The Companies Act, 1956

Contents
 Forms of Business Organizations

 Definition, Features of a Company

 Advantages & Demerits

 Types of Companies

 Incorporation of a Company (procedure and documentation)

 Share Capital & Membership

 Company Meetings

 Accounts and Audit

Forms of Business Organizations
 Sole trading concern

 Partnership Firm

 Cooperative Society

 Joint Stock Company

Forms of Business Organizations
Partnership Firm Sole Trading Concern
• 2 or more partners (max 20) • Owned by single individual
• Governed by the Partnership Act, 1932 • Minimal regulations
• Partnership deed for rules, regulations • No separate entity
regarding capital contribution, rights, • Unlimited liability
duties, profit sharing etc.
• Restricted growth
• Unlimited liability

Co-operative Society
• Based on cooperative principle
• Objective of promotion and growth of members
• Minimum 10 members, maximum no limit
• Limited liability of members
• Restricted activities, small scale, not professionally managed
Introduction – Joint Stock Company
 The word ‘company’ is derived from Latin words “Com – with or
together” and “Panis – bread”, i.e. together we earn our bread.
 A company is an association of persons formed for the purpose
of carrying on some business or undertaking.
 Industrial Revolution, growing business complexities, large
scale of operations etc. gave rise to ‘Joint Stock Company’.
 A joint stock company (known as ‘company’) is an artificial
person created by law having perpetual succession and a
common seal.
 Artificial legal person implies a ‘body corporate’ or ‘corporation’
and its entity is distinct from its members.
Company: Features
a) Voluntary association – company is a voluntary association formed for
some purpose, business or non-business.
b) Separate Legal entity – an artificial person separate from its members. All
assets, liabilities, profits, expenses are in the name of the company. It can
sue anybody or can get sued in its own name. It can enter into contract with
individuals or other cos. in its own name. e.g. (Salomon and Lee cases)
c) Limited Liability – the liability of members is limited and it is restricted to
the unpaid value of shares taken by them
d) Perpetual Succession – i.e. birth and death of a company are a process
of law (incorporation & winding-up). Life of co. does not depend on
members. Co. continues even all its members are dead.
e) Common Seal – a co. has no physical existence, hence it acts through its
agents and common seal as its official signature. Company name engraved
on the seal. Affixed on important docs like share certificate, warrants etc.
Company: Features
f) Share Capital – entire capital of a company is divided into certain units of
equal value, known as shares. Share capital is contributed by the owners.
g) Transferability of Shares – the shares of a company are movable and are
freely transferable (except pvt. co.). Thus, ownership is freely transferable.
h) Separate Property – since a company is a separate legal entity, it is
capable of owning, enjoying and disposing off property on its own name. All
assets are owned by the company and not by its shareholders (even though
they are owners of the company)
i) Ownership and Management – owners are the shareholders while mgt.
is vested with elected body known as Board of Directors. Hence, there is a
separation of ownership and management.
j) Registered under Companies Act – a company is born only upon its
incorporation under the Companies Act, 1956, i.e. registration with Registrar
of Companies (ROC)
Lifting the Corporate Veil
 Company is a separate legal entity, distinct from its members.
 Individuals for their personal gains, used this aspect for
fraudulent, dishonest ways.
 However, Courts disregarded this aspect of separate identity to
‘lift / pierce the corporate veil’ and look behind the company, who
are the real beneficiaries.
 Cases where corporate veil is lifted by Courts are –
 Protection of revenue – tax evasion
 Prevention of fraud and improper conduct
 Character of enemy company
 Sham or cloak company
 Avoid legal and welfare obligations
History of Company Law in India
 Company law in India is totally based on the English Companies Act.
 First legislative enactment for ‘Registration of Joint Stock Companies’
in year 1850.
 Further additions and revisions in the years 1857, 1860, 1866, 1882,
and 1913.
 Govt. of India appointed committee for final redraft under Mr. H. C.
Bhabha.
 Companies Act, 1956 came into force on April 1st, 1956.
 The Act extends to the whole of India, with exceptions as notified in
Official Gazette.
 Amendments are made in the Act from time to time, even till the
current decade.
Advantages of Company Form
 Corporate Personality gives infinite life, perpetual succession
i.e. not affected by death of its members.
 Limited Liability upto the unpaid value of shares held. Facilitates
raising funds & investments.
 Transferability of shares provides liquidity to the shares,
resulting in higher investments.
 Separation of ownership & mgt. provides high quality,
professional leaders and management.
 Capacity to sue and get sued in its own name provides
confidence to creditors and management.
Demerits of Company Form
 Formalities & Expenses – complex, rigid and cumbersome procedures and
formalities, requiring considerable time and money.
 Corporate Disclosures as required by various legislations, but limited access
to members.
 Separation of ownership and control which may lead to mismanagement.
 Greater legal & social responsibility having direct impact on earnings and
profits. For e.g. workers benefits, community welfare, high dividends, lower
prices, higher wages etc.
 Greater Tax burden due to high tax rates, limited deductions and benefits
etc.
 Detailed winding-up (restrictions, time, costs)
Types of Companies
Classification of Companies

 Incorporation
 Liability
 Number of Members
 Control
 Ownership & Function
Companies based on Incorporation
 Chartered Companies – a company created by the grant of
charter by the Crown is called Chartered Company and is
regulated by that Charter. E.g. East India Company.
 Statutory Companies – a company constituted by a special
Act of Parliament or State Legislature is called Statutory
Company. E.g. RBI, LIC, UTI etc.
 Registered Companies – a company that is incorporated
under the Companies Act, 1956 is known as a Registered
Company. These companies get themselves registered with
Registrar of Companies (ROC).
Companies based on Liability
 Unlimited Companies – a company where members’ liability
unlimited, i.e. members are liable for the company’s debts in
proportion to their respective interests in the company.
 Companies Limited by Guarantee – a company that has the
liability of its members limited to such amount as the members
may respectively undertake to contribute is called as company
limited by guarantee. The contribution is towards the assets of
the company in the event of winding-up.
 Company Limited by Shares – a company that has liability of
its members limited to the amount, if any, unpaid on the shares
held by them is termed as company limited by shares.
Companies based Number of Members
 Private Company – a private company means a company,
which by its articles –
• restricts the right to transfer its shares,
• limits the number of its members to 50 (not incl. employees),
• prohibits any invitation to the public to subscribe for any
shares or debentures of the company, and
• prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.

 Public Company – a public company means a company which

is not a private company, i.e. no restrictions as mentioned
above.
Private Company Vs. Public Company
Private Company
 Min. paid-up capital Rs. 1 Lakh
 Minimum members is 2
 Maximum members is 50
 Restrictions on shares transfer
 Restrictions on invitation for
issue of shares, debentures
 Minimum 2 directors
 Can commence business on
incorporation
 No restriction on managerial
remuneration
 Words ‘private limited’ be added •
Public Company
• Min. paid-up capital Rs. 5 lakhs
• Minimum members is 7
• No restriction on max members
• Shares are freely transferable
• No restrictions on invitation for
issue of shares, debentures
• Minimum 3 directors
• Can commence business only
after commencement certificate
• Restriction of 11% managerial
remuneration
Word ‘Limited’ be added
Companies based on Control
 Holding Company – a company is known as a Holding
Company of another company, if it has control over that other
company.
 Subsidiary Company – a company is termed as a subsidiary
of another company when control is exercised by the latter
(holding co.) over the former called as Subsidiary Co.
 Forms of control are as follows –
 Controls composition of BOD
 Holding majority of shares
 Control over majority voting power
 Subsidiary of another subsidiary
Companies based on Ownership, Function
 Government Companies – a company in which not less than
51 % of the paid-up share capital is held by the Central Govt,
or any State Govt or both, is termed as Government Company.
E.g. State Trading Corp. of India, Minerals & Metals Tr. Corp.
A subsidiary of a Govt. Co. is also treated as a Govt. Co.
 Association not for Profit – companies registered u/s 25 of
the Companies Act, 1956 are engaged in non-profit activities,
i.e. charitable, educational, promoting art, science, commerce.
 Foreign Companies – a company incorporated in a country
outside India and has place of business in India is termed as a
Foreign Company.
Companies based on Ownership, Function
 Investment Companies – an investment company is a
company, the principal business of which consists in acquiring,
holding and dealing in shares and securities.
 Public Financial Institutions – company that is a non-
banking institution which carries on business of making loans
and advances, acquiring shares, insurance business etc.
These institutions include the following –
 Industrial Credit & Investment Corporation of India
 Industrial Finance Corporation of India
 Industrial Development Bank of India
 Infrastructure Development Finance Company
Incorporation of Companies
Incorporation Process

 Promoters

 Memorandum of Association (MA)

 Articles of Association

 Incorporation

 Commencement
Incorporation – Basic Framework
Any 7 or more persons (2 for Pvt. Co.) can form a
company for any lawful purpose.
Preparation of Memorandum (MA) and Articles of
Association (AA).
Appointment of first directors
Declaration of compliance with all legal formalities
Payment of registration fees
Certificate of Incorporation
Prospectus filing
Commencement certificate
Promoters
Who is a Promoter ??
 Promoter – Father of a Company.
 Conceives the business idea
 Originates scheme for a new company
 Takes steps for company formation
 Ensures preparation of MA & AA
 Finds subscribers to MA
 Finds bankers, brokers, legal advisors
 Decides first directors of company
 Provides initial capital or loan funds
 Enters into preliminary contracts with
vendors for formation purposes
 Preparation, filing of prospectus
 Documentation, legal compliances
 First persons to control co. affairs
Promoter – legal position
 Promoter is neither an agent nor
trustee of the company, Why ??
 He is in a fiduciary capacity to
the company, (quasi trustee)
 Not to make profit at co. expense
 Act in best interest of the co.
 To make disclosure of interests
 Can be paid remuneration for his
services as per the AA.
Memorandum of Association (M/A)
 Constitution / Foundation document of a company
 Defines the scope of activities and relations with outside world
 Gives out the fundamental conditions under which the company is
being incorporated/ created. Every registered co. must have M/A.
 M/A is printed, divided in paragraphs, signed by subscribers (7 / 2)
 Any activity outside the purview of M/A is ultra-virus and cannot be
ratified, even by all the shareholders.
 Defines and confines powers of the Co.
 Main purpose is to inform shareholders about affairs, risks of
company
 Anyone dealing with the company should know its range of activities,
powers and limitations.
Contents of the Memorandum
A. Name Clause
• Company, being a legal entity must have its own name to
establish its separate identity.
• A name, which is identical or resembles the name of another
company in existence is deemed to be undesirable. For e.g.
Entangle Ltd. & N-10gle Ltd., IC pvt. ltd & Eye-see pvt. Ltd.,
• Also, a company is not allowed to use a name that is prohibited
under the Emblems and Names (Prevention of Improper Use)
Act, 1950, e.g. Mahatma Gandhi, President, Governor etc.
• The name of the company must be engraved on the company’s
common seal. Also the name must be painted or affixed outside
every office and place of business.
• Name must end in “Limited” or “Private Limited”.
Contents of the Memorandum
B. Situation Clause
• The situation clause shall give the name of the State
in which the registered office of the company is
located.
• The main purpose of situation clause is to identify the
Courts’ jurisdiction over legal matters.
• The address of the registered office must be filed with
the ROC within 30 days of incorporation.
Contents of the Memorandum
C. Objects Clause
• Provides the objects for which the company is being formed.
• Most important clause – divided into Main objects & Other
objects
• Objects clause determines the purpose and the capacity of
the company, besides its sphere of activities. (with no
restrictions !!)
• All acts beyond the ambit of objects clause are ultra-virus, i.e.
void-ab-intio Even all shareholders cannot ratify it.
• However, the company may do anything which is incidental,
ancillary to the attainment of the main objects.
Contents of the Memorandum
D. Liability Clause
• Important clause which states that the liability of the
members is limited
• Either limited by shares or limited by guarantee
• Liability is limited upto the value of share unpaid.
• E.g. a shareholders holding one share of Rs. 100 and
has paid Rs. 75 on it, his liability Rs. 25 only.
Contents of the Memorandum
E. Capital Clause
• States the amount of capital with which a company is
registered.
• Capital classification into equity and preference shares is
given
• Number of shares into which total capital is divided is given
• Each share must be of fixed value
• Total capital is known as ‘Nominal’ or ‘Authorized’ or
‘Registered’
• E.g. “the capital of the company is Rs. 100,000 divided into
10,000 shares of Rs. 10 each.”
Contents of the Memorandum
F. Association Clause
• Also known as Subscription Clause
• Clause serves as a declaration by the subscribers to the
memorandum.
• Declaration regarding their intention to form the company,
and purchase required shares.
• Declaration that all legal formalities are complied with.
Articles of Association (A/A)
 Articles of Association are the bye-laws or rules and regulations of a
company. They manage the conduct of its business.
 Articles govern the internal affairs and management of a company.
 Articles are subordinate to and are controlled by the memorandum.
 A pubic limited company should register its own Articles or can adopt
Table A of the First Schedule of the Act.
 The Articles must not be inconsistent with any provisions of the
Companies Act or any other statute.
 The Articles must not include anything which is illegal or proposed to
public policy.
 The Articles must be printed, divided into paragraphs, numbered
consecutively and signed by each subscriber to the memorandum
and filed along with the memorandum.
Contents of the Articles
a) Matters relating to Shares – issue & allotment of shares, calls on
shares, lien on shares, transfer & transmission of shares, forfeiture of
shares, alteration of share capital, share certificates, Demat etc.
b) Directors – appointment of directors, Mg. Director, qualifications,
powers, remuneration, vacation of office, removal, resignation etc.
c) Conduct of Meetings – type of meetings, general meetings, board
meetings, notices, quorums, chairman, proxies, voting rights, minutes
of the meeting, committees etc.
d) Financial Matters – issue of debentures, bonds, dividends, issue
of bonus shares, rights shares, buy-back of shares, accounts and
audit, borrowing powers etc.
e) Others – winding up, company secretary, common seal etc.
Commencement of Business
∞ Certificate of Incorporation is the proof of existence of a company.
∞ A private limited company may commence business and exercise its
various powers immediately upon its incorporation.
∞ However, a public company must obtain a separate certificate to
commence business, from the Registrar of Companies (ROC).
∞ In order to commence business, a public company must comply with
the formalities relating to subscription of its shares (Prospectus) –
• minimum subscription amount (90%) has been collected in cash,
• every director has paid to the company for shares purchased by him,
• permission to deal in recognized Stock Exchange have been obtained,
• statutory declaration of compliance has been filed with the ROC
∞ On compliance, the ROC issues Certificate of Commencement of business.
∞ Co. can be wound up if no CC is obtained within one year of incorporation.
Prospectus
Prospectus means any document and includes any notice, circular,
advertisement for inviting the public to subscribe or purchase any
shares or debentures of a company.
If shares / debentures are not offered to the public, or issued to
existing holders (rights), then issue of prospectus is not required.
A Prospectus must be dated, approved & signed by the BOD, and
filed with the ROC for registration.
Contents of the Prospectus –
General info about the company, its management, previous issues etc.
Financial info about capital structure, financial performance, accounts
and audits, P&L, BS of past five years, borrowings and charges etc.
Statutory info about directors, advisors, underwriters to the issue etc.
Share Capital
The word ‘share capital’ or ‘capital’ means the share capital
of a company - in terms of rupees, divided into specified
no. of shares of fixed denomination each.
The Memorandum of Association must state the amount of
capital and its division into various types, number and
value of shares.
There are two types of share capital –
Equity Share Capital
Preference Share Capital
Classification of Share Capital
 Nominal / Authorized / Registered Capital – the sum stated in M/ A,
and it is the maximum amount which a company is authorized to raise by
issue of shares. Incorporation fees are based on this capital sum.
 Issued Capital – it is part of the authorized capital, which a company
issues for public subscription and allotment.
 Subscribed Capital – it is that portion of the issued capital, which has
been subscribed / taken up by the public.
 Called-up Capital – it is that part of the subscribed capital, which has
been called up or demanded by the company.
 Uncalled Capital – part of the subscribed capital, not demanded by Co.
 Paid-up Capital – it is that portion of the called up capital which is
actually paid by the shareholders.
 Unpaid Capital – it is the total of the called up capital remaining unpaid.
Types of Share Capital
 Preference share capital is a part of total capital with following
features:
• preference in receiving dividend, and
• preference in repayment of capital, in case of winding up of the
company.
 Types of Preference Shares –
• Basis of Participation
• Basis of Accumulation
• Basis of Redemption
 Equity share capital means all share capital which is not preference
capital
 Equity shareholders are entitled to voting rights in proportion of their
paid-up equity capital.
Preference Capital Vs. Equity Capital
Preference Capital
 Entitled to preferential right on
dividend before equity holders.
 Preferential right for repayment of
capital in case of liquidation.
 Dividends are paid at a fixed rate,
subject to profits.
 Dividend payment is compulsory, if
sufficient profits are available.
 For cumulative pref. shares, arrears • Dividend to equity share holders is
of dividends are paid
 Preference shares are redeemable
at maturity, end of period
 Restricted voting rights
 Not entitled to bonus / rights issue
Equity Capital
• Entitled to dividend only after
payment to preference holders.
• Capital is repaid to equity only after
repayment to pref. shareholders.
• Dividend rate not fixed, paid only
upon recommendation by BOD.
• Dividend payment optional, even if
sufficient profits available.
always non-cumulative
• Equity shares cannot be redeemed
unless reduction, buy-back, winding.
• Unrestricted voting rights
• Entitled to bonus / rights issue
Membership in a Company
♠ A member is a person whose name appears in the Register of
Members of a company.
♠ A shareholder is a person, who holds the shares of a company.
♠ Thus, a member and shareholder may be the same or unrelated.

Modes of membership – Cessation of membership –

• By subscribing to memorandum • Member sells his shares & name
• By application & allotment of shares removed from register of members
• By transfer of shares & registration • Death of member
of the transfer instrument • Member is insolvent or insane
• By transmission of shares, i.e. after • Forfeiture or surrender of shares
death, insanity of guardian • Redemption of shares
• A company can become a member • Buy-back of shares
of another company. • Company is wound-up