Companies Act

A Company is defined as a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability. Companies, whether public or private, are an indispensable part of an economy. They are the modes through which a country grows and expands world wide. Their performance is an important parameter of a countries economic position. In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organisational, financial, managerial and all the relevant aspects of a company. It provides for the powers and responsibilities of the directors and managers, raising of capital, holding of company meetings, maintenance and audit of company accounts, powers of inspection, etc. The Act applies to whole of India and to all types of companies, whether registered under this Act or an earlier Act. But it does not apply to universities, co-operative societies, unincorporated trading, scientific and other societies. The Act empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders, creditors, employees and others. If an inspection discloses a prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act or the same is referred to the Central Bureau of Investigation. The Companies Act is administered by the Central Government through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) controls the task of incorporation of new companies and the administration of running companies. The Ministry of Corporate Affairs, earlier known as Department of Corporate Affairs under Ministry of Finance, is primarily concerned with administration of the Companies Act, 1956, other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with law. The Ministry has a three-tier organisational set-up:-

The Headquarters at New Delhi,

The Regional Directorates at Mumbai, Kolkata, Chennai and Noida, and

The Registrars of Companies (ROCs) in States and Union Territories.

The Official Liquidators who are attached to the various High Courts functioning in the country are also under the overall administrative control of the Ministry. The set-up at the Headquarters includes the Company Law Board, a quasi-judicial body, having the principal Bench at New Delhi, an additional principal bench for Southern Region at Chennai and four Regional Benches located at New Delhi, Mumbai, Kolkata and Chennai. The organisation at the Headquarters also includes two Directors of Inspection and Investigation with a complement of staff, an Economic Adviser for Research and Statistics and other Officials providing expertise on legal, accounting, economic and statistical matters.

The four Regional Directors, who are in charge of the respective regions, comprising a number of States and Union Territories, interalia, supervise the working of the Offices of Registrars of Companies and the Official Liquidators working in their regions. They also maintain liaison with the respective State Governments and the Central Government in matters relating to the administration of the Companies Act, 1956. Registrar of Companies (ROCs) appointed under Section 609 of the Companies Act, covering various States and Union Territories, are vested with the primary duty of registering companies floated in the respective States and the Union Territories and ensuring that such companies comply with the statutory requirements under the Act. Their offices function as registry of records relating to the companies registered with them. The powers vested with the ROCs are:-

Registration of memorandum and articles.

Registration of prospectus.

Registration of reduction of capital.

Call information or explanation.

Seizure of documents.

Investigation into affairs of a company.

Inspection of books of accounts, etc of companies.

To strike off defunct companies from register.

Enforcement of duty of company to make returns, etc to Registrar.

Non-disclosure of information in certain cases.

Winding up petition by the Registrar.

Official Liquidators are the officers appointed by the Central Government under Section 448 of the Companies Act and are attached to the various High Courts. They are under the administrative charge of the respective Regional Directors who supervise their functioning on behalf of the Central Government. According to the Act, a company means "a company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws". The salient features of a company are:-

Artificial legal person:- a company is an artificial person in the sense that it is created by law and lacks the attributes possessed by natural persons. It is invisible, intangible, immortal and exists only in the contemplation of law. Hence, it has to operate through a board of directors consisting of individuals.

Separate legal entity:- a company is a distinct legal entity, different from its members or shareholders. This implies that:- the property of the company belongs to it and not to the members or shareholders; no member can either individually or jointly claim any ownership rights in the assets of the company; an individual member cannot be held liable for the wrongful acts of the company even if he/she holds virtually the entire share capital; the members of the company can enter into contracts with the company.

Perpetual succession:- a company enjoys continuous existence and its continuance is not affected by the death, insolvency, mental or physical incapacity of its members. It is created by law and law alone can dissolve it.

Limited liability of members:- the liability of its members is limited to the amount remaining unpaid on the shares subscribed by them. Thus, in case of fully paid-up shares, the members cannot be asked to contribute any further, if the company goes into liquidation.

Common seal:- a company has a common seal, which is the signature of that company and signifies common consent of all the members. The company's seal is affixed on all the documents executed for and on its behalf.

Transferability of shares:- the shares of a public company are freely transferable without the permission of the company but in a manner provided in the Articles. The shareholders may transfer their shares to another person and this does not affect the funds of the company. But, a private company imposes restrictions on transfer of its shares.

Separate property:- all the property of the company vests in it. The company can control, manage and hold the same in its own name. The members have no ownership rights in the company's property, either individually or collectively. A shareholder does not even have an insurable right in the property of the company. The creditors of the company can have a claim only against the property of the company and not against the property of the individual members.

Capacity to sue and being sued:- a company can enforce its rights through suits and can also be sued for breach of its statutory rights.

The basic objectives underlying the Act are:-

A minimum standard of good behaviour and business honesty in company promotion and management;

To help in the development of companies on healthy lines;

To protect the interests of the shareholders;

To safeguard the interests of the creditors;

To equip the Government with adequate powers to intervene in the affairs of a company in public interest and as per the procedure prescribed by law;

A fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts;

Proper standard of accounting and auditing;

A ceiling on the share of profits payable to managements as remuneration for services rendered;

A check on their transactions where there was a possibility of conflict of duty and interest;

A provision for investigation into the affairs of any company managed in a manner oppressive to minority of the shareholders or prejudicial to the interest of the company as a whole;

Enforcement of the performance of their duties by those engaged in the management of public companies or of private companies which are subsidiaries of public companies by providing sanctions in the case of breach and subjecting the latter also to the more restrictive provisions of law applicable to public companies;

To help in the attainment of the ultimate ends of the social and economic policy of the Government;

In response to the changing business environment, the Companies Act, 1956 has been amended from time to time so as to provide more transparency in corporate governance and protect the interests of small investors, depositors and debenture holders, etc. For example, the Companies (Amendment) Act, 2006 introduced an important provision of Director Identification Number (DIN), which is an unique Identification Number allotted to an individual who is an existing director of a company or intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006). The various amendments are:-

The Companies (Amendment) Act, 2000

The Companies (Amendment) Act, 2001

The Companies (Amendment) Act, 2002

The Companies (Second Amendment) Act, 2002

Holding company A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of

risk for the owners and can allow the ownership and control of a number of different companies. In the U.S., 80% or more of stock, in voting and value, must be owned before tax consolidation benefits such as tax-free dividends can be claimed.[1] Sometimes a company intended to be a pure holding company identifies itself as such by adding "Holdings" or "(Holdings)" to its name, as in Sears Holdings

Holding company regulation 1. Introduction Section 4 of the Companies Act, 1956 (the Act) prescribes dual test and conceptually defines the Holding-Subsidiary company relationship. This is a special provision extending the provisions of the Act to intra-company relationships. Two significant factors which determine the relationships are control and ownership. The business conduct of such companies are regulated in certain respects and the effect of such regulations will result in treating another company as a Subsidiary of the Holding company. With the result, the provisions of the Act applicable to a public company will also apply to the subsidiary private company. However, the character of private remains unchanged. 2. Board Control The most common form of control in the case of bodies corporate is controlling the composition of the Board without being a member of the company. This may happen by direct control of the Board or through one or more Subsidiaries. Be that as it may, the Board occupies a pre-eminent position in the corporate hierarchy from the point of the view of enormous power it exercises and control it secures over the management of another company. It is not merely an economic unit but a power house. Considering these and other factors, the Act rightly recognizes the structure of the Board as a manifestation of its inherent strength and standing in the corporate structure. 3. Section 4 of the Act The composition of Board of a company is deemed to have been controlled, by another company if, but only if, that other company, without the consent or concurrence of any other person, can appoint or remove the holders of all or majority of the directors by virtue of exercise of some power exercisable by it, at its discretion. Further, the other company shall be deemed to have such a power of appointment a. if the person thereto cannot be appointed without the exercise of the said power in his favor by the other company b. that a person's appointment thereto follow necessarily from his appointment as director or manager or to any other office or employment in that other company or c. that the director-ship is held by an individual nominated by that other company or a Subsidiary thereof. This is the sum and substance of sub-section (2) of section 4 of the Act. If the conditions specified in the said sub-section are satisfied, then the first mentioned company is deemed to be Subsidiary of the other company by virtue of Board control. 4. Holding & Subsidiary Company Relationship

The manner of securing Board control is not envisaged as it is a matter relating to business practice. However, this is possible if the Articles of Subsidiary company specifically provide for a power to the other company to nominate all or majority of directors on the board of first mentioned company. The moot question is, can the Articles provide for such a provision if the other company does not hold all or majority of shares. However, there can be an arrangement between the lender and borrower companies as part of financing under which the lender may nominate all or majority of directors with or without a specific provision in the Articles for the purpose of ensuring proper utilization of funds. This is possibly one of the reasons why section 4 provides for Board control as a means of creating Holding & Subsidiary company relationship. The immediate effect of such an arrangement is that lending company becomes a Holding company by virtue of section 4 of the Act. 5. Examination of Section 4 in relation to Section 255 Another dimension relates to the validity of section 4 vis-a-vis section 255 of the Act which deals with appointment and retirement of directors by rotation. At least two-thirds of the total number of directors of a Public Company or a Subsidiary Private Company should be persons whose period of office is liable to retire by rotation. However, Section 255(1)(b) saves the arrangement in section 4 of the Act. With the result, prima facie, there is no conflict between section 4 and section 255 of the Act. Does this mean that the directors appointed by virtue of section 4 are not liable to retire by rotation, more so in the case a public company or Private Subsidiary Company? While sub-section 255(1) (b) saves the arrangement envisaged in section 4 by using the words "save as otherwise expressly provided in this Act", section 255(1)(a) provides that not less that two-thirds of total number of directors shall be persons whose period of office are liable to retire by rotation. This is a mandatory provision. 6. Case law on the subject; There is an interesting case on the above subject. In the case of Oriental Industrial Investment Corporation of India vs Union of India (1981)51 Com Cases 487(Del), the effect of section 4 in relation to sections 255,256 and 257 came up for consideration. The facts of the case is that by an agreement dated August 19, 1975 between Oriental Limited and Poonam Hotels, Oriental was given full and absolute power to appoint five directors on the board of directors of Poonam Hotels. This gave power to Oriental to appoint majority of directors on the board of Poonam Hotels with power to remove such directors and to appoint another in his place. Poonam also amended its Articles suitably and Oriental appointed five of its directors on the board of Poonam Hotels. This brought about holding and subsidiary relationship in terms of section 4 of the Act. Thereafter Oriental acquired 88% percent shares of Poonam Hotels in two tranches. Oriental made an application to the DCA for extending the financial year of its Subsidiary to bring it in line with its accounting year for complying with section 212 of the Act. The Department rejected the application on the ground that Article included by Poonam conferring authority on Oriental to appoint majority of directors is violative of sections 255,256 and 257of the Act and treated it as void as per section 9 of the Act and consequently Poonam cannot be treated as Subsidiary company. Request of Oriental for reconsideration did not evoke positive response and the Department reiterated its stand whereupon Oriental filed a writ in the High Court of Delhi. 7. Decision of Delhi High Court The High Court observed, inter alia, that the contention of the counsel for the Union of India that "the control of Oriental over the composition of the Board of Poonam Hotels which they exercise

by virtue of their agreement dated August, 1975 is in contravention of the provisions of Sections 255,256 and 257 of the Act overlooks the important fact that section 255 excludes from its purview cases which have been otherwise expressly provided in the Act. The words "save as otherwise expressly provided in this Act" used in section 255(1)(b) are of commanding significance. Section 4(2) is an express provision for the appointment of the directors on the Board of Subsidiary. This provision is not hit by Section 255 because it is expressly excluded." The High Court also observed that "there is no denying the fact that the right of the members of a public company to appoint directors of their choice at a general meeting is greatly abridged when there comes into being a relationship of a Holding and Subsidiary Company. But this restriction inheres in the definition of the Holding Company. It is firmly embedded in section 4 of the Act. The ability to control the conduct of the Subsidiary is the hall-mark of the Holding Company. The Holding Company is the controlling company. The controlled company is called a Subsidiary." 8. Revised clarification by DCA Following the Judgment of the Delhi High Court, the Department of Company Affairs (DCA) issued a clarification modifying their earlier views on the above matter which is reproduced below;"Department views";- The Department has issued a circular 14\74 dated 28-8-1974 to the effect that the Articles of a company which confer upon another company the right to make provisions for appointment of director upon another company with a view to make the company a subsidiary is invalid under section 9 of the Companies Act. On a combined reading of the provisions of sections 255, 256 and 257 and because section 257 is a mandatory provision, this view does not seem to be well founded. The appointments made pursuant to an arrangement whether by the Articles or by an agreement is not invalid merely because any shareholder may seek election at an annual general meeting. Section 257 only deals with the right of a person other than a retiring director to stand for election at the annual general meeting. The agreement or Article of a company, in so far as it or they invest a company with the status of holding company in relation to the company of which the board is controlled cannot be said to be inconsistent with section 257 which comes into operation only when elections are to be held at the annual general meeting. It follows from the above that a public company is not required to comply with the requirements of sections 255 to 257, if it is a Holding Company having the right to appoint majority of directors on the Board of the Subsidiary company pursuant to section 4 of the Act. 9. Shareholding Control- Direct ; This is the second method by which Holding & Subsidiary company relationship can be established. This is possible if one company holds more than half in nominal value of equity capital of another company as per section 4(1)(b)(ii) of the Act. This is a case of direct investment and indicates the financial interest and stake of the Holding Company in its Subsidiary. This is however subject to sub-section 4 (3) of the Act which seeks to exclude certain shareholdings for the purpose of reckoning half the nominal value of equity shares aforesaid. They are;a. any shares held or power exercisable by that other company in fiduciary capacity is considered as having not been held or exercisable by it. What is referred to is the equity shares carrying voting rights. Fiduciary capacity creates a relationship under which one owes to another the duties of good faith, trust and confidence. It is a company to company relationship;

b. any shares held by a nominee of that company, except as a fiduciary is considered as having been held by that company; c. any shares held by a nominee for a Subsidiary of that company, not being a Subsidiary connected as a fiduciary is considered as having been held by that company; d. any shares held or power exercisable by any person as security for the debentures of the first mentioned company or of a trust deed for securing any issue of debentures is to be disregarded; e. any shares held or power exercisable by or by a nominee for that other or its Subsidiary shall be treated as not being held or exercisable by that other ,if such holding or power is by way of security only for the transaction of lending in the ordinary course of business. 10. Indirect Control This is envisaged in section 4(1)(c) of the Act as third type of relationship applicable mainly in the case of group companies. A Subsidiary of a Subsidiary becomes a Subsidiary o f the ultimate Holding Company. This may be second or third generation Subsidiary by virtue of management or shareholding control and the linkage is endless. Another distinctive feature can be seen in sub-section (5) of the Act. For the purpose of section 4, the expression "company" is defined to include any body corporate, whereas for other provisions of the Act, "body corporate or corporation" includes a company incorporated outside India as defined in section 2(7) of the Act. 11. Extension of the Principle of Control. Sub-section (6) seeks to extend the principle of control in the case of a body corporate incorporated in a country outside India, a Subsidiary or Holding Company of such a company shall be deemed as Subsidiary or Holding Company of the body corporate within the meaning and for the purposes of Indian law, whether the requirements of section 4 are fulfilled or not. In this case, the same status is accorded under the Indian law to a body corporate as in the country of its incorporation in relation to its Holding or Subsidiary relationship. Here the shareholding control or management control discussed above are not relevant. 12. An Indian Private Company as Subsidiary of foreign body corporate Sub-section (7) of section 4 provides for a deeming provision. The intention is to place a Private Company registered in India which is a Subsidiary of a foreign company on par with a Private Company which is a Subsidiary of Public Company registered in India. To achieve this purpose, sub-section (7) provides that a Private Company which is a Subsidiary of the company incorporated outside India, which if incorporated in India would be a Public Company within the meaning of the Act shall be deemed as Subsidiary of a Public company, provided that the entire share capital in that Private Company is not held by the body corporate, whether alone or together with one or more bodies corporate incorporated outside India. This provision is based on the recommendation o f the Joint Company Law Committee as it considered unnecessary to treat an Indian Private Company, the entire share capital of which is held by one or more bodies corporate incorporated outside India as a Private Company which is a Subsidiary of a Public Company for the purposes of the Act. A close look at the provision indicates that the exemption is based on a similar position as in the case of private company whose entire share capital is held by one or more companies and none of them hold 51% or more of share capital o f the private company. Even if all these companies are public companies, the private company continues to be a private company, particularly in the context of deletion section 43A of the Act from the statute book.

Needless to say that a private company whose entire capital is held by one or more bodies corporate, whether incorporated in India or outside stands on a different footing, as such holding amounts to indirect public holding. Such companies have to have greater degree of accountability and transparency in their operations for the benefit of their shareholders. It is therefore necessary that legal framework to address this requirement should be in place.