PRESENTATION ON : -

 Introduction to Companies Act,1956;

 Structural Break-up of C.A. 1956;
 Preparation of the MOA;
 Regstr. Procedure & Change of Name;
 Preparation of AOA;
 Membership of the Co. – Contracts, Deeds,
Investments & Service of Docs.
 Legal provisions for Holding Companies, Private
Companies & Unlimited Companies.

August, 9, 2010 PGDM -SEM III – CORP. LAW 1

 Some Basic facts of the Companies Act, 1956

• Most voluminous Legislation in the world;

• The Act has 658 Sections, XV Schedules;
• The entire Act is split into XIII Parts with each
Part further being split into Chapters;
• The Rules and Forms are further stated in the
Guidelines / Rules, 1957;
• There are many other Rules / Guidelines for
supporting the provisions of the Sections.

August, 9, 2010 PGDM -SEM III – CORP. LAW 2

 Functional Division of the Act

Part I - Definitions, CLB, National Company Law

Tribunal(NCLT);
Part II – Incorporation of a Co. & matters incidental thereto;
Part III – Prospectus & Allotment relating to issue of shares
& Debentures;
Part IV- Share Capital & Debentures;
Part V – Registration of Charges;
Part VI – Management & Administration;
Part VII – Winding Up;
Part VIII – Companies formed under Previous Co, Law;
August, 9, 2010 PGDM -SEM III – CORP. LAW 3
 Functional Division of the Act (contd..)

Part IX – Cos. Authorised to Register under this Act;

Part X – Winding up of Unregistered Companies;
Part XI- Cos. Incorporated outside India;
Part XII- Registration Offices,& Officers & Fees;
Part XIII- General- collection of Info. & statistics;

The XV SCHEDULES follows thereafter.

August, 9, 2010 PGDM -SEM III – CORP. LAW 4

 Some Basic facts of the Companies Act, 1956

• For the interpretation of each Section, there are

innumerable Case Laws from the various Courts
that have pronounced judgment supporting or
contradicting an earlier decision;
• Company Law is the source from which the
subject of Auditing gets its identity, importance
and procedures to initiate Corporate Audit;
• The Act is heavily based on interpretation and
justification, which decides the case.
August, 9, 2010 PGDM -SEM III – CORP. LAW 5
 Some Basic facts of the Companies Act, 1956

• The Administrative Machinery to monitor the

affairs is vested with the Ministry of Company
Affairs(MCA), the Company Law Board(CLB);
• The routine functions are managed by the
Registrar of Companies(ROC), having Regional
Directors (RD), located in various states, where
the companies are required to file documents and
Returns, and the public is authorised to inspect
the same according to the provisions of law.
August, 9, 2010 PGDM -SEM III – CORP. LAW 6
 Some Basic facts of the Companies Act, 1956

• The other Regulatory Authority is the Securities

& Exchange Board of India (SEBI). Section 55A
of CA, 1956, gives exclusive powers to SEBI to
administer the issue and transfer of securities and
the non-payment of dividends as is stated in
various Sections of the Act.
• In the 2006 Amendment, MCA introduced “e-
Governance” ( known as MCA-21), u/s 610
B,C,D for filing of Returns & payments.
August, 9, 2010 PGDM -SEM III – CORP. LAW 7
 Some Basic facts of the Companies Act, 1956

• u/s 266A to G, Director Identification Number

(DIN) in 2006, to ease in the correspondence
with the ROCs and quick identification in e-
Filing;

August, 9, 2010 PGDM -SEM III – CORP. LAW 8

 A Company, its Nature and Kind

• Section 3(1)(i) defines a Company as “ A Company

formed and registered under the Act or an existing
Company.” or
“ A company is an incorporated Association, which is
an artificial juridical person, having a separate legal
entity, with a perpetual succession and a common seal,
a common capital comprised of transferrable shares,
and carrying limited liability.” ( Saloman vs Saloman
& Co. Ltd.)
•
August, 9, 2010 PGDM -SEM III – CORP. LAW 9
 A Company, its Nature and Kind( contd.)

• Section 11 defines an “Illegal Association” which

states that “ No Company, Association or
Partnership consisting of more than 20 persons
( 10 in the case of Banking Business) be formed
to carry on any business for gain unless it is
registered under the Companies Act or under any
other law”. Here the Liability is unlimited and
personal.

August, 9, 2010 PGDM -SEM III – CORP. LAW 10

 Types of Companies

 PRIVATE COMPANY Sec 3(1)(iii):- A company with a minimum

PUC of Rs one lac or more and which by its AOA –
1) restricts the right of members to transfer shares, if any;

2) Limits the number of members to fifty , excluding members who were

or are in the employment of the company;

3) Prohibits any invitation to the public to subscribe for any shares in, or
debentures of, the company, and

4) Prohibits any invitation or acceptance of deposits from persons other

than members, directors or their relatives.

August, 9, 2010 PGDM -SEM III – CORP. LAW 11

 Types of Companies (contd.)

PUBLIC COMPANY Sec 3(1)(iv):- It means a

company which :-
1) Which is not a Private Co.;
2) Has a min PUC of Rs. 5 lacs or such higher PUC, as
may be prescribed;
3) Can invite the public to subscribe to its shares & debs;
4) Does not limit the max. number of members;
5) Can invite or accept deposits from the public; and
6) Is a Pvt. Co. but subsidiary of a Public Co.

August, 9, 2010 PGDM -SEM III – CORP. LAW 12

 Types of Companies (contd.)

• STATUTORY CO. :- It is incorporated by a

special Act passed either by the Central or the
State Legislature;
• GOVERNMENT CO. :- Section 617 defines a
GC as any Company in which not less than 51%
of the PUC is held by the Central / State Govt.
• FOREIGN CO. :- Section 591 to 596 discusses
about such companies.

August, 9, 2010 PGDM -SEM III – CORP. LAW 13

 Types of Companies (contd.)

• Section 25 CO. :- These are Companies having

obtained the prior permission of the CG not to
include the words “Ltd” or “ Pvt. Ltd.” behind
their names since they have been formed to
promote commerce, art, science, religion or any
other charitable purposes and not to distribute the
profits as dividends but to plough them back for
the aforesaid activities.

August, 9, 2010 PGDM -SEM III – CORP. LAW 14

 Types of Companies (contd.)

Types of Companies based on Liability of Members:-

 Companies limited by shares;
 Companies limited by Guarantee –Sec 12(2)(b); and
 Unlimited Companies - Sec 12(2)(c).

Holding and Subsidiary Company – Section 4(4) states

that a company shall be deemed to be the Holding
Company of another, if the other is its Subsidiary.

August, 9, 2010 PGDM -SEM III – CORP. LAW 15

 Exemptions & Privileges of Pvt. Co

a) Only 2 Members can start a Co. which is 7 for Pub. Ltd.

Co. – Sec 12;
b) It can commence business immediately on incorporation
as it need not wait to obtain the Certificate for
commencement of business –
Sec 149(7);
c) Can function with 2 Directors while three are required
otherwise – Sec 252(2);
d) For General Meetings, the Quorum is 2 persons
personally present which is five for pub Co – Sec174(1);

August, 9, 2010 PGDM -SEM III – CORP. LAW 16

 Formation of a Company

• It is a lengthy process involving:

 Promotion
 Incorporation or Registration;
 Capital Subscription; and
 Commencement of Business.

August, 9, 2010 PGDM -SEM III – CORP. LAW 17

 Memorandum Of Association (MOA)

• MOA can be defined as the Charter which

defines the limitation of the powers of the
company. The MOA contains the fundamental
conditions upon which alone the company is
allowed to be incorporated.

• The contents of the MOA – NAME clause,

REGISTERED OFFICE clause, OBJECTS
clause, LIABILITY clause, CAPITAL clause &
August, 9, 2010 PGDM -SEM III – CORP. LAW 18
 Memorandum Of Association (MOA)

ASSOCIATION/SUBSCRIPTION clause.
Under the Objects Clause, the MAIN and OTHER
objects shall be separately stated.
Alteration of the NAME Clause:
A company may, by passing a Special Resolution,
and with the approval of the C/G, in writing,
change its name ( Sec 21). However, no such
permission is required for dropping/addition of

August, 9, 2010 PGDM -SEM III – CORP. LAW 19

 MOA ( contd..)

the words “Limited” or “ Pvt. Ltd.” to the

Company’s name.

Spl Res requires 21 days notice and with 75% of

the Members present ( or through Proxy ) and
voting are in favour of the Resolution.

August, 9, 2010 PGDM -SEM III – CORP. LAW 20

 MOA ( contd..)

 The Doctrine of Ultra Vires:-

According to this Doctrine, all such acts or
transactions of a Company which are ultra vires
( beyond the powers of) the objects clause of its
MOA, SHAL BE WHOLLY NULL & VOID,
and can never be subsequently ratified and
validated, even though all the shareholders
consent or purport to ratify such transaction.

August, 9, 2010 PGDM -SEM III – CORP. LAW 21

 Articles of Association (AOA)

• The AOA contains regulations for the internal

administration of the Company’s Affairs. It
prescribes the Rules and Bye-Laws for the
General Management of the Company and for the
attainment of its objects as given in its MOA.
Being subordinate to the MOA, the AOA cannot
extend the objects as defined in the MOA.

August, 9, 2010 PGDM -SEM III – CORP. LAW 22

 Contents of the AOA

The extent to which TABLE – A is applicable;

( Table A-Regulations for management of a company limited by shares)
Different classes of shares and their rights;
Borrowing powers of Directors;
Maintainance of Books of Accts and their Audit;
Matters relating to Board Meetings;
Winding Up; and many other Issues.

August, 9, 2010 PGDM -SEM III – CORP. LAW 23

 The Actual Reality

• Facts, as such, never settled anything.

They are working tools only. It is the
implications that can be drawn from facts
that count, and to evaluate these requires
wisdom and judgment that are unrelated
to the computer approach to life.

• CLARENCE B. RANDALL

August, 9, 2010 PGDM -SEM III – CORP. LAW 24

August, 9, 2010 PGDM -SEM III – CORP. LAW 25
 Registration of the MOA

August, 9, 2010 PGDM -SEM III – CORP. LAW 26

 Preparation of AOA

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 Concepts in Accounting

• ACCRUAL BASIS VS CASH BASIS – In

Accrual basis, accounting is done as and when
they accrue. This can relate to deferrals,
allocation, depreciation and amortisation.
• Tangible Fixed Assets are those assets …

August, 9, 2010 PGDM -SEM III – CORP. LAW 28

 BASIC ASSUMPTIONS OF ACCOUNTING

 ACCOUNTING ENTITY CONCEPT:- the company and

its Promoters are distinct persons;
 MONETARY UNIT CONCEPT:- Transactions that can
be expressed in monetary terms are to be included in
Accounting records;
 ACCOUNTING PERIOD CONCEPT:- this is also
known Periodicity or Time-Period Assumption. Here the
commercial life of the Co. is split into “ INCOME
STAT.” & “ POSITION STATEMENT”.
 GOING CONCERN CONCEPT:- A Co. is supposed

August, 9, 2010 PGDM -SEM III – CORP. LAW 29

 BASIC ASSUMPTIONS OF ACCOUNTING

to be operating in the forseeable future. It is on

this basis that the Assets and Liabilities are
further classified.
GOLDEN RULE OF ACCOUNTANCY
1. Debit what comes in, credit what goes out;
2. Debit the Receiver, credit the Giver;
3. Debit all expenses and losses, credit all incomes
and gains.
–
August, 9, 2010 PGDM -SEM III – CORP. LAW 30
 Statutes to be adhered to

 Companies Act, 1956;

 Securities Exchange Board of India Act, 1992;
 Securities Contract Regulation Act, 1956;
 Income Tax Act, 1961;
 All Indirect Taxes;
 FEMA, 1999;
 Contractual Acts;
 Labour Laws.
August, 9, 2010 PGDM -SEM III – CORP. LAW 31
 Compliance Matters
(Under the Security Laws)

SCRA SEBI Depositories Act Other Laws

• Companies Act 1956,

• FEMA
• Compl of Rules & Reg. • Demat Procedures
•Stamp Act
Issue Mgnt. • Insp & Investigation • Corporate Activity
• Income tax Act
• Appearing before SAT •Securities Recon. Certf.
•Competition Act

August, 9, 2010 PGDM -SEM III – CORP. LAW 32

 Some concepts

Reserves – can be of two types – CAPITAL &

REVENUE.
CR are not created out of Profits but arise due to
sale of capital assets.
RR are created out of Profits and can be a
General Reserve – for general purposes and
contingencies; and
Revenue Reserves – Div Equal Res / Deb Redmp.
PGDM -SEM III – CORP. LAW
August, 9, 2010 33
 Some concepts

For Fixed Assets, Fixed Tangible Assets are

depreciated, while Intangible assets are
amortised.
Contingent Assets have been defined by Kohler as
“ an asset, the existence, value and ownership of
which depend upon the occurance/non-occurance
of a specific event or upon the performance or
non-performance of a specific act – for eg.
Disputed Property coming in Co’s favour.”
August, 9, 2010 PGDM -SEM III – CORP. LAW 34
 AS -1 Contents Summary

 Areas of different Accounting Policies:-

Methods of Depreciation / Amortisation;
Conversion & Translation of Foreign currency;
Recognition of Profit on long-term contracts;
Treatment of – Expenditure during constr. period,
Goodwill, Retirement benefits, & Contingent
liabilities;
Valuation of Inventories, investments & Fixed Assets;

August, 9, 2010 PGDM -SEM III – CORP. LAW 35

 AS -1 Contents Summary(contd)

Selection of Accounting Policies :-

Based on PRUDENCE, SUBSTANCE OVER FORM,
& MATERIALITY.
Purpose of Disclosure :-
Better understanding of Financial Statements, Inter-firm
comparison, & Legal Compliance;
Fundamental Accounting Assumptions :-
Going Concern, Consistency & Accrual.

August, 9, 2010 PGDM -SEM III – CORP. LAW 36

 Practical Examples

• Balance Sheets of Public Limited Companies.

• Auditor’s Certificate;
• Notes to the Accounts;
• Qualified / Clean Report;
• Management Discussion & Analysis;
• Directors Report; and
• Chairman’s Speech.

August, 9, 2010 PGDM -SEM III – CORP. LAW 37

• GENERALLY ACCEPTED ACCCOUNTING
PRINCIPLES ( GAAP )
AICPA states that “ those rules of action and
conduct which are derived from experience and
practice, and when they prove useful, they
become accepted as Principles of Accounting.
The three criteria looked into are :-

August, 9, 2010 PGDM -SEM III – CORP. LAW 38

 GAAP

 RELEVANCE:- the information has to be

useful
for Accounting;
 OBJECTIVITY:- this denotes the reliability of
of the transaction;
 FEASIBILITY:- that which can be implemented
without much complexity or cost.

August, 9, 2010 PGDM -SEM III – CORP. LAW 39

 INDIAN AS, IAS / IFRS & US GAAP
A COMPARISON
Basis Indian AS IAS / IFRS US GAAP
Principal vs Rule “Rule based “Principle based More “Rule
Standard” Standards”with based Standard”
Limited with specific
Application application
guidance guidance
Historical Revaluation is Generally uses No Revaluations
Cost or permitted, subject Historical Costs, but except for certain
valuation to certain Intangible assets, types of Financial
plant & equp. and
conditions Instruments.
Investment Property
may be revalued to
fair value.

August, 9, 2010 PGDM -SEM III – CORP. LAW 40

 INDIAN AS, IAS / IFRS & US GAAP
A COMPARISON
Basis Indian AS IAS / IFRS US GAAP
Principal vs Rule “Rule based “Principle based More “Rule based
Standard” Standards”with Standard” with
Limited specific
Application application
guidance guidance
Derivatives,
certain other
Financial
Instruments are
revalued to Fair
Value.
First time No specific std. General Principle General Practice
Adoption Principles as per is full retrospec- is full retrospec-

August, 9, 2010 PGDM -SEM III – CORP. LAW 41

 INDIAN AS, IAS / IFRS & US GAAP
A COMPARISON
Basis Indian AS IAS / IFRS US GAAP
Principal vs Rule “Rule based “Principle based More “Rule based
Standard” Standards”with Standard” with
Limited specific
Application application
guidance guidance

Transitional prov. tive application of tive application

IFRS,in force at the
in the relevant std. time of adoption, unless
unless the
should be adhered the specific exceptions transitional
to. & exemptions in IFRS provisions in a
-1 permit or require specific standard
otherwise.
require otherwie.

August, 9, 2010 PGDM -SEM III – CORP. LAW 42