Companies Act Part 1

WELCOME TO

THE INDIAN COMPANIES ACT 1956

DEFINITIONS (i) "company" means a company formed and registered under this Act or an existing company as defined in clause (ii); (ii) "existing company" means a company formed and registered under any of the companies laws that have been in force from time to time.

DEFINITIONS • (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,• (a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty not including• persons who are in the employment of the company, and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

Definitions (iv) "public company" means a company which(a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

Joint Stock Companies These Private and Public Limited Companies are also know as “joint stock companies”. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal.

Joint Stock Company What this means is that, the company “is different” from the investors. The investors put in money and capital is raised. But the company is treated as a virtual person. The company is treated as a person who is different from it’s investors. The company has an identity of it’s own. If some one sues the company, he does not sue the investors, he sues the virtual person that is the company

Features of a Company Legal formation: No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company can come into existence only when it has been registered after completion of all the legal formalities required by the Indian Companies Act, 1956

Features of a Company Artificial person: Just like an individual takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as it’s birth, existence and death are regulated by law.

Features of a Company Separate legal entity: Being an artificial person, a joint stock company is independent of it’s investors. This means that a joint stock company can own property, enter into contracts and conduct any lawful business in it’s “own” name. It can sue and can be sued by others in

the court of law. ] The shareholders are “not” the owners of the property owned by the company. Also, the shareholders cannot be held responsible for any of the acts of the company.

Features of a Company Common seal: A joint stock company has a “seal”, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, becomes binding on the company

Features of a Company Perpetual existence: A joint stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of it’s investors [For example, in case of a private limited company having four members, if all of them die in an accident, the company will “not” be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the members]

Features of a Company Limited liability: In a joint stock company, the liability of a member is limited to the amount he has invested. • While repaying debts, for example, if a person has invested only Rs.10,000 then only this amount that he has invested can be used for the payment of debts. That is, even if there is liquidation of the company, the personal property of the investor can not be used to pay the debts and he will lose his investment worth Rs.10,000.

Features of a Company • Democratic management: Joint stock companies have democratic management and control. Since in joint stock companies there are thousands and thousands of investors, all of them cannot participate in the affairs of management of the company. Normally, the investors elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company.

Special characteristics of Public Limited Companies • A minimum of seven members are required to form a public limited company. • It must have minimum paid-up capital of Rs 5 lakhs. • There is no restriction on maximum number of members. • The shares allotted to the members are freely transferable. • These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits. • These companies are required to write either ‘public limited’ or ‘limited’ after their names. [Examples: Hyundai Motors India Limited, Jhandu PharmaceuticalsLimited, etc.]

“Holding Company" and “Subsidiary" • A company shall be deemed to be a subsidiary of another if, but only if,(a) that other controls the composition of its Board of directors; or (b) where the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital; or (c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary.

Illustration Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above; and so on.

End of Part 1

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