Indian company law

Indian company law regulates the corporations formed under the Companies Act 2013.

History

Main article: History of company law

• Company rule in India
• Societies Registration Act 1860
• The Indian Partnership Act, 1932
• Companies Act 1956
• The Companies Amendment Act, 2006
• The Limited liability Partnership Act, 2008

Incorporation

Companies can be incorporated through the rules of the Companies Act 2013.

Types of companies

• Sole Proprietorship - A sole proprietorship, also known as a trader firm or proprietorship, is a business form that is owned and run by one individual. A sole proprietor may use a trade name or business name other than his or her name.
• Registration not required - In summary, biggest advantage is quick formation and low compliances. However, the biggest disadvantage is unlimited liability.
• Partnership - liability is joint and unlimited.
  • Registration not compulsory.
  • Active partners take part in day-to-day operations of the business, in addition to investing in it. Active partners are entitled to a share of the enterprise's profits.
  • Sleeping partners invest in the business and are entitled to a share of its profits, but do not participate in day-to-day operations.
• Limited Liability Partnership - Liability is limited
• HUF (Hindu Undivided Family) - businesses owned by a joint family belonging to Hindu religion. Even though Jain and Sikh families are not governed by the Hindu law, they can still form a HUF.
• Cooperative
• Dormant company - A company which has been created for a future project or for holding assets including intellectual property of the company
• Family Owned Business
• Pvt Ltd (Private Limited Company): ≈ Ltd (UK) - May have 2–200 shareholders; shares are held privately and cannot be offered to public.
• Small company - A company other than a public company whose paid up share capital is not more than ₹ 50 lakh and turnover does not exceed ₹ crore.
• Ltd (Public Limited Company): ≈ plc (UK)
• Public Sector Unit (PSU) - Alternatively known as Public Sector Enterprise (PSE). It may be public limited company listed on stock exchanges with major ownership by a state government or a central government of India or it may be unlisted entity with major ownership by a state government or a central government of India. Some of these entities are formed as business entities through special legislation, where these entities are governed by the statutes of these legislation and may or may not be governed by company laws like a typical business entity.
• One-person company - It is a type of private company which can have only one director and member.
• Unlimited Company - A company, similar to its limited company (Ltd, or Pvt Ltd) counterpart, but where the liability of the members or shareholders is not limited.
• Incorporated Company

Corporate governance

Governance of the board

Under CA 2013 section 169, the basic rule is that any company director may be removed by the general meeting with a simple majority vote, after giving "special notice" of 28 days. In companies which elect the board by proportional representation according to section 163, there is an exception so that directors appointed by one particular group of members cannot be ousted by the majority. Those directors can only be removed by the members that appointed them, so as to protect the system of proportional voting.

Employee rights

See also: Codetermination and Indian labour law

It was the view of many in the Indian Independence Movement, including Mahatma Gandhi, that workers had as much of a right to participate in management of firms as shareholders or other property owners. Article 43A of the Constitution, inserted by the Forty-second Amendment of the Constitution of India in 1976, created a right to codetermination by requiring the state to legislate to "secure the participation of workers in the management of undertakings". However, like other rights in Part IV, this article is not directly enforceable but instead creates a duty upon state organs to implement its principles through legislation (and potentially through court cases). In 1978 the Sachar Report recommended legislation for inclusion of workers on boards, however this had not yet been implemented.

The Industrial Disputes Act 1947 section 3 created a right of participation in joint work councils to "provide measures for securing amity and good relations between the employer and workmen and, to that end to comment upon matters of their common interest or concern and endeavour to compose any material difference of opinion in respect of such matters". However, trade unions had not taken up these options on a large scale. In National Textile Workers Union v Ramakrishnan the Supreme Court, Bhagwati J giving the leading judgment, held that employees had a right to be heard in a winding up petition of a company because their interests were directly affected and their standing was not excluded by the wording of the Companies Act 1956 section 398.

• Excel Wearv. Union of India A.I.R. 1979 S.C. 25, 36

Directors' duties

See also: Directors' duties

Duties of directors.

166. (1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.

(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.

(6) A director of a company shall not assign his office and any assignment so made shall be void.

(7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Companies Act 2013 section 166

Directors' owe a range of duties to the company, which primarily involve acting within the constitution, avoiding conflicts of interest and performing their role to a desired standard of competence. The Companies Act 2013 section 166 lists directors' duties in seven simple sections, which reflect the existing principles developed by the case law in the courts around most Commonwealth countries, in common law and equity. Part of the reason for codification of directors' duties was to provide a transparent statement of the duties directors owe, and therefore to publicise principles of best practice. However, because of their generality, the case of law of the courts matters to interpret how duties will apply in specific situations.

Corporate social responsibility

Main article: Evolution of corporate social responsibility in India

In a new with the Companies Act 2013, section 135 requires companies to spend 2% of their net profit on socially responsible projects, if they have a net worth of over rupees 500 crore, or a turnover of over rupees 1,000 crore, or a net profit over rupees 5 crore. Socially responsible projects are defined in Schedule VIII, and mainly involve community development.

Enforcement

• National Company Law Tribunal, replacing the previous Company Law Board and Board for Industrial and Financial Reconstruction.
• Indian Corporate Law Service

See also

• UK company law
• German company law
• US corporate law

References

• HK Saharay, Company Law' (5th edn 2008)

External links

• Companies Act 2013 on the Ministry for Corporate Affairs website