Companies Act 1956 (original)

Companies Act 2013 (later version)

Companies (Amendment) Act, 2017

Classification of Companies

One person Company
Private Limited Company - 2-200
Public Limited Company - 7 - Unlimited

Listed Company
Unlisted Company

Minimum Capital required condition removed in 2014 amendment bill for 'Ease of Doing Business' which resulted in growth of shell companies that lead to easy tax avoidance
In India, more than 9 Lakh Companies are present. Out of which, 90% are private limited companies
Holding vs Subsidiary companies

Parent company that holds the shares of other unit/company is Holding company
Subsidiary company is an attached company to holding company
Ex of Holding company is Reliance Industries
Ex of Subsidiary company is Network 18

Limited Liability Partnerships

LLP is a partnership in which some or all the partners have limited liabilities. It therefore can exhibit elements of partnerships and corporations.
The LLP as a separate legal entity, is fully liable of its assets but liability of the partners is limited to their agreed contribution in the LLP.

It limits the liability of partners as far as civil cases are concerned.
In such a partnership, partners can’t be held liable for another’s misconduct or neg ence.

Foreign Direct Investment in an LLP is also allowed (both equity and investment)

Limited Liability Partnership Act, 2008

In India, LLPs are governed by LLP Act 2008
GOI can apply provisions of Companies Act 1956 as appropriate to LLPs
GOI has the powers to investigate the affairs of LLP
Registrar of Companies (RoC) which is appointed under Companies Act under Ministry of Corporate Affairs will also register LLPs in addition to Companies and RoC ensures LLPs compliance with statutory requirements

Benefits

Laws are less stringent for LLPs and hence preferred option for business
LLPs have lower registration cost and does not have requirement of compulsory audit
LLPs are also tax efficient as they are exempt from dividend distribution tax and minimum alternative tax

Cons

Inactive LLPs can be used for tax evasion and money laundering like Shell Companies

Blue chip Companies

Origin- In the game of Poker, blue chip has highest values
A blue chip is a nationally recognized, well-established and financially sound company.
Blue chips generally sell high-quality, widely accepted products and services.
Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy.

Shell Companies

The Companies Act, 2013 has not defined what a ‘shell company’ is and as to what kind of activities would lead to a company being termed a ‘shell’<
Shell companies are typically corporate entities which do not have any active business operations or significant assets in their possession.

Minimum Capital required condition removed in 2014 amendment bill for 'Ease of Doing Business' which resulted in growth of shell companies that lead to easy tax avoidance

Dormant Company

According to Companies Act, 2013, a company that does not have significant financial activity or has been inactive can apply to the Registrar of Companies and obtain the status of a dorma nt company.

Government owned companies

PSU - Not Govt employees - ONGC, LIC

Govt Companies

Registered in Companies Act
Govt Share > 50%
ONGC, SAIL, Coal India Ltd
Further classified into private, Listed and Unlisted Govt Companies

Public Corporations

Established by act of Parliament/State legislature
Fully owned by Govt
LIC, Air India, IDBI
SBI established under SBI Act 1955- Hence it is Public Corporation

Departmental Undertakings - Govt employees - Railways, Postal Department

Directly controlled by Govt like any other department
Not under Companies Act

Companies Act 2013

Annual General Meeting
Board of Directors

Elected in Company's Annual General Meeting by the shareholders of company which in turn elects CEO/MD of company
Composition

Chairman
Executive Director/Full time
Nominated Director - By Bank/Govt - under some special cases like SARFESAI act
Independent Director

Appointment by ordinary resolution at meeting of shareholders with explanatory statement
To protect interests of minority shareholders/common employees of public ltd company
Not a promoter, should not be appointed as MD, should not be an employee of that company
Should not have pecuniary interest with the company
Not applicable to One person and private limited companies
2 independent directors in case of unlisted public limited companies
In case of public listed companies

1/3 of directors must to be independent directors
A person can be an independent director upto a maximum of 7 companies (unlisted companies, not more than 10)
Term of an Independent director is 5 years and can be served two times at a time. Later cooling off period 3 years
AGM reviews the performance of independent director

For reappointment of an independent director, special resolution has to be passed

Minimum no.of directors in a board

One person Company - 1
Private Limited Company - 2
Public Limited Company - 3-15

Can be more if decided by AGM
1 woman mandatory
1 Indian Resident - min 182 days (not only a citizen but must be Indian Resident)

A Director (including independent) can be removed before the expiry of his term by its shareholders (ordinary resolution) except if the director is appointed by Tribunal for prevention of oppression and mismanagement and a director appointed under principle of proportional representation (no need to give reasons for removal)

Corporate Social Responsibility CSR

Companies should integrate social and environmental concerns in their operations
CSR applicable companies has to spend 2% of their profit (last 3 years average profit) as part of CSR
Applicable to

Net profit of 5 crores (50 million) (excluding tax)
OR Net worth of 500 crores (5 billion) (Asset minus liability)
OR turnover of 1000 crores (10 billion) (sales excluding tax)

Foreign branches turnover/profits excluded
Also applicable to foreign companies that have operations in India

In India, around 6000 companies are covered under CSR that amounts around to 20K crore
A CSR committee constituted within Board of Directors that reports to AGM
Companies through CSR can serve directly/indirectly (through NGOs)
No factual database where the CSR funds are spent and the qualitative and quantitative aspect of it.

4 statutory bodies

Tribunal - National Company Law Tribunal NCLT
Reporting - National Financial Reporting Authority of India
Education - Investor and Education Protection Fund Authority
Fraud - Serious Fraud Investigation Office (SFIO)

Companies (Amendment) Act, 2017

The Amendment Act now allows companies to issue shares at a discount to its creditors

Section 53 of the Companies Act, 2013 prohibited issuance of shares at a discount. The Amendment Act now allows companies to issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan such as resolution plan under the Code or debt restructuring scheme.

Companies Act, 2013 required approval of the company in a general meeting for payment of managerial remuneration in excess of 11 percent of the net profits But with this amendment prior to the approval in general meeting, approval of bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor as the case may be in case of the company defaulted in payment of dues to them
Companies Act, 2013 prohibited a registered valuer from undertaking valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during or after the valuation of assets. But with this amendment now prohibits a registered valuer from undertaking valuation of any asset in which he has direct or indirect interest or becomes so interested at any time during three years prior to his appointment as valuer or three years after valuation of assets was conducted by him.

Companies Amendment (Ordinance), 2018

Reduce the case load of Special courts

Shifting of jurisdiction of 16 types of corporate offences from the special courts to in-house adjudication, which is expected to reduce the case load of Special Courts by over 60%, thereby enabling them to concentrate on serious corporate offences

The penalty for small companies and one person companies has been reduced to half of that applicable to normal companies
Strengthening in-house adjudication mechanism
Declogging the NCLT by vesting the Central Government the power to approve cases of conversion of public companies into private companies

Companies (Amendment) Act, 2019

Corporate Social Responsibility (CSR)

Allows companies to transfer their unspent CSR funds to a separate account
In case, the money remains unspent, then it should be transferred to any fund specified in Schedule VII of the Act.

Registrar of Companies (RoC) is empowered to initiate action for removal of a company name if the latter is not carrying out business activities as per the Act
Proposes to transfer some functions from NCLT to the Central government such as dealing with applications for change of financial year and conversion from public to private companies
Mandatory that companies have a physical address

National Financial Reporting Authority of India NFRA

Statutory under Companies Act
NFRA is brought by Companies Act 2013 but notified by NFRA Rules 2018
1 Chairman + 3 full time members + 9 part-time members

Chairperson and full-time members would be selected through a search-cum-selection committee headed by Cabinet Secretary.

It is established as an independent regulator to oversee the auditing profession and accounting standards
Powers of civil court
Professional misconduct of CA/accountant=> debar
Appeal: NFRAA [appellate authority]
ICAI unhappy due to overlapping functions (Chartered Accountants Act, 1949)
NFRA Rules 2018

NFRA will oversee the auditors of banks, insurers, electricity firms and other entities referred to it by the government.
NFRA can investigate the auditors of:

Listed entities, unlisted entities with paid-up capital of not less than ₹500 crore or ann al turnover of over ₹1,000 crore. Those having aggregate loans, debentures or deposits of not less than ₹500 crore.
It enables the NFRA to debar erring auditors or audit firms
It can also refer service of an auditors to Quality Review Board under Chartered Accountants Act

Importance of NFRA

With the constitution of NFRA, India is now eligible to become a member of the International Forum of Independent Audit Regulators (IFIAR).
Shift from self-regulation to an independent oversight of auditors

Investor and Education Protection Fund Authority

Existing since 1956 under Ministry of Corporate affairs. Became statutory under Companies Act 2013
Unclaimed dividend, interest, principal used for Awareness, seminar, financial literacy

Serious Fraud Investigation Office (SFIO)

Earlier under Corporate Ministry. Now became statutory body
Examine documents, Search seize arrest, and gets Criminal Procedure Code powers of “investigator .
Once SFIO gets case, other agencies can’t proceed /span>.
State police, CBI –have to cooperate, provide documents & witnesses< span>

Insolvency and Bankruptcy Board of India (IBBI).

Statutory , Insolvency and Bankruptcy Code 2016
It is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in India
It covers Individuals, Companies, Limited Liability Partnerships and Partnership firms.
The new code will speed up the resolution process for stressed assets in the country.
It attempts to simplify the process of insolvency and bankruptcy proceedings.
It handles the cases using two tribunals like NCLT(National company law tribunal) and Debt recovery tribunal

PNB Fraud

What is LoU

A bank that is part of SWIFT can use the system to convey credit instruments called Letters of Undertaking (LoUs) to other banks located overseas.
An LoU is simply a request made to another bank in the SWIFT network to loan money to a client.
The bank that issues the LoU essentially guarantees the bank that receives the LoU request that it stands by the creditworthiness of the borrower.
That is, in case of a default, the bank that issued the LoU stands liable to compensate the bank that made the loan to the borrower.

What is fraud

PNB alleges that employees at one of its branches in Mumbai issued fraudulent LoUs that were not authorised by its management.
This allegedly allowed Mr. Nirav Modi's companies to obtain loans from the overseas branches of various Indian banks.

IL&FS Crisis

Infrastructure Leasing & Financial Services is a NBFC which is a vast conglomerate (around 169 companies) that funds infrastructure projects and has raised billions of dollars from the country’s corporate debt market.

IL&FS is a Systematically Important Non-Deposit Core Investment Company (CIC-NDSI) i.e. any crisis at IL&FS would not only impact equity and debt markets but could also stall several infrastructure projects of national importance

Many major corporates, banks, mutual funds, insurance companies, etc. such as LIC, HDFC and SBI have stakes in the IL&FS group.

What crisis:

IL&FS defaulted on their loan repayment (Term deposits, Short-term deposits, Inter-corporate deposits, Commercial paper, Non-convertible debentures)

What led to crisis

Asset-liability mismanagement and weak corporate bond market:

It has long terms infrastructure assets while need to service the short term liabilities which cannot be met from the returns of the assets
IL&FS owns long-term infrastructure assets financed with short-term funding because long-term (tenure of more than 10 years) debt is not available in India.

Critical lapse in Corporate Governance Norms: as Risk Management Committee, constituted met only once between 2015 and 2018
Shareholder Negligence: Well-known institutions such as LIC, HDFC, etc. which were major shareholder in ILF&S are guilty of negligence. For example, HDFC had not nominated a director to the board of IL&FS since last year
Lack of Effective Regulation: RBI which oversees NBFCs like IL&FS and the union finance ministry which oversees major shareholders like LIC, SBI, etc. are at fault here as the crisis was allowed to develop over a period of time

Impact of crisis

Lack of Capital Expenditure: It’s impact may spill over into the wider infrastruct re industry, pushing up funding costs and pulling government investment plans for achieving New India by 2022
Impact on Stock Market
Liquidity crisis
Impact on Shadow Banking (Shadow banking is that part of the financial system where credit intermediation involving entities and activities remains outside the regular banking system)
Other cascading effects of IL&FS’s defaults

Steps taken by Govt
- Taking Managing Control: Government superseded the IL&FS board under section 241(2) of the Companies Act, 2013, which enables supersession of a company’s boar to prevent it from further mismanagement in order to protect public interest.
- Government has also ordered Serious Fraud Investigation Office (SFIO) to investigate into the affairs of crisis-hit IL & FS and its subsidiaries amid concerns over financial irregularities

Corporate & Companies