Learning Unit BOB_LU2_SLU2.

2B- Joint Stock companies & TASC

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Introduction:

Subject: Basics of Banking

Your Action (This section helps the learner how this topic is practically useful in a
working environment

Learning Objective:
 Define Joint Stock Company and know its Characteristics
 Explain different types of Joint Stock Company
 List relevant documents of Joint Stok Company and its meaning
 Explain how TRUST accounts are different from other types of accounts
 Outline the list of documents to be obtained while opening different types of TRUST
accounts

Introduction (This section sets the context for the topic and also connect to previous SLU)
1. The growing requirements for business finances and managerial resources cannot be met
with sole proprietorship and partnership. Also, the adoption of innovative technologies
involves substantial monetary investments, and the increasing business volume brings in
more liabilities. The need to start a business on a larger scale with the limited liability of the
members of the organisation gave birth to another form of organisation, known as
Company.

In this unit, you will learn the concept of Joint-stock companies.

2. Trusts can be created for public and charitable purposes. In India, there are thousands of
trusts created by owners of industrial houses, affluent individuals and their families. Public
Charitable Trusts, under Indian laws, are treated as organisations with charitable purpose
 entitling all the tax benefits applicable. Given, nature, purpose and taxation, a lot of wealth
both in the form of cash and physical assets reside in the trust.

In this unit, you will learn how Trust accounts are different types of TRUST accounts

Knowledge

Joint Stock Company

Joint Stock Company is the third dominant form of business organisation. A group of investors
who want to start a venture should register the undertakings under the Companies’ Act, 1956.
 All registered undertakings under this Act are known as Companies.
 Section 3(1) (i) of Companies Act, 1956 defines a company as “a company formed and
registered under companies Act 1956 and any existing company “.
 Here an existing company means a company established and registered under any of the
earlier Company Laws.

In India, the first Companies Act was passed in 1850, and the principle of limited liability was
introduced only in 1857. A comprehensive Company’s Act was passed in 1956, and the Act was
amended in 2013.

1. Advantages of a Joint Stock Company

 The Company enjoys the benefit of increased capital.
 The Company offers the benefits of limited liability to the investors.

2. Characteristics of a Joint Stock Company

To understand the concept of joint-stock companies, consider the following general

characteristics:
i. Legal formation
A company is formed by a group of members who are also known as promoters, but it comes into
existence on completion of registration which involves all the legal formalities required by the
Indian Companies Act, 1956.

ii. Artificial person

Like a human being, a joint-stock company also has different stages in its life cycle. But it is an
artificial person as it does not possess any physical attributes of a human being, and the law
creates it.

iii. Separate legal entity

 As it is an artificial person, a joint-stock company has its separate existence independent of its
investors. The separate legal existence allows a joint-stock company to enter into contracts, own
property and perform any lawful business in its “own” name so that it does not perish when the
founders withdraw. The Company can sue and can be sued by others in the court of law. The
investors are “not” the owners of the property owned by the Company. Moreover, investors
cannot be held responsible for any of the acts of the Company.

iv. Common seal

Being artificial, a company cannot sign. Hence, it has a “seal” with its name engraved on it, which is
used for any dealings or entering into any contracts. The seal is called a common seal as any
officer, at any level of the organisation can use it, working on behalf of the Company. Any
document, which has the Company’s seal and is duly signed by an official of the Company,
becomes binding on the Company.
Example: To buy raw materials from the supplier, if the Purchase Manager signs any contract with
the company seal, it becomes valid. This contract will remain valid until a new contact is made or
the existing contract expires, though the Purchase Manager may leave the Company or be
removed from his job or may have taken a wrong decision.

v. Perpetual existence
A company has a permanent existence as long as it fulfils the requirements of law. The company
continuity is not affected by the death, lunacy, insolvency or retirement of any of its investors. For
example, the private limited Company will not be closed in case all the members of the Company
die in an accident. The company shares will be transferred to the legal heirs of the members, and
it continues to exist. The company existence comes to an end only by winding up, which is
possible through a legal process.

vi. Limited liability

The liability of investors is limited to the amount they have invested. As the Company has a
separate legal entity, it can incur debts in its name, and the investors will not be personally liable
for that.
Example: If a person has invested Rs.10 lacs, then he is liable to bear the debts of the Company to
the limit of the amount he has invested. The personal property of the investor cannot be used to
pay the debts off. If there is a liquidation of the Company and he/ she will lose his/her investment
amount to the tune of Rs. 10 Lacs.

vii. Democratic Management

Joint stock companies have democratic command and control. Since investors are large in number,
not all of them can participate in the day-to-day activities of the Company. Usually, the investors
elect representatives among themselves known as ‘Board of Directors’ to manage the affairs of the
Company

viii. Publication of Accounts

The accounts are to be audited by qualified auditors and its mandatory to file audited statements
with the Registrar of companies at the end of a financial year. Such reports are published for the
information of all stakeholders.

ix. Transferability of Shares

A company raises its capital by issue of shares. The shares held by an individual acknowledges the
ownership in the Company to the limit of a number of shares. The investors of a joint-stock
company are free to transfer their shares to anyone. However, shareholders in private companies
have more restrictions on the transferability of shares, virtually making it zero.

x. Capital
A company can raise a large amount of capital by issuing its shares to the public.

xi. Double Taxation

A company is subject to double taxation. First, the tax is levied on the profits of the Company.
Secondly, the investors pay tax on the profit received.
Therefore, a Company is a virtual person and is separate from its investors. The Company has an
identity of its own. So, if someone sues the company, he does not sue the investors.

3. Types of Joint Stock Companies

Joint Stock
Company

Chartered Registered Statutory

Company Company Company

Limited Limited
Unlimited
Company by company by
Compnay
Share Gurantee

Private
Public Limited
Limited

Joint Stock Companies are classified as:

I. By Incorporation
 a) Chartered Company
The companies that incorporated under the chartered companies are established a Royal Charter
issued by the Head of the State. These companies were formed before 1844. For example, East
India Company, Chartered Bank of England, the Charter of the British South Africa Company, etc.-
these companies are no longer formed in any country.
b) Statutory Company
A Company that is formed under the Special Act of the Parliament is called Statutory Company.
The Act defines clearly the objects, powers rights, rules and regulations. These type of companies
are formed when companies require special rights and power. Generally, companies for public
utility services are established under the special Act of the Parliament. For Example, Airports
Authority of India, National Highways Authority of India, Food Corporation of India etc.,

c) Registered Companies:
The companies established under the Company Act of the country concerned are known as
Registered Companies. The Companies Act contains comprehensive provisions about the
establishment, management, dissolution, etc. It is of two types- Limited liabilities and unlimited
liabilities

II. By Liability:
According to the liability, the registered companies are classified into three groups:
a) Unlimited Liability
The Company that is registered without limiting the liability of shareholders to the value of shares
is called an unlimited liability company. The shareholders are personal properties liable to meet
the obligations. For example, British all-terrain vehicle manufacturer Land Rover, GlaxoSmithKline
Services Unlimited.

b) Limited Company
The capital of a company is divided into shares. Any person can be a member of the Company by
purchasing its shares. The shareholder’s liabilities are limited to the extent of the value of the
amount invested by them. These companies are the most common in actual practice.

c) Limited Liability by Guarantee

These companies are formed by giving the written guarantee that members will pay up to a
specific amount in the event of the liquidation of the Company. The specified guarantee amount is
mentioned in Memorandum of Association. The members may or may not have any share capital.
These type of companies promotes art, literature, sports, education and other non – business
activities.

III. By number of members

Further, the limited Company by share value are:
a) Private Limited Company:
The Company where the number of shareholders ranges from two to fifty. The private limited
companies shares are not traded on the stock exchange. The unique characteristics of Public
Limited Companies are:
 A minimum of two members required to form a private limited company and they
 should have a minimum paid-up capital of Rs. 1 Lac.
 As per the Companies Act 2013, the total membership of these companies cannot
exceed 200.
 The members cannot transfer the shares freely, which are allotted to them.
 These companies are not allowed to raise funds from the public through open
invitations.
 The Company should have a minimum of two directors. The board of directors will
appoint the authorised persons, conduct business and mode of the financial operation
of the account through a board resolution.
 These companies names should suffix “Private Limited”. The examples of companies
are Combined Marketing Services Private Limited, Indian Publishers and Distributors
Private Limited etc.

b) Public Limited Company:

The Company where the number of shareholders ranges from seven to an unlimited number of
shares. The shares of public limited companies are traded on stock exchanges. The unique
characteristics of Public Limited Companies are:
 A minimum of seven members required to form a public limited company is seven, and
it should have a minimum paid-up capital of Rs. 5 Lacs
 No limit on the maximum number of members.
 The members can transfer the shares free, which are allotted to them.
 These companies can raise funds from the public through open invitations by selling
their shares or accepting fixed deposits.
 The public limited Company will have three directors. The board of directors will
appoint the authorised persons, conduct business and mode of the financial operation
of the account through a board resolution.
 These companies names should suffix either ‘public limited’ or ‘limited’. Examples are
Hyundai Motors India Limited, Jhandu Pharmaceuticals Limited etc.

4. Relevant Documents
The regulations to run a company are taken from the following documents.
1. Memorandum of Association
2. Article of Association

I. Memorandum of Association
Memorandum of Association directs or instructs Joint Stock Company. It is the primary document,
and it contains the objectives of the Company precisely and clearly, defines the scope of its
operation and its relation with the investors and the outside world. Memorandum of association is
submitted to the Company Registrar Office at the time of incorporation.
The document contains:
 Name of the Company
 The Company’s registered office address
 The objectives of the Company
 Activities to accomplish the objectives of the Company
 Amount of capital of the Company
  The different types of shares of the Company, right and power inherent in such shares,
 The value of per share.
 Restriction of purchase or transfer of shares, if any
 The number of subscribed shares
 Terms of payments of shares amount
 The liability clauses of share capital
 The maximum number of shareholders ( in case of a private limited company)
 Other important facts.

The memorandum must be printed, divided into paragraphs, numbered consecutively, and be
signed by at least seven persons who agree to take at least one share.

II. Article of Association

The Article of Association is a document which contains rules and regulation regarding the internal
management of the Company. The document defines the rights, powers and duties of the
management, the modes and manners of carrying the Company’s business. The Article of
association must be submitted to the Registrar of Companies for the incorporation of business
organisation.

The document contains:

a) Director related particulars
Which should have - the number of directors to be elected in the Company, their remuneration,
tenure of directors, the minimum shares to subscribed to qualify to become a director, rights &
duties of managing directors, the role of directors and promoters and delegation of authority etc.

b) Particulars related to meetings

The matters relating to the procedure of calling the Company’s meeting and provision of
conduction of the meeting are explicitly mentioned. For example, in the public Company before
the 21 days of conduction of meeting, shareholders are informed about the meeting.

c) Particulars related to shares

The Nature of share, transfer of shares, an issue of share etc. are depicted in the share related
particulars.

d) Other particulars
In this paragraph procedure of appointment of a company secretary, use and formation of the
common seal, the way of taking loan, amalgamation procedure of the Company, different classes
of shares and the rights, powers and restrictions attached to such shares. etc., are mentioned.

5. Other Vital Information

I. Companies Act, 2013:

The new Act consolidated and amended the law related to companies.

a) One-Person Company (OPC):

The Companies Act 2013 introduced the concept of One Person Company in India to support
entrepreneurs who are by their own capable of starting a venture by allowing them to create a
single person economic entity.
 One Person Company is a Private Company formed by one Member and at least One
Director.
 The pre-requisite to incorporate an OPC is that the only citizens of India, including
entrepreneurs, small businessmen, weavers, artisans or traders among others can take
advantage of the ‘One Person Company’ (OPC) concept outlined in the new Companies Act.
 The OPC shall have a minimum paid-up capital of INR 1 Lac and shall have no compulsion to
hold AGM (Annual General Meeting).
b) Small Company
The Companies Act 2013 introduced the concept of Small Company in India to provide exemptions
to Small Companies ( operating as a private limited company) primarily from specific requirements
relating to the board meeting, presentation of cash flow statement and specific merger process. A
Small Company defined in the companies act 2013 as companies whose
 Paid-up share capital of does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than five crore rupees, or
 Turnover as per its last profit and loss account does not exceed two crore rupees or such
higher amount as may be prescribed, which shall not be more than twenty crore rupees.

II. Overseeing bodies

a) MCA
Ministry of Company Affairs regulates corporate affairs in India through the Companies Act, 1956,
2013 and other allied Acts, Bills and Rules. MCA also protects investors and offers many essential
services to stakeholders.

b) ROC
The Registrar of Companies (ROC) is an office under the Ministry of Corporate Affairs (MCA),
which is the body that deals with the administration of companies and Limited Liability
Partnerships in India

c) SEBI
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.
It was established in the year 1988.

Non-Profit Organisation
A non-profit organisation (NPO) is generally understood as an organisational entity whose primary
objective is not profit-related. A simple way to delineate non-profit organisations is to identify
them by their legal status.
An organisation can claim non-profit status if it is registered under any of the following statutes:

 The Indian Trust Act,1882

 Public Trust Act, 1950
 The Societies Registration Act, 1860
 Section-8 Company under Companies Act, 2013 (earlier Section-25 Under Companies Act,
 1956)
 Special Licensing – Religious Endowments Act 1863, The charitable & Religious Trust Act
1920, Mussalman Wakf Act, 1923, Wakf Act 1923, Public Wakf Act 1959

All organisations registered under any of these Acts are legally non-profit because these
organisations are granted non-profit status and allowed tax benefits as per the Income Tax Act,
1961.

However, many non-profit organisations, especially those in a developing country like India,
function outside the purview of any legal framework. Such an organisation can be identified by the
nature of the services they provide.
Provision of public services to serve the public at large distinguishes non-profit from other
organisations.

Types of Non-Profit Organisation

The non-profit organisation is registered in four ways:
 Trust
 Association
 Society
 Clubs

While all the above are non-profit organisations, their constitution, structure and legal standings
are different. A clear understanding will help us effectively engage with such organisations.

I. Trust Accounts
Trusts are created by a group of persons to carry on activities for the benefit of a person or for a
group known as “Beneficiaries”. Trusts can be classified as Private trust or Public trust. Private
trusts are formed for the benefit of a specific person or group of persons in a family whereas, and
Public trusts are formed for the benefit of society at large.

There are three parties to a trust, and they are:

a. Settler - A trust begins with the owner of the property and assets. This person is known as
the settlor. The settlor begins a trust with the intent of holding property and assets for the
benefit of someone else.

b. Beneficiary- The ultimate parties to a trust are the ones receiving the benefit of the trust
(Trust amount), these individuals or group of individuals are known as beneficiaries.

c. Trustee - Once the trust is established, the trustee takes over the care of the trust. A
trustee is The trustee has the right to do whatever is necessary with the assets to grow
the trust.

Points to Note:
In a trust account, a trustee controls funds for the benefit of another party - an individual or a
group.
 Trust is governed by the Indian Trust Act, 1882.
 Trusts are managed by “Trustees”.
 Trust deed is a document that specifies the objectives of the trust, the name of the
beneficiaries, the activities that can be carried on by the trust, the powers of trustees and
what should be done in the event of the death of a trustee.
 Hence Bank has to allow operation strictly by following the provisions of the trust deed.
 Public Trusts to be registered with Charity Commissioner in the state.

1. Advantages of Trusts
 Reduce estate and gift taxes;
 Distribute assets to heirs efficiently without the cost, delay and publicity of probate court.
 Better protect your assets from creditors and lawsuits.

2. Documents Required to Open a Trust Account

 Trust Deed
 Registration certificate of the Charity Commissioner/Registrar of Trusts. (For Public
Trusts)
 Pan card.
 Address Proof of trust.
 Resolution for opening an Account passed by Trustees
 Authorised signatory for the account who operates the account on behalf of the trust
 Certificate of IT Exemption. (Charitable Trusts)

II. Associations, Clubs and Cooperative Societies

i. Clubs
Clubs may be run as a business as a non-profit making entity. It could be registered as a
company or society or trust. Clubs can be registered under Society Act 1860 or Company
Act 1956

ii. Co-operative societies

Co-operative societies have to be registered with the Registrar of Co-operative Societies.
They are incorporated under the Co-operative Society Act.

iii. Association
An Association is a group of persons formed towards specific goals. Association with more
than 20 persons has to be registered. Associations can open either SB or CA as they deem
fit.

Accounts of Clubs, Societies and Associations are governed by Bye-Laws of respective entities. Bye-
Laws are local laws made by an association, club or societies aligning with Rules framed by
respective States. These bye-laws have legal validity and approved by Registrar of Cooperative
Societies of the State.
 1. Documents to be collected to open Clubs / Societies / Association Accounts
 Bye-laws.
 List of all office bearers/authorised signatories.
 Certificate of IT Exemption u/s 11/12/12A of IT Act (Mandatory for SB accounts)
 Registration certificate of the Society with the Registrar of Societies
 Address proof in the entity name
 Pan card of the entity / authorised signatories.
 The resolution passed by governing bodies for opening an Account

2. Who can Open

 Primary Co-operative Credit Societies
 Khadi Village and Industry Boards
 Agriculture Produce Marketing Committees
 Societies registered under Societies Registration Act, 1860 or any other corresponding
law in force in State or a Union Territory except Societies Registered under State
Cooperative Societies Acts
 Companies governed by the Central Government under Sec 25 of the Company Act
 Government Department/Local Bodies/agencies in respect of government Grants,
subsidy released for implementation of various government-sponsored schemes
 DWCRA (Development of Women and Children in Rural Areas)
 SHGs (Self Help Groups) registered or unregistered which are engaged in promoting
savings habits among their members
 Farmers Clubs etc.

NOTE:
Associations can open Savings Accounts / Current Accounts. Others need to open Current
Account only

How do you apply

1. M/s Anand & Sons Private Limited wants to open a current account with your bank. You wish to
verify the activities the Company is permitted to engage in and its objectives and also the rights,
powers and duties of the management. How would you do it?

Solution –
Need to verify the two important documents pertaining to companies – MOA and AOA.

Shiva Charities, who are running several welfare activities for orphans near your branch wants to
open an account. What are the documents you would examine to be satisfied with the
genuineness of the activities?

Solution –
The most important document is the trust deed, which gives the scope of activities of the trust.
The other documents would be Registration certificate and the certificate of IT exemption.
Check your learning
1. Minimum members to start a Private limited company
a. 2
b. 7
c. 3
d. 4

Justification: To start a company, minimum members are 2 and a maximum of 200

2. What should be the minimum paid-up capital for a public limited company?
a. Five lakhs
b. One lakh
c. Ten lakhs
d. Fifty lakhs.

Justification: In public limited company minimum paid-up capital is five lakhs whereas in private
limited it is 1 lakh

3. Which of the below documents is mandatory for opening a Trust account?

e. Trust Deed
f. Bye-Laws
g. Partnership Deed
h. VAT certificate

Justification: (Trust deed is a document that specifies the objectives of the trust, the name of the
beneficiaries, the activities that can be carried on by the trust, the powers of trustees and what
should be done in the event of the death of a trustee.)

4. Associations can open either SB or CA. (True / False)

a. True
b. False.

(Justification: Associations can open either SB or CA as they deem fit).

5. TASC stands for Trusts Apartment Societies and Clubs. (True / False)
a. True.
b. False

6. (Justification: TASC stands for Trust Association Societies and Clubs).

Summary
1. There are four types of non-profit organisations – Trust, Association, Society and Clubs.
2. Non - Profit Organisations are allowed tax benefits as per the Income Tax Act, 1961.
3. Trusts have to be registered under the Indian Trust Act.
4. Associations can open Savings account while Trusts, Societies and Clubs have to open Current
accounts.
5.