A Visit to India's Companies Act

Author(s): JAROSLAV A. DRABEK

Source: The International Lawyer, Vol. 11, No. 3 (Summer 1977), pp. 547-554
Published by: American Bar Association
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 JAROSLAV A. DRABEK*

A Visitto India's CompaniesAct

Historyand Scope
Whenthepresent IndianCompanies Actwentintoeffect on April1, 1956,l it
wasgenerallybelievedtorepresent a significantimprovement overtheprevious
Actitwasreplacing.2 In particular, itwasthought to havebeenimposing much
of on
standards conduct management therefore
stricter and was a in
step the
rightdirectiontowardimproving corporate morality.3
To any Americanpractitioner, unfamiliar withthe generaltenorof the
British
Companies Act, which is followed bymanyofherformer dependencies,
theIndianCompaniesAct(hereinafter called"theAct") represents a curious
mosaicof corporate legislation.In an effort to coverthe broadestpossible
spectrum ofcorporate jurisprudence, thisomnibus statutereachesoutintosuch
divergent fields as of
regulation securities,4registration of corporate
mortgages,5commingling ofemployee funds,6andevenprohibition ofpolitical
orfieldsgenerally
contributions,7 considered outsidethepurview ofcorporation
codesin theUnitedStates.
There are, to be sure, separateIndian laws governing certainspecific
corporate as wellas statutes
activities,8 whichcodify thecommonlawand apply
itmutatismutandis tocompanies, in additionto individuals,
partnerships and
In general,however,
otherentities.9 theAct coversa verybroadfieldof law

♦LL.B., George WashingtonUniversity; Chairmanof the InternationalLaw Section'sSubcom-

mitteeon New Formsof Doing BusinessbetweenEast and West.
at least sixteentimes,mostrecentlyin
'It has subsequentlybeen amended,directlyor indirectly,
February1975.
'Enacted in 1914.
3 M. J. Sethna, Indian Company Law, 1967, 35.
p.
The Act, §§ 55-68.
'Id., §§ 124-145.
'Id., §§ 417-420.
7Id., § 293A.
•Examplesare the Capital Issues ControlAct, 1947, Monopoliesand Restrictive Trade Practices
Act, 1969, ForeignExchange RegulationAct, 1973, TemporaryRestrictionson Dividends Act,
1974 and others.
'Such as contracts,sales, negotiableinstrumentsand others.

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International 547

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548 INTERNATIOΝAL LA WYER

relating to companies.It is important to notethat,unlikein thiscountry, the

Actspeaksofa "company" rather thana "corporation/'usingagain theBritish
precedent, althoughitrecognizes theterm"bodycorporate"10 to accommodate
corporations fromoutsideofIndiaas wellas Indiancompaniesformed under
thatdesignation byspecialactsofIndianlegislature.11
With some minorexceptions,the Act extendsuniformly to the entire
of
Republic India12and appliesto all tradingcompaniesas wellas thosenon-
trading companies whoseactivitiescovermorethanonestate.Companies inthis
lattercategory, suchas banks,insurance companies and electric are,
utilities,13
however, governed by theAct only to theextentthatitdoes notcontravene the
provisions of theirownorganicacts. In varying degrees,dependingon the
extentofIndiancontrol, foreign companiesincorporated outsideIndia which
maintaina placeofbusinessin India,are also coveredbytheAct.14
TheActis topically arrangedintothirteen partsand containsa totalof658
sections,althoughsomeofthemhavebeenrepealedor rendered obsoleteby
subsequent amendments. Its text,without annotations,covers344 pages.

Types of Companies
All companiesregistered underthe Act are eitherprivateor public. To
qualify as a privatecompany, a company mustbyitsarticleshaveno morethan
shareholders
fifty (excludingemployees orformer employees), restrict therights
totransfer itssharesandprohibit subscriptionby public any itsshares
the for of
or debentures.15
TheActfurther recognizes threedifferenttypesofcompanies withrespect to
liability,
any oneof which can be either or
private public. Where the of
liability
thestockholders (or members as they are known in India) is limited by the
amount,ifany,remaining unpaidon theirshares,thecompany is knownas a
company limitedbyshares.Wheretheirliability is limitedto suchamountas
theymayagreeto contribute to the assetsof thecompany,the companyis
knownas a company limitedbyguarantee. Finally,wherethereis no limiton
thepersonalliability ofthestockholder, thecompany is knownas an unlimited
company.16
There are many advantagesin being a privatecompany.Only two

I0TheAct, § 2(7).
UA. Ramaiya, Guide to the Companies Act, 1975, p. 11.
12TheAct, § 1(3).
"Id., § 616.
"Id., §§ 591-601.
"Id., § 3(l)(iii).
"Id., § 12(2).

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 Act
A VisittoIndia's Companies 549

incorporators arerequiredinsteadofseven;17itdoesnothaveto holdtheinitial

statutory meetingandfilethedetailedreporttothestockholders;18 itneedsonly
twoinsteadof threedirectors;19 it can startdoingbusinessor issue further
capitalwithout certain itsdirectors
formalities;20 moreeasilyforelection
qualify
orappointment;21 itdoesnothavetofilea registrationstatementwhenallotting
itsshares;22and itrequiresonlytworather thanfiveshareholders to demanda
poll at a shareholders' meeting.23Of an even more practicalnature is the
on or
absence of restrictions managers managing directors of private
companies.24
Thestatusofa private company canbe lost,subjecttosomeexceptions, when
theannualvolumeofsalesexceedsRs. 10,000,000(about$1,000,000),orwhen
controlof twenty-five percentor morepasses intothe hands of a public
company.25 Whenthishappens,a company is requiredtofilea statement with
theregistrar ofcompanies.26

Incorporation:Capital Shares
The legal existenceof an Indiancompanybeginswiththe adoptionof a
memorandum ofassociation,whichmustincludethenameofthecompany and
thesuffix"Limited"incaseofa publiccompany, and"PrivateLimited"incase
of a privatecompany.It mustalso givethe nameof the statein whichthe
company'sregistered officeis located,the company'smain objectsand the
The memorandum
limitsof its liability.27 and any subsequentamendments
mustbe registered withthe registrar of companies.There is no provision
regarding duration anditis therefore presumed tobe perpetual.Whatwerefer
to as "bylaws"are knownas "articlesofassociation"undertheIndianlaw.
TheActprovides fortwokindsofsharecapital,preference sharesand equity
shares.Theformer isentitledtohavepreference ondividendsand capitaldistri-
butionintheeventofdissolution,28 fromallowing
whilethelatteris prohibited
disproportionate rights to holdersofthe same class ofshares.29

l7Id., § 12(1).
"Id., § 165(1).
"Id., 6 252.
20Id.,§§ 81 & 149.
21Id., § 266.
22Id., § 70.
»Id., § 179.
24Id.,§ 388A.
25Id.,§ 43A.
"Id., § 44.
27Id.,§ 13.
"/</.,§ 85.
29Id.,§ 88.

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550 INTERNATIOΝAL LA WYER

Managementand Administration
Theboardofdirectors, electedbytheshareholders, is thegoverning bodyof
an Indiancompany.Directorsmustbe individuals,30 cannotbe directors in
morethantwenty companies at the same are
time,31 subjectto disqualification
in certaincases,32and one-third of thetotalboardmembersare subjectto
retirementbyannualrotation, witha rightto be re-elected.33 Interim appoint-
mentsmaybe madebytheboardbutsuchdirectors serveonlyuntilthenext
annualmeeting.34 Thereis norequirement thatdirectors alsobe shareholders or
evenIndiannationals,althoughsinceconsentof the centralgovernment is
for
required any board appointments exceeding twelve,35 the government
exercises
somecontrol overwhotheindividuals willbe. Directors are required,
undercriminal penalties,to disclosecontracts orarrangements ofthecompany
inwhichtheyhaveinterest, areprecluded fromvotingon anymatterinvolving
suchinterestand thecompanyis requiredto maintaina separateregister of
suchcontracts or arrangements.36
Theboardis required to meetat leastonceevery threemonths37 butthereis
no requirement thatsuch meetingsbe held in India. Cumulative votingis
permittedwhere the articlesof association provide for it.38
Exceptfortheoffice ofsecretary,discussedhereinlater,theprovisions ofthe
Actrelatingtoofficers bearno resemblance to similarprovisions foundin our
statecorporation codes. The veryterm"officer"is broaderthan ours and
includesnotonlythedirectors but also anypersonin accordancewithwhose
theboardofdirectors
directions or anyone or moreofthedirectors is or are
accustomedto act.39This definition would seem to suggestthat the term
includesevenconsultants and expertsretainedbythecompanyand has even
beenconstrued to includea director's wife.40It certainly doesincludethetwo
typesof chiefoperatingofficers recognizedby the Act; i.e., the managing
andthemanager.Thedistinction
director between thetwois somewhat unclear,
exceptfor theobvious implication that in order to be a managingdirector, a
personmustalso be a director. of
Both thesepositions requireas a condition to
appointment a unanimous consentoftheboardofdirectors and ofthecentral

"Id., § 253.
"Id., § 275.
»Id., § 274.
"Id., δ 256.
34Id., § 260.
"Id., 6 259.
"Id., 88 299-301.
'Id., 8 285.
"Id., δ 265.
»Id., δ 2(30).
40A.Ramaiya, Guide to the Companies Act, 1975, p. 17.

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 A VisittoIndia's Companies
Act 551

government.In neitherof the two positionscan a person serve in the same

capacityin more than two companies at the same time, nor can his termof
officeexceed fiveyears,thoughhe can be reappointed.As a generalrule, the
remunerationof neitherone, if based on an incentiveplan, can exceed five
percentof the net profitsof the company.
Thereis one statutory distinction
betweenthetwoofficeswhichwouldseemto
suggestthatthemanagingdirectoroutranksthe managerin powerand import-
ance. Whilebothare ineligiblefortheirpositionsif delinquentin payingtheir
bills,adjudgedinsolventorconvictedofan offenseinvolvingmoralturpitudeby
an Indian court,such ineligibilitycarriesback onlyfiveyearspriorto appoint-
ment in case of a manager,41while it is permanentin case of a managing
director.42Moreover, although the central governmentmay remove such
disqualificationin case of a manager,43it has no powerto do so in case of a
managingdirector.
Asidefromtheinteresting dichotomyofthestatusofmanagersand managing
directors,the only other officethe Act presentlyrecognizes is that of a
secretary.44 The positionis mandatoryin all companieswhichhave a paid up
capital of Rs. 2,500,000 or more.45Under the implementingprovisionsof
Section 642(1)(a), the centralgovernmentprovidedcertainminimumprofes-
sional requirementsnecessaryto hold the officeof a secretary.The Act then
imposescertainspecificdutieson theofficeofa secretary, but mostof his duties
emanatefromtheboard ofdirectors.Like his Americancounterpart,he acts as
thecorporatehousekeeper,maintainsliaisonwiththevariousregulatory organs
ofthe centralgovernment and functionsas the depositaryof officialcorporate
records.
The sole section dealing with indemnification of officers,employeesand
auditors46 is couchedin prohibitiveratherthan permissivelanguage. Therecan
be no indemnification foranyliabilityattachingas a resultof anymalfeasance,
negligence,default,breach of dutyor breach of trustunder any law.47Such
indemnification extendsto all reasonable expenses, which include damages,
legal fees, and so on, but the centralgovernmenthas issued instructions that
any such indemnification must await the determinationof innocencefroma
competentcourtand no fundscan be advanced.

41TheAct, § 385.
"Id., § 267.
"Id., 8 385.
4The officeof Treasurer,formerly coveredby §§ 378-382,was abolished in 1970.
45TheAct, § 383A.
"Id., § 201.
"Compare withthebroaderprovisionsoftheDelaware CorporationCode, Title 8-145 or eventhe
so-called "thresholdtest" of the N.Y. BusinessCorporationLaw, § 723.

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552 INTERNATIONALLA WYER

Prospectasand Allotment
PartIII oftheActdealswithallotments ofsharesand also requirements for
prospectuses. Broadlyspeaking, theterm"allotment" includesanyissuanceof
capitalsharesor debentures, but such meaningmustbe derivedfromthe
context,as theActnowhere definestheterm.
Theinformation required be furnished
to totheprospectiveinvestoris notas
exhaustive as in theUnitedStates,but it does includeconsiderably detailed
financialdata, biographical information on management, materialcontracts
and interestsofdirectors and history ofthecompany.Expertsto an offering
in
cannotbe engagedorinterested theformation, promotion ormanagement of
thecompany48 andmustconsentinwriting totheissueoftheprospectus.49 The
prospectus itselfmust be signedby all either
directors, in personor under a
of
power attorney and filed with the of
registrar companiesalong with the
consentoftheexperts.50
Civilliabilityformisstatements in theprospectus extendsto the directors,
and
promoters experts.51 It is a validdefense to claim thatthepartycharged
had reasonablegroundto believeup to thedateoftheissueoftheprospectus
thatthestatement wastrue.52
Thereis also criminalliabilityin connection withthe issuanceof false
prospectuses and onceagain the "reasonable groundto believe"can be usedas
defenseinaddition provingthattheuntrue statementwasimmaterial. Violators
aresubjecttoa fineuptoRs. 5,000andimprisonment uptotwoyearsorboth.53

Amalgamationand Reconstruction
As used in the Act,the term"amalgamation" includesbothmergerand
consolidationin thatit contemplatesblending of two or morecompaniesof
whichonemaysurvive ora newone be formed as a result.Reconstruction,on
theotherhand,contemplates restructuringofa company bymeansoftransfer
of assets,in whichthe shareholders of the transferorcompanyreceivein
exchange an allotment ofshares ofthetransfereecompany.WhiletheUnited
willimmediately
Statespractitioner here
recognize a vehicleinthefield
favorite
ofacquisitions,
inIndiatheprocessofreconstruction moreoftenservesas a tool
ofprotectingcreditors'rights.Bothoftheseprocedures requireconsentofthe

4eTheAct, § 57.
»Id., § 58.
50Id.,§ 60.
"Id., § 62.
"Compare withthe "reasonable investigationrequirementof § ll(b)(3) of the SecuritiesAct,
1933.
"The Act, § 63.

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 A VisittoIndia's Companies
Act 553

in addition,is thought
court.Amalgamation, to requirean enablingprovision
in thememorandumofassociation.54

Suits Againstthe Company

Whilethesupervisory powersofthevariousbranchesofthecentralgovern-
mentoverIndiancompanies aregenerally notmuchmoreonerousthanin this
country, nowhere is thecontrolled natureof the Indianeconomyas regards
companiesmoreself-evident thanin thosesectionsof the Act dealingwith
prevention ofoppression andmismanagement.55 Anaggrieved shareholder can
petitionthecourtforreliefwhenever he feelshis interests
are notadequately
promoted bythemanagement. Byaddingthewords"prejudicial to thepublic
interest"to "prejudicialto the interestof the shareholders"56 the central
government injecteditself
intothe scope ofthischapterbyhaving rightto
the
intervene on a basis muchbroaderthanmerely theinterests of one or more
shareholders. The powersofthecourtto grantreliefunderthischapterare
broadand includedivestiture orders,modification or termination of certain
employment contracts, aside
setting contractualobligationsentered intowithin
daysofthepetition
thirty andevenregulation oftheconductofthecompany's
affairsin the future.57The last of thesecan conceivably open the doorto
eventual takeover the
by government.

GovernmentSupervision
The administration of the Act is leftto the officeof the registrar of
companies,58somewhat compatible to our of
departments corporations within
theofficeof the secretaryof statein manyof our states.Appointedby the
centralgovernment, theregistraris responsibleforserving as a depositaryof
papersfiledby the companies under the Act, accepting feesand preparing
authenticationofdocuments.Additionally, he performsall suchdutiesthatthe
central
government mayprescribe to implement theAct.Alldocuments filedin
hisofficeare a matterofpublicrecordand are availableforinspection upon
payment ofone rupee.59
Asidefrom theofficeoftheregistrar,theActalsocreatedtheso-calledBoard
of CompanyLaw Administration,60 withmembership not exceedingnine,

54A.R amaiγa, Guide to the Companies Act, 1975, p. 618.

"The Act, §§ 397-409.
"Section 399 of the Act requiresthat not less than 100 shareholders,or one-tenthof the total
number,whicheveris less, join in such petition.
57TheAct, § 401.
"Id., § 609.
S9Id., § 610.
"Id., § 10E.

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554 INTERNATIONALLA WYER

appointed likewise
bythecentral government. Thisorgan,moreinthenatureof
a policeman is givenwidepowersto assurestrict
thantheregistrar, compliance
bythecompanies withtheAct.To thisend,theboardcan issuesubpoenasto
compelattendance ofwitnessesorproduction ofdocuments, examinewitnesses
underoathand receiveevidenceon affidavits. In practice,thepowersofthis
organoverIndiancompaniesare practically limitlessand its ordersare not
to
subject appealexceptby a collateral
civil
suit.

Summary
Thereis an obviousadvantagein havinga nationalcorporation law in a
as
country large and as
diversified India is. Allowingfor the oftenrandom
topicalarrangements of thesectionsas well as an overall
ambitious attempt to
codifyall law as it mayrelateto companies,the Act nonethelessrepresents a
remarkable legaltoolforpractitionersdealingwiththemodusvivendi ofIndian
companies. Whenever itcoincidesin wording withthe British
Companies'Act,
Britishcase lawmaybe usedas precedent in additionto Indian,although it is
onlyguidingratherthan binding.In whatis generally considereda state-
controlledsocialisteconomy,the Indian CompaniesAct is all the more
interestingin thatit offersa relativelyunrestrained environment withinwhich
private can
enterprise still functionwith littlemore than
interference one is used
tointhiscountry. Thisis indeedunusualin a country wheremajorbusinesses,
suchas banks,insurancecompaniesand others,havelongbeenstate-owned
and wherethegovernment nowrulesvirtually bydecree.

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