UNNI IIM-CIntroduction to Corporate LawBhawani Nandan PrasadSMP – IIM CalcuttaMBA – Stratford UniversityB.E. IT
UNNI IIM-CCompany Law.. A company as an entity has several distinct features whichtogether make it a unique organization.The following are the important features of a company :-1. Separate Legal Entity: Once incorporated a company becomes a separate legal entity ascompared to its members. Under the eyes of Law, the company is different and distinctfrom its members. It has its own name and its own seal, its assets and liabilities areseparate and distinct from those of its members. The company can own property, incur debt, borrow money, havea bank account, give jobs to people, enter into contracts and sueand get sued separately
Company Law..2. Limited Liability The liability of the members of the company is limited tocontribution to the assets of the company upto the face value ofshares held by him. A member is liable to pay only the uncalled money due on sharesheld by him when called upon to pay and nothing more, even ifliabilities of the company far exceeds its assets.3. Perpetual Succession:A company does not die or cease to exist unless it is specificallywound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to timebut that does not affect life of the company. Death or insolvency of member does not affect the existence of thecompany
UNNI IIM-CCompany Law..4. Separate Property: A company is a distinct legal entity and the company’s propertyis its own. A member cannot claim to be owner of the companys propertyduring the existence of the company.5. Transferability of Shares:Shares in a company are freely transferable, subject to certainconditions, Thus no share-holder is permanently affiliated to a company. When a member transfers his shares to another person, thetransferee steps into the shoes of the transferor and acquires allthe rights of the transferor in respect of those shares.
UNNI IIM-CCompany Law..6. Common Seal As the company is an artificial person it does not have a physicalpresence As a result of this it acts through its Board of Directors forcarrying out its activities and entering into various agreements. In such cases the contracts must be under the seal of the company. In simple words the common seal is the official signature of thecompany. The name of the company must be engraved on the common seal.
UNNI IIM-CCompany Law..7. Capacity to sue and being sued A company can sue or be sued in its own name as distinctfrom its members8) Separate Management:A company is administered and managed by its managerialpersonnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in thecompany and may not necessarily be managing thecompany.
UNNI IIM-CCompany Law..Distinction between Company and Partnership Partnership firm is sum total of persons who have cometogether to share the profits of the business carried on bythem or any of them. It does not have a separate legal entity. A Company is association of persons who have cometogether for a specific purpose. The company has a separate legal entity as soon as it isincorporated under law. Liability of the partners is unlimited. However, the liability of shareholders of a limited companyis limited to the extent of unpaid share or to the tune of theunpaid amount guaranteed by the shareholder.
UNNI IIM-CCompany Law.. The property of the firm is owned by the partners and they arecollectively entitled to it. In case of a company, the property is owned by the company and notits members. A partner cannot transfer his stake in the partnership firm unless allother partners agree In case of a company, shares may be transferred without thepermission of the other members, in absence of provision to contraryin articles of association of the company. In case of partnership, the number of members must not exceed 10 incase of banking business and 20 in other businesses. A Public company may have as many members as it desires subjectto a minimum of 7 members. Whereas a Private company cannot have more than 50 members.
UNNI IIM-CCompany Law …. There must be at least 2 members in order to form apartnership firm. The minimum number of members necessary for a publiclimited company is seven and two for a private limitedcompany. In case of a partnership, unanimity is needed for any decisionwhereas in the case of a company decision approved by themajority prevails. On the death of any partner, the partnership is dissolved unlessthere is provision to the contrary. On the death of the shareholder the company existence doesnot get terminated.
Company Law Under the Companies Act-1956, not more than 10 persons can cometogether for carrying on any banking business and not more than 20persons can come together for carrying on any other of business,unless the association is registered under the Companies Act or anyother Indian law (Sec 11) Any association which does not comply with the above norms is anillegal association. Therefore, a partnership of more 10 or 20 members, as the case maybe, is an illegal association unless the registered under theCompanies Act or any other Indian law. An illegal association is not recognised by law. An illegal association cannot enter into any contract, cannot sue anymembers or any outsider, cannot be sued by any members oroutsiders for any of its debts. The members of the illegal association are personally for theobligations of the illegal association
UNNI IIM-CCompany LawTypes of Companies A company can be a public or a private company and could havelimited or unlimited liability. A company can be limited by shares or by guarantee. In the former, the personal liability of members is limited to theamount unpaid on their shares while in the latter, the personalliability is limited by a pre-decided nominated amount. For a company with unlimited liability, the liability of its members isunlimited. The most prevalent form of large business enterprises is a companyincorporated with limited liability. Companies limited by guarantee and unlimited companies arerelatively uncommon
UNNI IIM-CCompany Law According to the Act a private company shouldhave a minimum paid up capital of Rs. 1 lakh orany higher amount prescribed. The Act also provides that a private limitedcompany shall by its articles1. restrict the right of transfer of shares2. limit the number of its members to 50,3. prohibit any invitation to the public to subscribe forany shares in or debentures of the company and4. prohibit any acceptance of deposits from personswho are not its directors, members or theirrelatives It should have a minimum of 2 directors
UNNI IIM-CCompany Law According to the Act a public companyshould have a minimum paid up capitalof Rs. 5 lakhs or any higher amountprescribed It should have a minimum of 7 members There is no limit on the number ofmembers it can have It should have a minimum of 3 directors
UNNI IIM-CCompany LawSection 25 Companies: Under the law the name of a public limited company must endwith the word Limited and the name of a private limitedcompany must end with the word Private Limited But there is an exception given under Section 25, according tothis the Central Government may allow companies to removethe word "Limited / Private Limited" from the name if thefollowing conditions are satisfiedi. The company is formed for promoting commerce, science, art,religion, charity or other socially useful objectsii. The company does not intend to pay dividend to its members butapply its profits and other income in promotion of its objects
UNNI IIM-CCompany LawForeign Company Means a company incorporated in a country outside India under thelaw of that other country and has established the place of business inIndia.Holding and Subsidiary Companies A company shall be deemed to be subsidiary of another company ifi. That other company controls the composition of its board ofdirectors ; orii. That other company holds more than half in face value of its equityshare capitaliii. If Company Y is subsidiary of the Company X and Company Z issubsidiary of Company Y, then Company Z will be considered as asubsidiary of Company X.
UNNI IIM-CCompany Law The control of the composition of the Board of Directors of thecompany means that the holding company has the power at itsdiscretion to appoint or remove all or majority of directors of thesubsidiary company without consent or concurrence of any otherperson.Government Companies Any company in which not less than 51% of the paid up sharecapital is held by the Central Government or any State Governmentor partly by the Central Government and partly by the one or moreState Governments and includes a company which is a subsidiaryof a government company. Government Companies are also governed by the provisions of theCompanies Act.
UNNI IIM-CCompany Law However, the Central Government may direct that certainprovisions of the Companies Act shall not apply or shall apply onlywith such exceptions, modifications and adaptations as may bespecified to such government companies.Producer Companies The Companies (Amendment) Act 2002, has brought in the conceptof producer companies This is a hybrid of a cooperative society and a private limitedcompany The new type is termed as ‘Producer Company’, to indicate thatonly certain categories of persons can participate in the ownershipof such companies.
UNNI IIM-CCompany Law The members have necessarily to be ‘primary producers,’ i.e.,persons engaged in an activity connected with, or related to,primary produce of agriculture including animal husbandry,horticulture, floriculture The companies shall be termed as limited and the liability of themembers will be limited to the amount, if any, unpaid on theshares. On registration, the producer company shall become as if it is aprivate limited company with the significant difference that aminimum of two persons cannot get them registered (10 producermembers needed) The provision relating to a minimum paid-up capital of Rs. 1 lakhwill not apply and the maximum number of members can alsoexceed 50
UNNI IIM-CCompany LawDeemed Public Companies Initially the Indian Companies Act, 1956 used to definecompanies as “Public Companies” or “Private companies.” However in 1960 a third category “Deemed PublicCompany” was created by virtue of Section 43-AAccording to Section 43-A a private company shall become adeemed public company1. Where at least 25% of the paid up share capital of a privatecompany is held by one or more bodies corporate, theprivate company shall automatically become the publiccompany on and from the date on which the aforesaidpercentage is so held.
UNNI IIM-CCompany Law2. Where the annual average turnover of the private companyduring the period of three consecutive financial years is notless than Rs 25 crores, then it shall become a deemed publiccompany3. Where not less than 25% of the paid up capital of a privatecompany limited is held by the public company, then it shallbecome a deemed public company4. Where a private company accepts deposits after the invitationis made by advertisement or renews deposits from the public However by the 2000 amendment, the provisions relating todeemed Public Company were effectively withdrawn. Thus section 43-A has been made inoperative except subsection 2A.
UNNI IIM-CCompany Law 2A is merely a procedural sub-section, requiring a existingdeemed public company, which has become a private companyby virtue of the amended provision to inform to the Registrar ofCompanies and do the other formalities In simple words it means that after the 2000 amendment aprivate company will not automatically become a publiccompany on account of its shareholding or turn over However acceptance of deposits from the public shall still makea private company public and this has been laid down under Sec3(1)(iii)
UNNI IIM-CCompany LawDisadvantages of Incorporation It involves lot of formalities and expenses, various returns anddocuments have to be filed with the Registrar of Companies(ROC)/other authorities etc It involves loss of privacy as many of the returns, resolutionswhich will be filed with ROC is open to public scrutiny Members of a company cannot have effective control over itsworking as in partnership or proprietary business The law provides for a detailed winding up procedure which isvery cumbersome and expensive compared to otherorganisations like firms
UNNI IIM-CCompany Law.. A company has greater public accountability and thus itcannot go against public interest Few people with business background or with enterprisingcharacter can effectively control the entire business withdisproportionately low per centage of financial stake,Satyam was controlled by the Raju family with about 3 %stake Since the control of the company is in the hands of fewprofessionals there is always a chance of defrauding theshareholders and creditors
UNNI IIM-CCompany LawBody Corporate Body corporate means an association of persons formed under somestatute which has perpetual succession, common seal and having alegal entity different from the members constituting it The expression body corporate is wider than the word company This includes all public financial institutions like IFCI,UTI, LIC,NABARD etc, companies incorporated outside the country etc,however it does not include a co-operative societyLifting the Corporate Veil Piercing the corporate veil describes a legal decision to treat therights or duties of a corporation as the rights or liabilities of itsshareholders or directors.
UNNI IIM-CCompany Law Usually a company is treated as a separate legal person,which is solely responsible for the debts it incurs and thesole beneficiary of the credit it is owed. Common law countries (countries like India, U.K.,Australia, Canada, USA) usually uphold this principle ofseparate personhood, but in exceptional situations may"pierce" or "lift" the corporate veil. The logic behind this is probably that the law will not allowthe corporate form to be misused just to defraud the generalpublic. If the court feels that there are certain circumstances inwhich the corporate personality is being misused it will liftthe corporate veil and expose the true character and nature
Company Law..Following are the Circumstances in which Court may lift the corporateveil Reduction of membership- if at any time the number of members ofcompany is reduced below the statutory minimum and the companycaries on business for more than 6 months with the reduced number,then every person who carries on business after the 6 months shall beindividually liable for the debts of the company (Sec 45) A holding company is required to disclose to its members theaccounts of its subsidiaries (Sec 212) If any investigation is going on for allegations pertaining tomismanagement then such inspector appointed for that purpose mayalso investigate into the affairs of another company belonging to thesame management/group (Sec 239)
UNNI IIM-CCompany Law… Fraud-The courts will generally lift the corporate veil when itfeels that fraud could be perpetrated behind the veilCase law: Gilford motor company ltd v. Horne In this case Mr. Horne was employed with The Gilford motorcompany and his employment contract provided that he couldnot solicit the customers of the company. To get over this limitation he incorporated a limited companyin his wifes name and solicited the customers of the company. The company brought an action against him and the Courtfound that "the company was formed as a device/stratagem, inorder to mask the effective carrying on of business of Mr.Horne"
UNNI IIM-CCompany Law…Group Companies Sometimes in the case of group of enterprises the principle ofseparate legal entity may not be adhered to and the court may lift theveil in order to look at the economic realities of the groupEnemy character In times of war the court shall lift the corporate veil to determine thenature of shareholding as it did in the Daimler case where Germanshareholders held the shares of an English company during the timeof world war 1.Tax Tax legislations may provide for lifting of the corporate veil. The courts are prepared to disregard the separate legal personality ofcompanies in case of tax evasions or liberal schemes of taxavoidance without any necessary legislative authority.
UNNI IIM-CCompany LawConversion of Private Company into Public company Conversion by default: when a private company makes a default incomplying with the statutory requirements it will become a publiccompany automatically Conversion by Choice : A private company may become a publiccompany by its own choice by taking the following measures1. Private company which wants to convert into a public company hasto pass a special resolution so as to delete from its articles theprovisions relating to private companies2. If the number of members is less than seven it must be increased toseven3. If the number of directors is less than three the number should beincreased to three
UNNI IIM-CCompany Law…4. If the paid up capital is less than Rs 5 lakhs it should be raised tothe said amount5. Within 30 days from the special resolution a prospectus orstatement in lieu of prospectus shall be filed with the RegistrarConversion of Public Company into a Private Company1. Public company which wants to convert into a private companyhas to pass a special resolution so as to add in its articles theprovisions relating to private companies2. Changing the name by adding the word private3. Any change in the articles of a company which has the effect ofconverting a public company into a private company shall takeeffect only if it is approved by the Central Government
UNNI IIM-CCompany LawPromotion of Companies It covers the entire process by which a company is brought intoexistence. It commences with the conceptualization of the birth a companyand determination of the purpose for which it is to be formed. The persons who conceive the company and bring the initialfunds are known as the promoters of the company. The promoters enter into preliminary agreements with vendorsand take steps for the preparation, advertisement and thecirculation of prospectus and placement of capital. However, a person who merely acts in his professional capacityon behalf of the promoter and who is paid by the promoter is nota promoter
UNNI IIM-CCompany LawThe promoters have certain basic duties towards the company formed He must not make any secret profit out of the promotion of thecompany. He must make full disclosure to the company of all relevant factsincluding to any profit made by him in transaction with the company.Promoters may be compensated by the company for his/her efforts in thefollowing ways The company may to pay some remuneration for the servicesrendered. The promoter may make profits on transactions entered by him withthe company after making full disclosure to the company and itsmembers. The promoter may be given commission on shares sold and he maybe given an option to buy further shares in the company.
UNNI IIM-CCompany LawIncorporation by Registration The promoters have to decide on the type of company which theywant to form i.e a public company or a private company or anunlimited company, etc Thereafter they have to prepare the documents for incorporation ofthe company. In this connection the Memorandum of Association and Articles ofAssociation (MoA & AoA) are crucial documents to be prepared.Memorandum of Association of a company : It is widely regarded as the constitution or charter of thecompany and contains the powers of the company. No company can be registered under the Companies Act, 1956without the Memorandum of Association.
UNNI IIM-CCompany LawContents of Memorandum1. Name clause The name of the company has to be mentioned in the name clause. A public limited company must end with the word Limited and aprivate limited company must end with the words Private Limited. The company cannot have a name which in the opinion of theCentral Government is undesirable. A name which is identical with or the nearly resembles the name ofanother company in existence will not be allowed. A company cannot use a name which is prohibited under the Namesand Emblems (Prevention of Misuse Act, 1950 or use a namesuggestive of connection to government or State patronage.
UNNI IIM-CCompany Law…2. Domicile clause The state in which the registered office of company is to besituated has to be mentioned here. Any change in the registered office must also be intimatedto the Registrar of Companies within 30 days. The registered office of the company is the official addressof the company where the statutory books and records mustbe normally be kept. Every company must affix or paint its name and address ofits registered office on the outside of the every office orplace at which its activities are carried on in.
UNNI IIM-CCompany Law3. Objects clause This clause is the most important clause of the company as itspecifies what all activities the company can do and what allit cannot do The company cannot carry on any activity which is notauthorised by its MoA. This clause must specify :-Main objects of the company to bepursued by the company on its incorporation Objects incidental or ancillary to the attainment of the mainobjects Other objects of the company not included in (i) and (ii)above.
UNNI IIM-CCompany Law4. Capital clause The amount of share capital with which the company is tobe registered divided into shares must be specified givingdetails of the number of shares and types of shares. A company cannot issue share capital greater than themaximum amount of share capital mentioned in this clausewithout altering the memorandum5) Association clause A declaration by the persons for subscribing to theMemorandum that they desire to form into a company andagree to take the shares place against their respective namemust be given by the promoters
Company Law6. Liability clause A declaration that the liability of the members is limited in case ofthe company limited by the shares or guarantee must be given. A declaration that the liability of the members is unlimited in case ofthe unlimited companies must be given. The effect of this clause is that in a company limited by shares, nomember can be called upon to pay more than the uncalled amount onhis shares. If his/her shares are already fully paid up, he has no liability towardsthe company.
UNNI IIM-CCompany LawThe following are exceptions to the rule of limited liability If a member agrees in writing to be bound by the alteration of MoAincreasing his liability, he shall be liable up to the amount agreed toby him. If every member agrees in writing to re-register the company as anunlimited company and the company is re-registered as such, suchmembers will have unlimited liability. If to the knowledge of a member, the number of shareholders hasfallen below the legal minimum, and the company has carried onbusiness for more than 6 months, then members constituting thecompany would be personally liable for the debts of the companycontracted during that time.
UNNI IIM-CDoctrine of Ultra Vires Any transaction which is outside the scope of the powers specified inthe objects clause of the MoA and are not reasonable incidentally ornecessary to the attainment of objects is ultra-vires the company andtherefore void. No rights and liabilities on the part of the company arise out of suchtransactions and it is a nullity even if every member agrees to itConsequences of an ultravires transaction The company cannot sue any person for enforcement of any of itsrights. No person can sue the company for enforcement of its rights. The directors of the company may be held personally liable tooutsiders for an ultra vires act
Company LawAlteration of MoA Alteration of MoA is permitted under certain circumstances byfollowing the express provisions For example section 21 provides that the name of a company can bechanged by passing a special resolution along with approval by thecentral government Similarly change of its registered office is also permitted If the new office is located in the same city/town then it can be doneby passing a resolution at the Director Board meeting If the new office is in a different city in the same state then a specialresolution has to be passed by the company along with confirmationfrom the Regional Director of the Registrar of Companies If the new office is in a city in a different state then a specialresolution has to be passed by the company along with confirmationfrom the Central Government is needed.
UNNI IIM-CCompany Law Similarly the object clause in the MoA can also beamended by passing a special resolution on the followinggrounds (Sec 17)1. To carry on business more economically and efficiently2. To attain its main purpose by new or improved means3. Enlarge or change the local area of operations4. To carry on some business which may conveniently becombined with the business of a company5. To restrict or abandon any of the objects specified in MoA6. To sell or dispose whole or any part of undertaking of thecompany7. To amalgamate with any other company
UNNI IIM-CCompany Law The object clause can be altered by the company itself by passing aspecial resolution however the grounds cannot be different fromthose mentioned earlier With regard to alteration of liability clause, the liability of a memberof a company cannot be increased unless the member agrees inwriting Alteration of Capital Clause : According to Sec 94, subject to theauthorisation under the AoA, a company can increase the authorisedcapital by passing an ordinary resolution at the general meeting. It can also consolidate and divide all or any of its share capital intoshares of larger amount than its existing ones
UNNI IIM-CCompany LawArticles of Association The Articles of Association (AoA) contain the rules andregulations of the internal management of the company. It is essentially a contract between the company and its membersand also between the members themselves that they shall abideby the rules and regulations of internal management of thecompany specified in the AoA. It clearly specifies the rights and duties of the members anddirectors. The provisions of the AoA must not conflict with the provisionsof the MoA However if there is any conflict then MoA will prevail.
UNNI IIM-CCompany LawThe important aspects dealt under AoA include :- Powers, duties, rights and liabilities of members Powers, duties, rights and liabilities of Directors Voting powers of members, etc Rules for Meetings of the Company Borrowing powers of the company Dividends Calls on shares Transfer of shares Forfeiture of shares
UNNI IIM-CCompany LawAlteration of Articles of Association : A company can alter any of the provisions of its AoA, subject toprovisions of the Companies Act and subject to the conditionscontained in the MoA of the company (Sec 31). A company, by special resolution at a general meeting of members,alter its articles provided that such alteration does not have theeffect of converting a public limited company into a privatecompany unless it has been approved by the Central Government.Doctrine of Constructive Notice & Indoor Management Both memorandum of association and the articles of association arepublic documents and any person may inspect them
UNNI IIM-CCompany Law As a consequence, the knowledge about the contents of thememorandum and articles of a company is not necessarily restrictedto the members of the company alone Once these documents are registered with the registrar of companies,these become public documents and are accessible by any membersof the public by paying the requisite fees Thus information about the contents of memorandum and articles issaid to be within the knowledge of both members and non-membersof the company. Thus every person dealing with the company is presumed to haveread and understood the contents of the registered documents of thecompany.
UNNI IIM-CCompany Law This is known as the rule of constructive notice. Thus the doctrine or rule of constructive notice is a presumptionoperating in favour of the company against the outsider. It prevents the outsider from alleging that he did not know that theconstitution of the company rendered a particular act or a particulardelegation of authority ultra vires. The doctrine of indoor management is an exception to the rule ofconstructive notice. It imposes an important limitation on the doctrine of constructivenotice. According to this doctrine “persons dealing with the company areentitled to presume that internal requirements prescribed inmemorandum and articles have been properly observed
UNNI IIM-CCompany Law The doctrine of indoor management is also known as theTURQUAND rule after Royal British Bank v. Turquand. Here the directors of a company issued a bond to Turquand. The directors had the power under the articles to issue suchbond provided they were authorized by a resolution passed bythe shareholders at a general meeting of the company. But no such resolution was passed by the company. When the case was filed by Turquand, it was held thatTurquand could recover the amount of the bond from thecompany on the ground that he was entitled to assume that theresolution was passed.
UNNI IIM-CCompany Law The rule is based on public convenience and is based on the logicthat the internal procedure is not a matter of public knowledge. Even though an outsider is presumed to know the constitution of acompany, he may not know what might have taken place within thedoors that are closed to him. Thus persons dealing with a company having satisfied themselvesthat the proposed transaction is not in its nature inconsistent with thememorandum and articles, are not bound to inquire the regularity ofany internal proceeding.The exceptions to the doctrine of indoor management are as under Knowledge of irregularity Utmost negligence Forgery by the party who wants to rely upon this doctrine
Company LawRegistration of the Company Once the documents have been prepared, vetted, stamped and signed,they must be filed with the Registrar of Companies (ROC) forincorporating the Company.The following are some of the important documents filed at the time ofregistration The MoA & AoA A statutory declaration by an advocate/company secretary/ CharteredAccountant/ by a person who is named as a director that therequirements of the Companies Act have been complied with inrespect of the registration of the companyCertificate of Incorporation Once all the above documents have been filed the ROC will issueCertificate of Incorporation of the Company.
UNNI IIM-CCompany Law In a way this is the birth certificate of the company and is proof ofthe existence of the company. Once, this certificate is issued, the company cannot cease itsexistence unless it is dissolved by order of the Court which is knownas winding up.Commencement of Business A private company or a company having no share capital cancommence its business immediately after it has been incorporated. However, other companies can commence their activities only afterthey have obtained Certificate of Commencement of Business. For this purpose, the certain additional formalities have to becomplied with
UNNI IIM-CCompany LawTypes of shares : Shares in the company may be similar i.e they may carry the samerights and liabilities and confer on their holders the same rights,liabilities and duties. There are two types of shares under Indian Company Law Equity shares means that part of the share capital of the companywhich are not preference shares. Preference Shares means shares that carry preferential rights inrespect of Dividend at fixed amount or at fixed rate and it alsocarries preferential right in regard to payment of capital on windingup. In other words, preference share capital has priority both inrepayment of dividend as well as capital.
UNNI IIM-CCompany LawEquity Shares Equity shares are divided into two, a) with voting rights and b) withdifferential rights as to dividend, voting Equity shares with differential rights were introduced by the 2000amendment Now companies upon satisfying certain conditions can issue equityshares with differential rights including non voting shares up to 25%of the total issued share capital Issue of such shares has to be approved by the shareholder’sresolution in a general meeting The company issuing such shares should have distributable profits inthe three financial years preceding such issue
UNNI IIM-CCompany LawCorporate Governance Corporate governance deals with therights and responsibilities of a companysmanagement, shareholders and variousstakeholders Another simple definition is "the ways inwhich suppliers of finance to thecorporation assure themselves return ontheir investment."
UNNI IIM-CCompany Law In an open market, investors choose from a variety of investmentvehicles. The existence of a corporate-governance system is likely a part ofthis decision-making process. In such a scenario, firms that are "more open and transparent," andthus well governed, are more likely to raise capital successfullybecause investors will have "the information and confidencenecessary for them to lend funds directly" to such firms. Moreover, well-governed firms are likely to get capital morecheaply than firms that have poor corporate-governance practices
UNNI IIM-CCompany Law When India attained independence from British rule in 1947,it stillpossessed sophisticated laws regarding "listing, trading, andsettlements” and 4 fully operational stock exchanges During the period from 1950-90 the corporate-governanceframework was totally absent Boards of directors invariably were staffed by friends or relatives ofmanagement, and abuses by dominant shareholders and managementwere commonplace The year 1992 was a defining moment in Indias corporate-governance history, That year the Indian Parliament created the Securities and ExchangeBoard of India ("SEBI") to "protect the interests of investors insecurities and to promote the development of and to regulate thesecurities market."
UNNI IIM-CCompany Law In the years leading up to 2000, as Indian enterprises turned to thestock market for capital, it became important to ensure goodcorporate governance industry-wide. Additionally, a plethora of scams rocked the Indian business scene,and corporate governance emerged as a solution to the problem ofunscrupulous corporate behaviour In 1998, the Confederation of Indian Industry ("CII"), unveiledIndias first code of corporate governance. However, since the Codes adoption was voluntary, few firmsembraced it. Soon after, SEBI appointed the Kumarmangalam Birla Committeeto draft a code of corporate governance.
UNNI IIM-CCompany Law In 2000, SEBI accepted the recommendations of the Birla Committeeand introduced Clause 49 into the Listing Agreement of StockExchanges Clause 49 outlines requirements vis-a-vis corporate governance inlisted companies. In 2003, SEBI instituted the N.R. Narayana Murthy Committee toscrutinize Indias corporate-governance framework further and tomake additional recommendations to enhance its effectiveness. SEBI has since incorporated the recommendations of the MurthyCommittee, and the latest revisions to Clause 49 became part of thelisting agreement since January 1, 2006
UNNI IIM-CCompany LawCorporate Governance under theCompanies Act 1956 The Act contains numerous provisions forgovernance of Indian companies Thus the Act calls for holding of periodicmeetings of the director board as well asshareholders to transact the business,discuss policies, plan activities etc
UNNI IIM-CCompany Law The Act prescribes 2 types of meetings, meetings of thedirectors and meetings of the shareholders, The former is known as the Board Meeting and the latter isknown as the General Meeting General Meetings are further classified as statutory meeting,Annual General Meeting (AGM), Extraordinary GeneralMeeting (EGM), class meetings or meetings under direction Company holds class meetings to seek approval of a specificclass of shareholders where the matter under considerationaffects the right of a particular class Similarly EGM are held when some matter needs the urgentapproval of shareholders
UNNI IIM-CCompany LawMatters earmarked for Shareholders The Act vests the ultimate governance in the hands of theshareholders and without their consent the company cannotundertake a number of activities, The following acts require express consent of the shareholders1. Alteration of Memorandum of Association (Sec 17)2. Change in the name of the company (Sec 21)3. Alteration of company’s Articles of Association (Sec 31)4. Buyback of shares (Sec 77A)5. Issue of shares at a discount, issue of sweat equity shares, rights issue(Sections 79 and 81)6. Appointment/removal and remuneration of statutory auditors (Sec224)
UNNI IIM-CCompany Law7. Appointment of managerial personnel and their remuneration (Sec269)8. Authorizing sale of undertaking (Sec 293)9. Intercorporate loans and investments exceeding prescribed limit(Sec 372A)Matters earmarked for Director Board Though the Board is entrusted with the management of the companythey exercise their powers only at the board meeting unless authorityin certain matters is sub-delegated Decisions are taken at the board meeting with the consent of themajority of directors present unless the Act provides otherwise
UNNI IIM-CCompany Law The Act also states that certain matters can only betransacted at the board meeting while some can betransacted by circulation alsoMandatory matters for Director Board to be decided only at themeeting1. Power to make calls on unpaid shares2. Power to issue debentures3. Power to borrow money other than debentures4. Power to invest the funds of the company5. Power to make loans
UNNI IIM-CCompany Law The Act prescribes that the company shall maintain theprescribed registers and records in a proper format The company has to file various returns and forms with theRoC on the occurrence of certain events / transactions These records and filing will help to bring transparency inthe activities of the company as such records filed with theRoC are available for inspection by any member of thepublic on the payment of a prescribed feeCorporate Governance through Listing Agreements Companies whose shares are listed on stock exchanges arelisted on stock exchanges are required to comply withadditional requirements as to disclosure and reporting
UNNI IIM-CCompany Law Such disclosures are made part of the listing agreements entered intobetween the company and stock exchanges Clause 49 of the listing agreement embodies various corporategovernance norms to be followed by listed companies and containsthe following provisions relating to1. Board of Directors It should compose of Executive & non-executive directors with notless than 50% to be non-executive directors For a company with an Executive Chairman, at least 50 per cent ofthe board should comprise independent directors. In the case of a company with a non-executive Chairman, at least33% of the Board should be independent directors (independentdirectors have been defined )
UNNI IIM-CCompany Law• If the non-executive chairman of the company is related to thepromoters/persons occupying management position, then at least50% of the Board should consist of independent directors2. Audit Committee : All members of the audit committee shall be financially literate withone member having accounting/ financial management expertise The term ‘financially literate’ means the ability to read andunderstand basic financial statements like balance sheet, statementof cash flows etc Chairman of the Audit Committee shall be an independent director
UNNI IIM-CCompany Law3. Subsidiary Companies One independent director of holding companyto be on the board of non-listed subsidiarycompany. Audit committee of the holding company shallreview financial statements / investments ofsubsidiary company. Board minutes of subsidiary company shall beplaced for review by the board of holdingcompany
UNNI IIM-CCompany Law4. Disclosures Disclosure of related party transactions Disclosure by senior management of all material financialand commercial transactions, where they have personalinterest Disclosure of accounting standards:. Disclosure on Risk Management Disclosure on proceeds from public issue, rights issue andpreferential allotment Disclosure about remuneration of directors
UNNI IIM-CCompany Law5. Whistle-blower Policy Company to have an internal policy on access to auditcommittee by employees on unethical and improperpractice the policy to be communicated to employees andincluded in the HR manual. company shall affirm that it has not denied anypersonal access to audit committee and has providedprotection to whistle blowers from unfair terminationetc.
UNNI IIM-CCompany LawDirector A company can only act through natural persons ,i.e it canonly act through human beings forming part of the DirectorBoard A Director is an officer of the company A director as per the provisions of the Act is also consideredas an officer in default for the purposes of the offences underthe Act Within the board of directors some directors may enter into acontract of employment with the company and they will becalled working/whole-time/executive directors Managing and whole-time directors fall in this category
UNNI IIM-CCompany Law While some directors just attend the board meetings and they arereferred as non-executive directors Usually the powers of general management are vested with thedirectors acting collectively, but they delegate some or all of thepowers to the executive /whole time directorsLegal Position of Directors The true position of director is that of an agent and he/she does notincur any personal liability in the normal course of their duties Directors are also in the position of trustee of the companyWhole-time Director The term whole-time director is not defined under the Act however itis understood that he is a person who is in whole-time employmentof the company
UNNI IIM-CCompany Law..Liability under Companies Act All the directors could be treated as officer in default only whenthe company does not have a managing director or whole-timedirector and no director is specified by the board on this regard Thus the company may appoint a Managing Director or whole-time director to look after the day to day management of thecompany and in the event of any default they become officers indefault In the case of non-executive directors they cannot be held liablefor any violation because they are not concerned with the day today management of the company
UNNI IIM-CCompany LawWinding Up Winding up is the process by which all the affairs of a companyare shut down To be simple, this process involves the realization of all its assets,paying off all the liabilities and distributing the balance (if any )to its members in proportion to their holdings in the company This entire process is conducted by an administrator called theliquidator A company registered under Companies Act can be closed byway of winding upWinding Up is divided into two a) Compulsory winding up
UNNI IIM-CCompany Lawb) Voluntary winding up which is again sub-divided intomember’s voluntary winding up and creditor’s voluntarywinding upCircumstances for compulsory winding up Company passing a special resolution so as to be wound upby the tribunal, Company failing to deliver the statutory report to theregistrar or failure in holding the statutory meeting Company failing to start its business within a year orsuspends its business for a full year without valid cause Company not having the requisite number of membersprescribed by the Company’s Act,
UNNI IIM-CCompany Law Company’s failure to pay its debts, (debt has been clearly defined) If the tribunal is of the opinion that it is just and equitable to windup the company, Default in filing balance sheets profit and loss account before theregistrar for a continuous period of 5 years, Company acting against the sovereignty and integrity of India,security of state, public order etcVoluntary winding up: It is again sub classified into member’s voluntary winding upand creditor’s voluntary winding up In the former the company is financially solvent whereas in thelatter it is not