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The Companies Act, 2013

by:- Team Legal Specs


What is the Companies Act, of 2013?

The Companies Act 2013 resulted from meticulous legislative deliberations, which were brought about by a number of chronological procedures that need to be highlighted. The advent of the Companies Act began with the introduction of the Companies Bill, 2008, which was introduced in Parliament on October 23, 2008. But the bill lapsed due to the dissolution of the Lok Sabha in 2009. Pursuant to that, on the basis of the Standing Committee on Finance (hereinafter "SCF") Report, the Companies Bill, 2009, was introduced in the Lok Sabha on August 31, 2010, but it again lapsed in the Lok Sabha in 2011 due to its inherent flaws. Again, with the requisite amendments incorporated, the Companies Bill, 2012, was approved by the Lok Sabha on December 18, 2012, and in the year 2013, it was approved by the Rajya Sabha, subsequently getting renamed as the Companies Bill, 2013, thereafter giving rise to the Companies Act, 2013. On August 13, 2013, the President signed it into law. Under this act, the laws framed were deemed operational in a number of different phases. This can be better illustrated by the fact that in its first phase of operationality, only 98 sections were made effective from act that in its first phase of operationality, only 98 sections were made effective from September 12, 2013, pursuant to which the corresponding sections of the Companies Act ceased to have effect from that date, and most of its sections, that is, 283 sections, became effective from April 1, 2014. Also, this act contains no transitional provisions, which means that it does not contain a statutory provision that regulates a process that starts before an amendment or enactment of the statute comes into force and ends after the amendment or enactment of the statute has come into force.


Provisional Breakdown

This act contains 29 chapters, 470 sections, and 7 schedules, which makes it a more effective and streamlined piece of legislation when compared to its older version, the Companies Act of 1956, which contained 658 sections and 14 schedules. On a thorough reading of the Act, it can be observed that there exists a deliberate repetition of certain words and phrases, such as the word "prescribed," which has been used 416 times, "imprisonment," which has been used 76 times, the phrase "special resolution," which has been used 74 times, "prosecution," which has been used 25 times, and "approval from the central government (hereinafter "CG")," which has been used 15 times. But the reason behind the constant usage of such words and phrases has a well-thought-out underlying intent beneath its superficial nature. The repetitions exist to provide CG with enough power within its ambit to attune the functioning of the statute as and when required directly through the Ministry of Corporate Affairs, thereby refraining from knocking on the doors of the parliament, especially with the ongoing scenario where continuous economic transformations are plaguing the nation.


Introduction of New Concepts

Company Structure

The Act has introduced some required provisions with respect to the types of companies that can be incorporated. One such provision is the introduction of the one-person company under Section 2(62), which provides for one-person companies to have only one person as a member. A one-person company is required to comply with the provisions laid down in Section 149(3), which states that a director must have stayed in India for a period of not less than 182 days in the previous calendar year, but apparently there are no such provisions in the original statutes. Also, there is no requirement for annual general meetings now as the completion of at least one meeting in half a calendar year is deemed to have complied with the statutory requirement of a minimum quorum if the gap between two meetings is not more than 90 days.


Corporate Social Responsibility

The act also focuses on corporate social responsibility (hereinafter "CSR") which aims to make companies more socially responsible towards their business dealings in a way that does not affect the business operations or competitiveness among the companies. The statute delineates that "companies having a net worth of Rs 500 crores or more, a turnover of Rs 1000 crores, or a profit of Rs 5 crores or more" will be considered for CSR policies under Section 135 of the Act, and similar provisions are enumerated under Schedule VII of the Act as well. It is to be noted that any surplus that arises out of the CSR activities shall not be considered for the business profits of the respected company.


Board of Directors

The 2013 Act provides for a minimum of 3 and a maximum of 15 directors. In the original act, the upper limit of directors could only be increased with the permission of the government, as contrasted with the 2013 act, in which the upper limit can be increased by passing a resolution at the annual general meeting. This demonstrates that the act focuses on providing greater authority to the company to deal with the ongoing crisis rather than the government, for the obvious reason that a company is better equipped and suited to deal with such situations when more hands are required on the board. This can be further reinforced by the case of Tesco Supermarkets Ltd v Nattrass, wherein it was held that th

e conduct of a company is to be guided by living persons in their ordinary course of day-to-day business, and these living persons can be none other than the directors of a company. Therefore, a director is to be appointed by virtue of the act under Section 2(34).

The 2013 act also focuses on the introduction of women directors, a provision that was missing in the older versions of the legislation. It requires that every company with a paid-up capital of more than Rs 100 crore or a turnover of more than Rs 300 crore have at least one woman director. Also, the 2013 Act enables a provision for the appointment of independent directors, which is one-third of its constitution, subject to the CG prescribing the minimum number of independent directors in any class of public companies.


The Prospectus of a Company and Securities Allocation

The provision of shelf prospectuses is provided for under Section 31 of the Act. The 2013 Act takes a step forward from its predecessors and provides for conditions to be followed for the private placement of securities for both private and public companies. The law states that a prospectus can only be issued by a public company, but this provision can only be applied when a prospectus is issued. In the case of South of England Natural Gas and Petroleum Ltd., when 3000 copies of a prospectus were distributed to the members of certain gas companies, it was held to be an act of offering shares to the public. Further, the act has increased the time gap within which the reports by auditors on liabilities and assets can be submitted.


Coalescence of Domestic and Foreign Companies

Although there is no reference or definition regarding the term "merger" or "amalgamation" in the statute, the case of Somayajula v. Hope Prudhomme and Co. Ltd. circumvented what an "amalgamation" constitutes. When Indian companies merge, the CG has the authority to create rules in consultation with the Reserve Bank of India (hereinafter "RBI"). Also, a foreign company may merge with an Indian company or vice versa, subject to approval by the RBI and the laws in force at that particular time.


Acceptance of Deposits

The term "deposits" has been defined under Section 2(31) of the Act and has been covered more extensively in the Deposit Rules, 2014. The provisions for the acceptance of deposits have been made more stringent in the 2013 Act. Previously, the CG had the power to prescribe the limits and manner in which deposits could be requested by the company, either from its members or the general public. But now, the act stresses a certain degree of leniency in the acceptance of deposits, with the most crucial exemption being the ones given to private companies.


How the Laws Differ from Amendments


Definition of the Financial Year: Under Section 2(41)

According to the 2013 Act, a company that is a holding or subsidiary company incorporated outside India and is required by the Tribunal to use a different financial year for consolidation of its accounts outside India may use any period, whether or not that period is a year.

The power transferred to the central government in the 2019 Amendment Bill may allow an application made by the company in such form and manner as may be prescribed.


Alteration of Articles: Under Section 14

According to the 2013 Act, any change that has the effect of converting a public company into a private company requires the Tribunal's approval. The power of the tribunal for conversion was transferred to the central government in the 2019 Amendment Bill.


Matters to be Stated in the Prospectus: Under Section 26

The 2013 Act shows the requirement for the registration of prospectuses under sub-sections (1) to (9).

In the 2019 Amendment Bill, in sub-sections (4), (5), and (6), the word "registration" has been substituted with the word "filing," and sub-section (7) shall be omitted.


Public Offer of Securities to be Dematerialized: Under Section 29,

In the 2013 Act, sub-section (1) clause (b) states: "such other class or classes of public companies as may be prescribed issue the securities only in dematerialized form."

In the 2019 Amendment Bill, the word "public" in sub-section (1) clause (b) shall be omitted and, new sub-section inserted (1A) for such other class or classes Unlisted companies, as may be prescribed, shall hold or transfer their securities only in dematerialized form.


Section 53 Prohibits the Issuance of Discounted Shares

Except as provided in Section 54 of the 2013 Act, a company may not issue shares at a discount. If any company violates this section, the company shall be fined not less than one lakh rupees but not less than five lakh rupees, and any officer who is in default shall be punished with imprisonment for a term not less than six months or a fine, or both.

According to the 2019 Amendment Bill, if a company fails to comply with these provisions, the company and each officer who is in default will face a penalty of up to the amount raised through the issue of discounted shares or five lakh rupees, whichever is less.


Notice to be given to the Registrar for Alteration of Share Capital: Under Section 64

Subsection (2) of the 2013 Act states that if a company and any officer of the company who is in default violate the provisions of sub-section (1), they will be fined up to one thousand rupees for each day that the default continues, or five lakh rupees, whichever is less.

In the 2019 Amendment bill, the word "fine" was substituted by the word "penalty."


Conclusion

Since the advent of the 1956 act, the legislation has been notably amended several times to make up for the deficiencies that existed in the statute. The main aim behind the legislature's constant amendments was to bring about an overhaul in the realm of company law and fill in the hiatus that existed. There have been multiple amendments to the original legislation, but they have failed because of their simplistic nature. But the 2013 act paved the way for the statute to usher in corporate democracy, through which the companies would be given more freedom, liberty, and authority in managing their respective affairs without unnecessary government intervention. Still, with the rise of unforeseen circumstances involving blatant corporate fraud, corporations need the help of a better version of the legislation to deal with them, and that is the 2019 amendment bill, which aims to revamp the structure and functioning of the companies in such a way that the existing lacuna that hampers the smooth functioning of these corporations is filled. To summarize, the amendment aims to give companies more power by allowing the government to intervene minimally while also holding them more accountable for their actions.


FAQS


1. When did the Companies Act, 2013 came into force?

Ans. The Companies Act, 2013 came into force on 29 August.


2. Why this Act was Enacted?

Ans. This Act was implemented for better accountability, governance, and disclosure for shareholders, which includes key management, directors, secretaries, and auditors.


3. Explain the Structure of this Act?

Ans. The Companies Act, 2013 came into force on 29 August, containing 7 Schedules divided into 29 Chapters and 470 Sections.


4. Define the Concept of Corporate Social Responsibility in reference to this Act?

Ans. Section 135 of the Companies Act, 2013 focuses on corporate social responsibility (hereinafter "CSR") which aims to make companies more socially responsible towards their business dealings in a way that does not affect the business operations or competitiveness among the companies.


5. What is the Alteration of Articles?

Ans. According to Section 14 of the Companies Act 2013, any change that has the effect of converting a public company into a private company requires the Tribunal's approval. The power of the tribunal for conversion was transferred to the central government in the 2019 Amendment Bill.



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