nominee, and obtain the written consent of
the new nominee within 30 days of receiving the withdrawal notice.
4. This information must be filed with
the RoC using Form No. INC-4 along with the required fee, and the written
consent must be submitted using Form No. INC-3.
5. The nominee can be changed at any
time by informing the RoC.
2.1.4.3. Limit on multiple memberships
If a person is a member of one OPC
and becomes a member of another OPC as a nominee, they must choose to remain a
member of only one OPC within 180 days. They need to withdraw their membership
from one of the OPCs within this period.
2.1.4.4. Registration of OPC
In order to register an OPC, here are
the steps one needs to follow:
1. Get a Digital Signature Certificate
(DSC) for the proposed director. This requires documents like address proof, an
Aadhaar card, a PAN card, and contact details.
2. Apply for the Director Identification
Number (DIN) using the SPICE+ form. This form allows for applying for DIN for
up to three directors at once.
3. Apply for name approval for the
company using the SPICe+ application. One needs to specify a preferred name. If
rejected, another name can be submitted.
4. Once the name is approved, prepare
the necessary documents including the Memorandum of Association (MoA), Articles
of Association (AoA), proof of registered office, and consent from the nominee
in case the director becomes unable to act.
5. File these documents along with forms
like INC-9 and DIR-2 with the Registrar of Companies (ROC) using the SPICE+
Form, SPICE-MOA, and SPICE-AOA.
6. The PAN number is automatically generated
during incorporation.
7. After verification, the ROC issues a
Certificate of Incorporation, and the company can start operating.
8. The OPC must have at least one member
and a nominee, with the nominee's consent obtained in Form INE-3.
9. Make sure to comply with the
Companies (Incorporation Rules) 2014 regarding the company name.
The whole process, from
getting DSC and DIN to receiving the Certificate of Incorporation, usually
takes around 10 days, on departmental approval and response times.
2.1.4.5. Advantages of OPC
1. Setting up an OPC is relatively easy
and requires only one person to start.
2. An OPC offers limited liability
protection to its owner; accordingly, personal assets are not at risk in the
case of business debts.
3. The owner has complete control over
the company without sharing decision-making power with anyone else.
4. An OPC is seen as its own legal
entity, separate from its owner. This makes it look more credible and makes it
easier to get funding.
5. Compared to bigger companies, OPCs
usually have fewer legal rules to follow and less paperwork to deal with,
making it simpler to run the business.
6. OPCs might enjoy tax benefits and
incentives from the government, which can save money on taxes.
7. Since there is only one owner,
decisions can be made easily without needing to consult or get approval from
others. This makes it easier to adapt to changes in the market.
2.1.4.6. Disadvantages of OPC
1. Only one person can own an OPC, which
might cause difficulty in growing and getting investments compared to larger
companies with multiple owners.
2. OPCs are owned by just one person and
have to deal with a lot of legal paperwork and
rules, which can be more complicated compared to businesses.
3. Some people might think OPCs are less
stable or reliable than bigger companies with more owners.
4. OPCs have to appoint someone else to
represent them, which might bother entrepreneurs who want to make all the
decisions themselves.
5. With just one owner, OPCs might find
it hard to get enough money, expertise, or connections, making it tough for
them to grow.
6. If something happens to the owner,
like if they get sick or pass away, it can be hard to figure out what to do
with the OPC next, especially if there is no plan in place.
7. Selling or giving away an OPC can be
complicated and might scare off potential buyers or investors because of all
the legal stuff involved.
2.2. Types of companies on the basis of control
2.2.1. Holding company
A holding company is a company that
owns one or more other companies. These other companies are called subsidiary
companies because they are controlled by the holding company. So, the holding
company is like the parent company, and the subsidiaries are its smaller
companies. Such a type of company, directly or indirectly, via another company,
either holds more than half of the equity share capital of another company or
controls the composition of the Board of Directors of another company.
2.2.1.1. Definition of holding company
Section 2(46) of the Companies Act,
2013 defines a holding company as a holding company, in relation to one or more
other companies, means a company of which such companies are subsidiary
companies."
Provided that such class or classes
of holding companies as may be prescribed shall not have layers of subsidiaries
beyond such numbers as may be prescribed.
Ø Further explanation
1. The composition of a company's Board
of Directors would be deemed to be controlled by another company if that other
company, by the exercise of some power exercisable by it at its discretion,
could appoint or remove all or a majority of the directors;
2. The expression "company" includes
any body corporate;
3. "Layer" in relation to a
holding company means its subsidiary or subsidiaries."
A company can become the holding
company of another company in any of the following ways:
1. by holding more than 50% of the
issued equity capital of the company,
2. by holding more than 50% of the
voting rights in the company,
3. by holding the right to appoint the
majority of the directors of the company.
2.2.1.2. How it works
A corporation can become a holding
company in two main ways. One way is by buying enough shares in another company
to have control over it. The other way is by starting a new company and keeping
some or all of its shares. Even if a holding company owns just a small part of
another company's shares, like 10%, it can still control its decisions. The
main connection between a holding company and the companies it controls is
called a parent- subsidiary relationship. The holding company is like the
parent, and the company it buys or controls is like the child, called the
subsidiary. If the parent company owns all the shares of the other company,
it's called a wholly-owned subsidiary.
2.2.1.3. Types of holding companies
In general, these companies can be
bifurcated into the following types:
1. Pure: A pure
holding company only owns shares in other companies and does not do any other
business.
2. Mixed: A mixed
holding company not only owns other companies but also does its own business.
3. Immediate: An
immediate holding company owns another company, even if it is already owned by
someone else.
4. Intermediate:
An intermediate holding company is both a holding company and a subsidiary of a
larger corporation. It might not have to share financial records like a regular
holding company.
2.2.1.4. Merits of a holding company
1. A holding company owns different businesses,
so if one business faces problems, the others can step in to help, lowering
overall risk.
2. By managing everything together, a
holding company can save money on things like purchasing supplies or
advertising because they buy in bulk for all their businesses.
3. A holding company can choose where to
invest money, people, and technology to help its businesses grow and succeed.
4. Sometimes, a holding company can pay
less in taxes because it can balance out profits and losses between its
businesses, potentially reducing its tax bill.
5. A holding company can control its
different businesses while still allowing them to make their own decisions.
This gives it flexibility in how it operates.
2.2.1.5. Demerits of a holding company
1. Managing many different businesses
can be challenging, and it will slow down decision- making processes.
2. Holding companies have to follow
rules for each business they own, which can be a lot of work and cost money to
ensure compliance.
3. If one business owned by the holding
company faces financial trouble, it can affect the other businesses,
potentially amplifying the problem.
4. Sometimes, the holding company's
objectives might clash with the goals of its businesses, which may lead to
disagreements and conflicts in decision-making.
2.2.2. Subsidiary company
A subsidiary company is a company
that is both owned and controlled by another company. The owning company is
called a parent company or a holding company. The parent of a subsidiary
company may be the sole owner or one of several owners of the company. If a
parent or holding company possesses complete ownership of another company, that
company is referred to as a "wholly-owned subsidiary." There is a
difference between a parent company and a holding company in terms of
operations. A holding company doesn't have its own operations but owns most of
the shares and assets of its subsidiary companies. It is basically a company
that operates a business and also owns another business, known as the
subsidiary. The holding company runs its own operations, while the subsidiary
might engage in a related business. For example, the subsidiary might handle
owning and managing the holding company's property assets to keep their
liabilities separate.
2.2.2.1. Definition of subsidiary company
As per Section 2(87) of the Act, a
subsidiary company is a company that is controlled by another company, called
the holding company. Accordingly, a company that operates its business under
the control of another (holding) company is known as a subsidiary company.
Examples include Tata Capital, a wholly-owned subsidiary of Tata Sons Limited.
This control can happen in two ways:
1. The holding company controls who sits
on the subsidiary company's Board of Directors.
2. The holding company owns more than
half of the total shares of the subsidiary company.
Even if the control is exercised
through another subsidiary company of the holding company, the subsidiary is
still considered part of the group. For instance, if the holding company's
subsidiary controls the Board of Directors or owns more than half of the shares
in another company, that company becomes a subsidiary too.
2.2.2.2. Types of subsidiary company
In general, the subsidiary company
can be divided into the following categories:
1. Wholly owned subsidiary company: A wholly owned subsidiary is a company where the holding
company owns all of its voting power. This means that 100% of the subsidiary's
shares are held by the holding company.
2. Deemed subsidiary company: A deemed subsidiary is a company considered to be under the
control of a holding company, even if that control comes from another
subsidiary of the holding company.
2.2.2.3. Determination of subsidiary company
1. It is important to know the
difference between the money invested in a company's shares and the voting
power those shares carry. The ownership of a company is determined by its
shareholders. The total value of shares that have voting rights is important.
When a vote is taken at a meeting, each member usually gets one vote. But if
there is a poll, the 'one share, one vote' rule applies.
2. For companies that are fully owned by
another company, their AoA might give them special powers to appoint or remove
directors. Checking these AoAs is important to understand the level of control
the parent company has over the subsidiary.
3. Besides the AoA, there might be other
agreements between the companies that outline their relationship and the powers
the parent company has over the subsidiary. These agreements could come into
play during mergers, acquisitions, or other business arrangements. Checking
these agreements is important to understand the extent of control the parent
company has over the subsidiary.
2.2.3. Shared relationships between holding company and subsidiary
company.
A holding company and subsidiary have
certain common grounds on which they share relationships, such as:
2.2.3.1. Consolidated balance sheet
It is the accounting relationship
between the holding company and the subsidiary company, which shows the
combined assets and liabilities of both companies. The consolidated balance
sheet shows the financial status of the entire business enterprise, which
includes the parent company and all of its subsidiaries.
2.2.3.2. Management and control
The autonomy of a subsidiary company
may seem to be merely theoretical. Besides the majority stockholding, the
holding company also controls the important business operations of a
subsidiary. For example, the holding company takes charge of preparing the by-laws
that govern the subsidiary, especially for matters pertaining to hiring and
appointing senior management employees.
2.2.3.3. Responsibility
The subsidiary and holding companies
are two separate legal entities; any of them may be sued by other companies, or
any of these companies may sue others. However, the parent company has the
responsibility of acting in the best interest of the subsidiary by making the
most favourable decisions that affect the management and finances of the
subsidiary company. The holding company may be found guilty in court for breach
of fiduciary duty if it does not fulfil its responsibilities. The holding
company and the subsidiary company are perceived to be one and the same if the
holding company fails to fulfil its fiduciary duties to the subsidiary company.
2.2.3.4. Investment in holding company
A subsidiary company can't hold
shares in its holding company. Any company can, neither by itself nor through
its nominees, hold any shares in its holding company, and no holding company
shall allot or transfer its shares to any of its subsidiary companies, and any
such or transfer of shares of a holding company to its subsidiary company would
be allotment or transfer void.
Provided that nothing in this
subsection shall apply to a case;
1. where the subsidiary company holds
such shares as the legal representative of a deceased member of the holding
company; or
2. where the subsidiary company holds
such shares as a trustee; or
3. where the subsidiary company was a
shareholder even before it became a subsidiary company of the holding company.
2.3. Types of companies on the basis of ownership
On the basis of ownership, companies
can be divided into two categories:
2.3.1. Government company
"Government company" under
Section 2(45) of the Companies Act, 2013 is essentially defined as "any
company in which not less than 51% of the paid-up share capital is held by the
Central Government, or any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company
which is a subsidiary company of such a Government company." The
definition ensures that any company falling within the ambit of equal to or
more than 51% ownership by the central government, any state government or
governments (including more than one state's government), or a combination of
central and state ownership, is recognized as a government company. Further,
this classification extends to subsidiary companies that are under the control
or ownership of such government companies.
Some examples of government companies
are National Thermal Power Corporation Limited (NTPC), Bharat Heavy Electricals
Limited (BHEL), Steel Authority of India Limited, etc.
2.3.1.1. Overview of government companies
Government companies have to follow
all the rules of the Companies Act, unless there are specific exceptions. They
can be registered as either private or public companies, but their names must
end with 'limited.' In the names of government companies, the word 'STATE' is
allowed. When it comes to transferring shares or bonds in government companies,
certain formalities, like executing transfer documents, are not needed when
transferring securities held by government nominees. These companies can accept
deposits up to a certain limit, and their annual general meetings must be held
during business hours and on non-national holidays. A government company gives
its annual reports, which have to be tabled in both the House of the Parliament
and the state legislature, as per the nature of ownership.
In the director's report of
government companies, certain clauses about policies on director appointments
and remuneration do not need to be included, as these requirements are relaxed
for government companies. A subsidiary of a government-owned company is also
considered a government company. These companies, managed by the government,
have both government and private individuals as shareholders. They are
sometimes called mixed-ownership companies. As per Section 188, the
requirements for seeking approval for contracts or arrangements between
government companies or between a government company and another entity have
been relaxed. As per Section 188(1), transactions between two government companies
or between an unlisted government company and another entity do not need
special resolution approval, provided the administrative ministry or department
gives prior approval.
2.3.1.2. Features of a government company
There are several features of a
government company that are helpful in increasing the potential and efficiency
of the company to a great extent.
2.3.1.2.1. Separate legal entity
Perhaps one of the most important
features of a government company is that it is aseparate legal entity, which
helps a government company to deal with many legal aspects.One main legal
aspect is the non-dependence on any other body. In legal terms, as it is a
separate entity in itself, this makes the system more fluent and efficient.
2.3.1.2.2. Incorporation under the Companies Act 1956 & 2013
A government company is incorporated
under "the Companies Act, 1956 & 2013". This gives government
companies boundaries to work within, and hence it profits the end-users of the
services as there are fewer chances of fraud or improper working. Also, the
employees get better working conditions and are not exploited, as they have the
law as their backup to protect them.
2.3.1.2.3. Management as per provisions of the Companies Act
Management in a government company is
governed and regulated by the provisions of the Companies Act. This makes sure
that employees are not exploited and overburdened. This further ensures the
smooth functioning of the company.
2.3.1.2.4. Appointment of employees
The appointment of employees is
governed by the MoA and AoA (Memorandum of Association and Articles of
Association). This ensures a fair appointment on the basis of meritocracy, and
people don't misuse their contacts and enter government companies.
2.3.1.2.5. Fund raising
A government company gets its funding
from the government and other private shareholdings. The company can also raise
money from the capital market. Hence, a government company has several fund
raising mechanisms, which helps it to be financially less burdened as finances
in a government company can be raised in a lot of ways.
2.3.1.3. Appointment of directors
1. As per Section 134L (3)(p) of the
Act, listed and certain public companies must report on how they evaluated
their board, committees, and individual directors.
2. According to Section 149(1)(b),
government companies can have more than 15 directors without needing a special
resolution to appoint them.
3. In Section 149(6)(c), which states
the criteria for selecting independent directors, it is usually required that
these directors do not have any financial connections to the company or its
affiliates. However, this rule does not apply to government companies. So, even
if a director has financial ties to the government company or its related
companies, they can still be appointed as independent directors.
4. If the Central or State Government
appoints a director, they do not need to formally consent to the appointment or
file paperwork with the Registrar of Companies within 30 days.
5. Under Section 196, government companies
are exempt from certain provisions related to appointing or re-appointing
managing directors, whole-time directors, or managers for terms exceeding 5
years. Section 196(2), Section 196(4), and Section 196(5) are also exempt from
the requirement to seek approval from the board and members for such
appointments, if not in accordance with Schedule V. The notice for board or
general meetings does not need to include terms and conditions of appointment.
There is no need to file returns of appointments within 60 days with the
Registrar of Companies. Acts performed by the appointed personnel before
approval at a general meeting are considered valid.
2.3.1.4. Merits of government companies
1. Government companies have the freedom
to make decisions independently. This autonomy allows them to respond quickly
to changes in the market or in their operations.
2. Government companies play an
important role in ensuring that the local market remains fair and competitive.
They do this by controlling certain aspects of business activities, such as
pricing or quality standards, to prevent unfair practices like monopolies or
price gouging.
3. Government companies can bring
together different strengths and resources to solve the complex problems of
private companies. Private companies sometimes face challenges like not having
enough money or struggling to achieve their goals. Government companies often
have access to additional funding or resources that private companies may lack.
By joining with government companies, private companies can benefit from the
financial support, expertise, and networks of government companies to overcome
obstacles
2.3.1.5. Limitations of a government Companies
1. Government companies usually have to
face a lot of government interference and the involvement of too many
government officials. Hence, it has to go through lots of checks in order to
make a stable decision. Governmental decisions are usually late as they follow
an elaborate procedure before actual implementation.
2. These companies evade all
constitutional responsibilities by not answering to the parliament because they
are financed by the government.
3. The efficient operations of these
companies are hampered, as the board of such companies comprises mainly
politicians and civil servants, who have special emphasis and interest in
pleasing their political party's co-workers or owners and are less concentrated
on the growth and development of the company. They (politicians and civil
servants) are essentially focused on their promotions, which are essentially in
the hands of their seniors; hence, they keep on pleasing their seniors. In
order to please their seniors, they usually make the wrong decisions too.
2.3.2. Non-Government Company
All other companies, except the
government companies, are known as non-government companies. They do not
possess the features of a government company, as stated above.
2.3.3. Associate companies
According to Section 2(6 of the
Companies Act, 2013, when one company owns at least 20% of the shares of
another company, the second company is considered an "associate
company" of the first one. For companies say X and Y, X in relation to Y,
where Y has a significant influence over X, but X is not a subsidiary of Y and
includes a joint verure company. Here X is an associate company. Wherein;
1. The expression "significant
influence" means control of at least twenty percent of total voting power,
or control of or participation in business decisions under an agreement.
2. The expression "joint venture" means
a joint agreement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.
If a company is formed by two
separate companies and each such company holds 20% of the shareholding, then
the new company shall be known as an associate company or joint venture
company. The Companies Act 2013, introduced for the first time the coricept of
an associate company or joint venture company in India through Section 2(6). A
company must have a direct shareholding of more than 20%, and an indirect one
is not allowed. For example, A holds 22% in B and B holds 30% in C. In this
case, C Company is an associate of B but not of A.
2.3.4. Foreign companies
A foreign company, as per Section
2(42) of the Companies Act, means a company or a corporate body that is
incorporated outside India which either has a place of business in India
whether by itself or through an agent, either physically or through an
electronic mode, and conducts any business activity in India in any other
manner." The definition states that the company has some kind of physical
location or representation in India. It could be an office, a store, a factory,
or any other place of business. This presence could be established directly by
the company itself or indirectly through an agent. Additionally, having an
online presence or conducting business electronically also counts. For Section
2(42) of Companies Act, 2013, and Rule 2(c) of the Companies (Registration of
Foreign Companies) Rules, 2014, 'electronic mode' means conducting activities
electronically, regardless of whether the main server is in India. This
includes:
1. Business transactions between
businesses and consumers, exchanging data, and other digital supply transactions.
2. Accepting deposits, subscriptions in
securities, or offering securities in India or to Indian citizens.
3. Financial settlements, online
marketing, advisory and transactional services, managing databases, and supply
chains.
4. Online services like telemarketing,
telecommuting, telemedicine, education, and research.
5. Any related data communication
services, whether using email, mobile devices, social media, cloud computing,
document management, or voice and data transmission.
Provided that offering securities electronically,
subscribing to them, or listing securities in International Financial Services
Centres under the Special Economic Zones Act, of 2005, is not considered
'electronic mode' for the purposes of the Companies Act, 2013.
2.3.4.1. Accounts of foreign company
Section 381 of the Companies Act,
2013 states the rules or instructions about how a foreign company's accounts
are to be handled. It states that:
1. Every foreign company must, in every
calendar year;
1.1. make a balance sheet and profit and
loss account in such a form as contains all such particulars and includes or
has annexed or attached thereto such documents as may be prescribed,
1.2. must deliver a copy of those
documents to the Registrar, provided that the Central Government may, by
notification, direct that, in the case of any foreign company or class of
foreign companies, the requirements of above-pointer "a" wouldn't
apply or would apply subject to such exceptions and modifications as may be
specified in that notification.
2. If any document as mentioned in
Section 381(1) of the Companies Act, 2013 is not in the English language, there
shall be annexed to it a certified translation thereof in the English language.
3. Every foreign company shall send to
the Registrar, along with the documents required to be delivered to him under
sub-section (1), a copy of a list in the prescribed form of all places of
business established by the company in India as of the date w.r.t. reference to
which the balance sheet referred to in sub-section (1) is made.
2.3.4.2. Registration requirements for foreign companies under the
Companies Act
2.3.4.1. Submission of documents to registrar
As per Section 380, foreign companies
must provide certain documents to the registrar within 30 days of establishing
their place of business in India. These include:
1. A certified copy of the company's
charter, statutes, or memorandum and articles, translated into English if
necessary.
2. Full address of the company's
registered or principal office.
3. List of directors and secretary with
required particulars.
4. Name and address of persons in India
authorised to accept service of process.
5. Address of the company's principal
place of business in India.
6. Details of previous establishment
closures.
7. Declaration regarding directors and
authorised representative's history.
8. Any other prescribed documents.
2.3.4.2.2. Accounting obligations
As per Section 381, foreign companies
must prepare a balance sheet and profit and loss account annually in the
prescribed format and language. These documents, along with a list of Indian
business locations, must be filed with the registrar. If not in English,
certified translations are required. Accounts must be audited by a practising
chartered accountant in India.
2.3.4.2.3. Name display requirement
As per Section 382, foreign companies
must display their name and country of incorporation outside all Indian offices
and on business correspondence. Additionally, if applicable, they must indicate
limited liability status.
2.3.4.2.4. Service process on foreign companies
As per Section 383, any documents
served on a foreign company must be sent to the authorised persons in India
whose details are provided to the registrar. However, now electronic services
are acceptable for this purpose.
2.3.4.2.5. Other compliance matters
As per Section 384, foreign companies
must adhere to regulations concerning debentures, annual returns, registration
of charges, and bookkeeping. Charges on properties, whether in or outside
India, must be registered. They must maintain proper accounts at their principal
place of business in India. Inspection procedures apply to their Indian
operations.
2.3.4.2.6. Prospectus and winding Up
As per Section 391, foreign companies
issuing prospectuses or Indian Depository Receipts must comply with relevant
regulations. Procedures for winding up foreign companies in India are outlined,
including penalties for non-compliance. A foreign company that ceases business
in India may be wound up as an unregistered company, according to Section 376
of the Companies Act, 2013.
2.3.4.2.7. Capital Raising
Foreign companies can raise capital
in India privately or through public offerings, subject to prospectus
requirements. Indian Depository Receipts (IDRs) may be issued, provided
specific conditions are met.
2.3.4.3. Foreign companies can register in India through various means,
including:
1. Private Limited Company: This is the quickest option. Foreign nationals can establish
a private limited company, allowing up to 100% Foreign Direct Investment (FDI)
under the automatic route.
2. Joint Venture:
Foreign entities can partner with local firms in India through a joint venture.
A joint venture agreement outlines terms and must comply with legal standards.
3. Wholly-Owned Subsidiary: Foreign nationals or companies can invest 100% FDI in an
Indian company, creating a wholly-owned subsidiary.
4. Liaison Office:
This office facilitates communication between the foreign company and Indian
entities. Expenses are covered by the parent company through foreign
remittances.
5. Project Office:
For specific projects awarded by Indian companies, foreign companies can set up
project offices. Approval from the Reserve Bank of India may be necessary.
6. Branch Office:
Large foreign businesses can establish branch offices in India, provided they
demonstrate profitability and meet certain criteria.
2.3.4.4. Compliance for foreign companies operating in India
1. If a foreign company stops working in
India, it might need to close down as per Section 376 of the Companies Act,
2013.
2. Under the Foreign Exchange Management
Act (FEMA) 1999,
2.1. Foreign companies in India fall into
categories like Liaison Office (LO), Branch Office (BO), or Project Office (PO)
under the Foreign Exchange Management Act (FEMA), 1999.
2.2. When starting a Liaison or Branch
Office, the company must inform the police within five days, as per FEMA
regulations.
2.3. Branch and liaison offices must
provide a yearly report along with financial statements to the Reserve Bank of
India (RBI) by September 30, according to FEMA rules.
2.4. If a branch, liaison, or project
office is closing down, it must submit the necessary documents to a designated
bank by following FEMA provisions.
2.5. Indian companies receiving or
investing foreign money must report their finances annually by July 15, as
mandated by FEMA regulations.
For example, ABB is a foreign company
that originally focused on manufacturing electronic equipment. ABB has since
expanded its operations into various sectors, including robotics, automation,
and rail transport. The parent company of ABB is owned by Investor AB, which is
associated with the Wallenberg family.
2.3.5. Section 8 Companies (Non Profit Companies)
Section 8 Companies, as defined under
the Companies Act, 2013, are entities that promote various objectives such as
commerce, art, science, education, research, social welfare, religion, charity,
and environmental protection. These companies operate with the intention of
utilising their profits for the betterment of society rather than distributing
dividends to their members. If the Central Government is convinced that a person
or group aims to form a company under the Companies Act, 2013 for purposes like
promoting commerce, art, science, sports, education, charity, etc., intends to
use its profits for these aims, and won't distribute dividends to its members,
it can grant a licence for registration. When a Section 8 company is
registered, it does not need to include words like imited' or 'Private Limited'
in its name, unlike other types of limited companies. It is often referred to
as a non-profit organisation because its main purpose is to benefit society
rather than generate profits for its members.
2.3.5.1. History of Section 8 Company
Under the Companies Act of 1913,
there were rules made for starting companies that wanted to do good things,
like helping people or the environment. These companies didn't have to use
words like 'limited' or 'private limited.' Later, the Companies Act of 1956
allowed for the creation of companies that were focused on doing charity work.
These were called Section 25 companies. Later on, the Bhabha Committee
suggested some changes to the laws about how companies are run and how
charities are set up. In 2013, they updated the law, called Section 8, which
replaced the old Section 25. It made it easier for companies to be formed for
things like helping society, education, health, or the environment. These
companies cannot give profits to their owners; instead, they have to use the
money for their charity work. The Indian Constitution states that both the
central and state governments can make rules about charities. 'Trust and
Trustees' in Entry No. 10 of the Concurrent List, and 'Charities &
Charitable Institutions, haritable and Religious Endowments, and Religious
Institutions' in Entry No. 28 of the Indian Constitution allow that both the
central g and state governments have the authority to legislate and regulate
charitable organisations.
2.3.5.2. Characteristics of Section 8 Company
1. Section 8 Companies are established
with a primary intention of social welfare and charitable activities rather
than profit-making.
2. Unlike other companies, Section 8
companies do not require a minimum prescribed paid- up share capital.
3. These companies are licensed by the
central government under Section 8 of the Companies Act, 2013, and are mandated
to work for the betterment of society
4. These companies often receive
donations from the general public for their welfare projects.
5. Section 8 Companies operate with
limited liability, similar to private or public limited companies, where
liability of members is restricted to the extent of their share subscription.
6. Section 8 Companies are legally
prohibited from distributing dividends to their members. Instead, they can
reinvest their profits to further their charitable projects. The company's
objectives should align with promoting various social causes, and it should
plan to use its profits for these objectives without distributing dividends to
members.
7. Once a company is registered, it
enjoys the benefits and must follow the obligations of other limited companies.
Even a firm can be a member of such a company.
8. The company cannot change its
memorandum or articles without prior approval from the Central Government. It
can be converted into another type of company with prescribed conditions.
9. Existing limited companies with
charitable objectives can apply to be registered under this section, omitting
'Limited' or 'Private Limited' from their name.
2.3.5.3. Regulatory Control
1. The Central Government can revoke the
licence if the company violates the requirements or conducts affairs against
the public interest. The government directs to change its name to include
'Limited' or 'Private Limited.'
2. If the licence is revoked, the
company may be wound up or merged with another similar company in the public
interest.
3. In the public interest, the Central
Government can force amalgamation with another similar company, specifying
terms and conditions.
4. After settling debts, remaining
assets may be transferred to another similar company or credited to a
government fund, subject to conditions.
5. After settling debts, remaining assets may be
transferred to another similar company or credited to a government fund,
subject to conditions.
6. Failure to comply with these rules may result
in fines or imprisonment for directors and officers, especially if fraudulent
conduct is proven.
2.3.5.4. Steps to incorporating Section 8 companies
1. Start by selecting a name for the
company and applying for its reservation through the SPICE Plus (SPICE+) form.
If the chosen name is rejected, one can try again with two new names within 15
days of rejection.
2. Apply for a DSC for each proposed
director and member. This certificate will be used for electronically signing
forms.
3. Once the company name is approved, it
is valid for 20 days, and further, one needs to fill out the incorporation
application form online within the given timeframe.
4. The SPICE+ form combines multiple
forms into one, allowing applications for name reservation, incorporation, DIN,
TAN, PAN, EPFO, and ESIC registration simultaneously.
5. Provide details such as the total number of
directors and members, authorised and paid- up capital, company address,
director and member details, and attach necessary documents like MOA, AOA, and
EPFO/ESIC registration forms. For Section 8 companies, additional documents
like physically signed MOA and AOA drafts and declarations in Form INC-14 are
required.
6. Upon approval of a company's
incorporation application and the issuance of the Certificate of Incorporation
by the Registrar of Companies (ROC), it is necessary to obtain approval to
commence business within 180 days.
2.3.5.5. Eligibility requirements for registration
To qualify for registration, the
primary aim must be to advance social welfare, arts, education, science,
commerce, or provide financial aid to underserved communities. All profits
generated must be dedicated to furthering the organisation's goals and fulfilling
its objectives. No dividends may be distributed to any members or directors,
either directly or indirectly. Directors or promoters are prohibited from
receiving any form of remuneration. A well-defined vision and project plan for
the company's operations over the next three years are essential.
2.3.5.6. Advantages 2.3.5.7. Disadvantages
1. These companies have a distinct legal
entity separate from their members, offering protection from personal liability
for company debts.
2. Member's liability is limited to the
extent of their shareholding, safeguarding personal assets from company debts.
3. Section 8 Companies can be
incorporated without any minimum paid-up capital, facilitating easier
establishment.
4. The incorporation of Section 8
companies incurs minimal stamp duty, as the government provides certain
privileges to encourage such entities.
5. Unlike other companies, Section 8
companies may choose not to include suffixes like private limited' or 'limited,
by offering flexibility in naming conventions.
6. Section 8 Companies can avail
themselves of tax benefits by obtaining registration under Sections 80G and
12AA of the Income Tax Act.
2.3.5.6. Disavantages
1. Section 8 companies cannot share
profits with their owners. This might make it harder for them to attract investors
or make money compared to regular companies.
2. These companies have to follow many
rules set by the government. This means they might need to spend more time and
money to make sure they are doing everything right.
3. Section 8 companies often rely on
donations or grants to keep going. If they don't get enough donations, they
might struggle financially.
4. They can't share profits or pay their leaders;
they might find it tough to attract talented people or change how they do
things when needed.
5. Since they cannot keep profits to
help them grow, they might not be able to expand or improve as quickly as
regular companies.
2.3.6. Dormant Company
A dormant company is a type of
company that is inactive or not doing any business activities for a certain
period. In other words, a company may be considered dormant if it has not
carried out any business operations or significant transactions for a specific
period, typically two consecutive financial years or If a company has not filed
its financial statements or annual returns for two consecutive years, it might
also be labelled as dormant.
Being dormant does not mean the
company has shut down. It is still registered, but it is not actively engaged
in any business activities. Companies may become dormant for various reasons,
such as waiting to start a new project, holding assets, or temporarily pausing
operations. It is defined as an 'inactive company' under the Companies Act
2013. Even though a company is dormant, it still has some responsibilities. It
needs to maintain a minimum number of directors, file certain documents, and
pay any required fees to keep its dormant status. A dormant company can become
active again by applying to the registrar and fulfilling the necessary
requirements, such as submitting financial documents and paying any outstanding
fees.
2.3.6.1. Definition
As per Section 455 of the Companies
Act 2013, an 'inactive company' is one that has not done any business or
significant transactions or filed financial documents for the past two years. A
'significant accounting transaction' is any transaction except for a few
specific ones, like paying fees to the government or maintaining office
records.
2.2.6.2. Registration of a dormant company
1. If a company hasn't been active and
wants to be officially recognised as 'dormant,' it can apply to the registrar,
the official in charge of company registrations, in a specific way.
2. The registrar will review the
application and, if everything checks out, grant 'dormant' status to the
company. They will provide a certificate to confirm this.
3. The registrar will keep a list of all
dormant companies.
4. If a company hasn't filed its
financial documents for two years in a row, the registrar will send a notice.
If the company still doesn't comply, it'll be listed as dormant.
2.3.6.3. Requirements to maintain dormant status
A dormant company must have a minimum
number of directors, submit certain documents, and pay a fee to the registrar
to maintain its dormant status. If it wants to become active again, it can
apply and fulfil the necessary requirements.
2.3.6.4. Removal from dormant register
If a dormant company does not meet
the requirements or comply with the rules, the registrar can remove it from the
list of dormant companies.
2.2.6.5. Annual return.
Dormant companies file an annual
return of Dormant Company (MSC-3) within 30 days from the end of each financial
year, along with audited financials.
2.3.6.6. Beard meetings
At least 1 board meeting every 6
months with a gap of at least 90 days between meetings.
2.3.6.7. Application for active status
1. Use Form MSC-4 along with the MSC-3
return for the financial year.
2. If a company remains dormant for 5
consecutive years, the registrar may initiate the process to strike off its
name.
3. If a dormant company starts operating again,
an application for active status must be filed within 7 days.
4. If the registrar suspects a dormant
company is operating, an inquiry may be initiated. If it is confirmed, the
company's dormant status may be revoked.
2.3.6.6. Merits of the dormant company
1. Dormant status allows the company to
remain registered and legally existent without actively engaging in business
operations. This means the company can be revived and used in the future
without the need for re-registration.
2. Dormant companies can hold assets
such as properties, katellectual property rights, or investments without the
need for an active business operation.
3. By maintaining dormant status, the
company can retain its business name, preventing others from registering a
company with the same name during the dormant period.
4. Reviving a dormant company is generally
simpler and faster than incorporating a new company. This allows for a quicker
resumption of business activities when needed.
5. Keeping the company dormant instead
of closing it down entirely helps preserve its reputation and goodwill in the
market.
6. Dormant status provides flexibility
for future business ventures or projects. The company can be activated when
there is a need to engage in business activities without the need for a new
incorporation process.
2.3.7. Nidhi companies
Nidhi companies are a type of
Non-Banking Financial Institution (NBFC) recognized under the Companies Act,
2013, primarily dealing with lending and borrowing within their members. Nidhi companies
are mutual benefit societies, meaning they are owned by their members who
contribute to and benefit from the company. The core activity of a Nidhi
company is to cultivate the habit of thrift and savings among its members and
to lend funds to them for their mutual benefit.
Section 406 of the Act deals with the
power of the Central Government to modify the application of the Companies Act
to Nidhi companies. Accordingly, this section states that:
1. A Nidhi is a company formed with the
goal of encouraging thrift and savings among its members. It collects deposits
from and lends to its members only, for their mutual benefit, and follows rules
set by the Central Government.
2. The Central Government can decide
which provisions of the Companies Act should or should not apply to Nidhi
companies. It can specify exceptions, modifications, or adaptations for these
companies through notifications.
3. Before issuing such notifications, a
braft must be presented to both Houses of Parliament for review. This draft
must be available for a total of thirty days during parliamentary sessions. If
both Houses agree to disapprove the notification or suggest modifications
within this period, the notification won't be issued or will be issued in a
modified form.
2.3.7.1. Characteristics of the Nidhi companies:
1. Nidhi companies cannot deal with any
other type of financial business except lending and borrowing among their
members. They are not allowed to deal with the public.
2. To become a Nidhi company, one needs
to register as a public company under the Companies Act, 2013, and meet certain
criteria set forth by the Ministry of Corporate Affairs.
3. Nidhi companies need to comply with
specific regulations outlined by the government to maintain their status and
function as per the law. Membership in a Nidhi company is limited to
individuals only. Other types of entities, like companies or trusts, cannot
become members.
4. Nidhi companies cannot accept
deposits or loans from people who are not their members, ensuring that their
activities are focused solely on the mutual benefit of their members.
3. Conclusion:
The Companies Act of 2013 plays a
very important role in keeping different kinds of companies in check and making
sure they follow the rules. This law isn't just good for the companies themselves
but also for their workers, customers, and society overall. This defined scope
ultimately helps the end-users, as the companies have a legal framework under
which they are bound to work. Hence, these companies remain under a certain
boundary wall, and hence they don't misuse their power. Thus, it helps in many
ways, as the employees get protected in terms of their labour rights, the
end-users get good-quality products, and society as a whole faces comparatively
less company-related fraudulent issues because the law has it all in its hands.
The Companies Act of 2013, replacing
the Company Law of 1956, has given wonderful amendments which have improved the
"quality of this law" to a great level. The Act also improves women's
employment in the corporate sector. It stipulates that certain classes of
companies spend a certain amount of money every year on activities or
initiatives that reflect corporate social responsibility. It has introduced the
National Company Law Tribunal (NCLT) and the National Company Law Appellate
Tribunal (NCALT) in order to replace the company law board for industrial and
financial reconstruction. Such tribunals relieve the courts of their burden and
simultaneously provide specialised justice. However, it is important to consider
the pros and cons of each type of company before deciding which one best fits
business goals and circumstances.
4. References:
http://www.economicsdiscussion.net/company/types-of-companies/31784
https://www.caclubindia.com/articles/an-overview-on-associate-company-27387.asp
https://www.setindiabiz.com/learning/associate-company/
https://www.toppr.com/guides/business-laws/companies-act-2013/doctrine-of-ultra-
vires/
https://accountlearning.com/under-what-circumstances-a-pvt-company-be-converted-
to-public-company
https://www.businessmanagementideas.com/organisation/types/conversion-of-a-private company-into-a-public-company/8935
http://www.mca.gov.in/SearchableActs/Section381.htm
https://blog.ioleaders.in/information-prospectus-company/
https://www.toppr.com/guides/business-studies/private-public-and-global-
enterprises/government-company/
http://www.arthapedia.in/index.php?title=Government_Company
https://smallbusiness.chron.com/relationship-between-holding-subsidiary-company-
14683.html
https://blog.ipleaders.in/difference-between-holding-and-subsidiary-company/
https://www.owlgen.com/question/write-a-note-on-illegal-association
https://www.clearias.com/indian-companies-act-2013-salient-features/
https://corporatefinanceinstitute.com/resources/management/holding-company/
https://taxguru.in/company-law/implication-amendment-definition-associate-company-
companies-amendmentact-2017.html
https://companykayda.com/subsidiary-company-definition/
https://taxguru.in/company-law/government-company-companies-act-2013.html
https://taxguru.in/company-law/rules-regulations-section-8-company.html
https://blog.ipleaders.in/section-8-of-companies-act-2013/
https://investguiding-com.custommapposter.com/article/what-are-the-disadvantages-
of-a-public-company
5.
Referred books
Avtar Singh, Company Law, 15th Edition, Easter Book Company.