Overview of the Companies Act, 2013

This article provides an overview of the Companies Act, 2013 with special emphasis on the Paradigm Conceptual shift from Companies Act,1956.

Abstract

It’s the nature of any environment and their species to adapt to the changes in the landscape to survive. Similarly, the corporate world or business is a part of this environment and run by such species, which requires to adapt to the environment they are lacking. And as a result of this species, I mean the human has some corporate social responsibility, who are a reflection of their nation’s corporate culture whose need is to maintain the economy with good corporate sustainability, and each democracy divided by states plays these roles.

And by adaptation, these nations also have to develop their corporate governance in terms of sustaining a position or place in such a competitive corporate world. We focus here on the Companies Act,1956 when it comes to corporate governance and what were the objectives behind getting Companies Act, 2013 – the base for the corporate and business world in India.

Introduction

‘A stitch in time saves nine.’

This procrastination is the perfect statement for this research paper to drive you on the ideal start of this comparative analysis for explaining the development in corporate structure from Companies Act, 1956 to the recently amended Companies Act, 2013.

The loopholes in the 1956 Act,

• when it comes to corporate structure and their governance.
• Safety and security of investors while there is much competition in the nation as well as internationally.

There was a chain of reactions while the functioning of the Act, 1956 which occurred altogether at that time and all its reason lies on the fact that we had weak corporate security, poor organizational structure and pressure from an external competition which led step by step towards adopting the Companies Act, 2013.

A landmark case which all the way showed us the face of poor corporate social responsibility and corporate governance in India that was the loophole case or can say the ‘Satyam Scam[1]’ This case created the paradigm of the 1956 act and were the drawback of corporate structure and a disaster to the corporate environment, including the investor in India.

They arose leaks to the corporate sector of our nation, which included:

• Unethical conduct
• Insider trading
• Fraudulent accounting

Hence, this paper focuses on whether the amendments made by Companies Act, 2013 what all provisions amended, whether it will fulfil the loopholes created by Companies Act, 1956 and to what extent can it be reliable in enacting this Act for companies, investors and shareholders.

Objectives of the study:

• To find out the reasons for the amendment of Companies Act, 2013
• To give a comparative analysis to both the 1956 and Companies Act 2013.
• Whether the Companies Act 2013 will be a bane or boon in creating a corporate structure for the company, in investments for investors and stakeholders.

Importance of the study:

• To understand the need for Amendment of the Companies Act, 2013
• It will activate as a spoon-feed for the researchers to understand the basics and requirements to maintain a proper corporate balance by keeping corporate social responsibility, appropriate corporate governance.

This research work is limited to rules and sections of Companies Act, 2013 which deals with the:

• Incorporation of the company,
• Responsibilities and duties of promoters, auditors and share/debt holders,
• Re-structuring and dissolution of Companies Act.

Comparative Analysis:

This analysis will be  in a relative format where we will see what all additions or amendments are made by the legislation in Companies Act, 2013 while keeping in mind the drawbacks of 1956 Companies Act:

1. Composition and Definition

Companies Act,1956, was enacted on 1^st April 1956 by the parliament, where it made into 13 parts of 658 sections, including 15 schedules. Later in the 2013 amendment was made where 29 chapters with 470 articles, including seven programs, were made. There were some definitions which considered to modified in the 2013 amendment:

1. the term listed company then included on the stock exchange[2]
2. body corporate[3] was also included as a definition that was undermined before by the 1956 law.
3. Definition of employee stock option[4] now covers directors, employees, and officers of the subsidiary
4. Officer in default[5] was also modified and added merchant bankers in it

Companies Act, 2013 included some definitions which were undermined by the act 1956:

1. Associate company
2. Independent director
3. Small company
4. Promoter
5. Related party
6. GDR
7. Key Managerial

2. Changes in Incorporation of entity:

There were amendments made in:

1. One-person company[6] which was not included in the 1956 act, after which it made it easy for the sole-entrepreneurs to do business and make terms based on section Companies Act, 2013 in this no more approval as required for making a one-person company or a private company from public co.
2. MOA to be given importance as much as the constitution of Companies Act, 2013 and all objects mentioned should not be bifurcated by anyone, and if done, it would lead to penalizing that person.
3. ROC was brought in the time of strike off of the name of the company if incorporated with wrong information.
4. The person knowingly forges or give incorrect information then also he will be penalized under the amended Act of 2013.
5. IPO and FPO called by a prospectus in which the amount of the prospectus raised can not be used in buying the equity share of different companies.
6. Private placements introduced for public limited to QIBs
7. Person fraud making someone buy the shares will also be punished under act[7]
8. In the Act of 1956 raising funds through the shelf, the prospectus was limited to public financials, scheduled banks but in Companies Act 2013 they asked the govt to create a list for companies who can raise fund through shelf prospectus[8]

Penalties:

Person misleading the prospectus who is authorized to issue it shall be criminally liable for it.

3. Shares and debentures

1. Covered all types of stock and debentures out of somewhere missed in the Act of 1956 which brought changes in the voting rights and dividends
2. Preference shareholders are given the right to give votes if the profit to be paid to them turn to be an arrear for more than 2 yr.
3. Private companies can also now issue shares which were before limited to a public company
4. Before discounts were on every stock, but after the 2013 amendment, it limited to sweat equity shares.

4. Acceptance of deposits

1. RBI will issue rules which are required to be followed compulsorily by NBFC, which were not before a part of the Act.
2. Shareholder’s approval also required for accepting deposits from members.

5. Charges

Companies Act 2013 includes all kinds of expenses, whether in or out of the nation; it includes assets, property, again, which was undermined. Due to the cases evolved after the enactment, this amendment made.

6. Directors and teams

1. A whole-time director, MD, manager, CEO, CS included in a board
2. The total number of directors which was 12 before got increases to 15 in the amendment
3. More than 15 directors can also be appointed only after the special resolution passed by the shareholders
4. Even prescribed number also stated for removal which  before ignored in the 1956 act

7. Duties to director

Directors are required to give a proper act of

1. Trust and good faith feel
2. Work to be done under due diligence
3. To not assign another person without appropriate resolution is made
4. To not get involved in controversies which hamper the company’s reputation

8. New provisions in conducting board meetings:

1. The notice required to send before seven days of meeting
2. It should submit through any means
3. The video conference was a new feature included in the provisions
4. Meeting to be conducted in 4 weeks and no interval to be made exceeding 120 days for two meeting

9. Re-structuring

1. Reduction of capital must require two things there should not be any areas for a deposit, and there should be the conformity of having a good standard in the market
2. Fast track merger  introduced which required RBI approvals
3. Cross mergers were also allowed. While making any arrangement or compromise, prior notice is expected to send to a government body, income tax debt, competition commission of India. It is mandatory for calling the meeting before making arrangements and about 3/4^th creditor is required to be present.
4. Treasury stock abolished
5. The sick company also introduced in which there any of or all type of the company can be the ill company it’s they have to mention that they have 50 cents of net worth lost
6. And what company not in a position to will before 30 days given by the creditors and they will be considered to be sick

10. Audit and Dividends

1. All listed companies shall not appoint any individual auditor for more than 1 to 5 consecutive years and reappoint any auditor. It is required to fulfil that 5-year course no one can skip that rule if it has done, it will be considered void.
2. Any auditor will be bound not to provide fortunately or, unfortunately, the internal audit, advisory to investment banking or institute, any actuarial services, bookkeeping audit sources, which is the most confidential part.
3. The dividend will be paid to the employee, keeping in mind that these are their rights. Still, it should be given keeping in mind that those dividends not provided from the reserves or the free reserve of the company as the reserves are the companies right. That cant is taken out from the company’s reserve for any personal use. it was the essential amendment made so that any misuse of reserves cannot entertain

Suggestion

This Companies Act, 2013, has turned the table in a good sense of faith. It has brought back the situation under control corporate governance from government control, which made dealing easy with the law and made a steady decision-making process.

Improvement in liquidity has maintained confidentiality, and supports internal transparency among the company’s and 10 points, as mentioned above, has made it clear with the fact that the amendment made has stood up with the requirements. That was basically to create a thin layer of good faith and has turned to be a bane and not a boon, according to the above-mentioned comparative analysis.

Conclusion

Hence, on a concluding note, I would say that this article had a focus on giving an overview of how the Act enacted in 1956 was criticized and under which reasons they were unexpected. After reading the circumstances mentioned above, it’s evident in it that the Act required more flexibility and should not be rigid, as in the Act of 2013. They gave us a detailed study of the Companies Act, 2013, were they modified some of the provisions and also amended some.

Therefore, every branch of law represents their sector without the interference of any other body in it. So company law, 2013, was a much-needed step to be taken by the government to give a broader view to the corporate sector in India, which was on the scale of losing its position slowly after the 2009 scam.

The Companies Act 2013 had welcomed many additional provisions that undermined beforehand, and later. It drafted and presented correctly before the table here. I am talking about the mergers and acquisition factor, which introduced us to cross border mechanisms, which led to have an international phase and face and to create history.

Hence the paradigm complete conceptual shift from Companies Act, 1956, was required as it was biased with the top-level management later on a balanced environment was created by the Companies Act, 2013.

By -Shrey Singh

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[1] https://www.sebi.gov.in/sebi_data/attachdocs/may-2018/1526621992592

[2] 2(52) of Companies Act, 2013

[3] 2(11) of Companies Act, 2013

[4] 2(37) of Companies Act,2013

[5] 2(60) of Companies Act, 2013

[6] 2(62) of companies Act 2013

[7] 470 of companies Act 2013

[8] 31 of companies Act 2013

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1. Issue of Prospectus by the Company(Opens in a new browser tab)
2. Introduction to Company Law