Companies Act is an act which is implemented by the Parliament of India regulating the incorporation, dissolution, directors, and many other related aspects of the company.
This act has a long history of implementation and change. The first Companies Act was enacted in 1956 with the recommendation of the Bhabha Committee with the aim to establish corporate law for Independent India. The law was subsequently replaced with the new version of it, known as the Companies Act 2013.
Both of these acts have provided a legal framework for the corporate entities and from time to time with the change in the Indian economy, it has also implemented changes accordingly. At the time when India planned for the economic reforms programme in the year the 1990s, many attempts were made to change the Companies Act 1956 but were subsequently unsuccessful.
This act is divided into 29 Chapters which contains 470 sections. On 29th August 2013, the Companies Act 2013 came into consideration when the President of India accepted it. Section 1 was among the first section which was implemented followed by others. Increasing safeguard against cyber-crime was the major implementation which was done. In the year 2020, Minister of Corporate Affairs, Nirmala Sitharman introduced The Companies Bill 2020.
Companies Act Terms
Some of the basic terms and descriptions that the Companies Act hold are described in brief in the following paragraphs.
Corporate Identification Number (CIN)
Under the Ministry of Corporate Affairs (MCA) a unique number is assigned by the Registrar of Companies which is referred to as the Corporate Identification Number (CIN).
This number consists of 12 digits which have alpha-numeric code, holding unique meaning. This 12 digit number is subdivided into 6 parts indicating Listing Status, Industry Code, Sate Code, Incorporation Year, Ownership Type, and lastly the Registration Number. Any registered company’s information can easily be traced with this unique number. But under three conditions the CIN number can also be changed. Such as-
- Changes in the listing status of the company
- Changes in the registered office location of the company
- And changes in the industry or sector under which the company comes in
This identification number needs to be mentioned under the papers and documents such as Annual Report, Company notice, Invoices and Receipts, Letterheads and any other report or publication with respect to the company.
In case one doesn’t follow the above-mentioned aspect then a penalty of Rs. 1000/ day will be charged. The maximum penalty amount that would be charged will be Rs. 1 Lakhs.
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Director Identification Number (DIN)
This is a unique number that represents & gives an identity to the existing or proposed Director of the company. This concept was introduced by the Companies Amendment Act 2006.
A company is a legal entity formed by the association of people who carries common goals works under the vision of a few prominent people which indirectly gives identity to the company. As to uniquely identify the individual under the Government document purview, DIN is allotted to Directors of the Company.
It is an 8 digit unique number that is allotted by the Central Government and holds lifetime validity. Individuals who hold Designated Partner Identification Number (DPIN) which was obtained by them during the governance of LLP can also use this identity proof in exchange for DIN.
This identity proof can be obtained when the application form (SPICe, DIR-3 Form, and DIR-6 Form) is being filed with the Ministry of Corporate Affairs. The application must be signed with the Digital Signature Certificate (DSC) and after the approval of the documents, DIN will be allotted within 2-3 working days. On the application processing side, the Central Government process Form DIR-3 and rules under Section 154 (Companies Act 2013) and Rule 10 of the Companies Rules 2014 is looked at. In case the application form is rejected then 15 days are given to rectify it.
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Types of Directors Under Companies Act
Directors are responsible for managing, guiding and directing the company at the same time taking care that the objectives of the company are being met. Multiple roles (like a trustee, officer, agent, employee etc) which are being played by the directors during their journey involves a lot of responsibility.
Since any organisation is a big body and can’t be single headedly managed so there are many types of directors who are appointed. The minimum number of directors for Private and Public Limited Company is 2 and 3 respectively. Whereas in case of one Person Company 1 director is needed apart from it any company can have a maximum of 15 directors.
There are 7 major types of directors that any company can have. They are as:
- Residential Director
- Independent Director
- Women Director
- Small Shareholders Directors
- Additional Director
- Nominee Director
- Alternate Director
Since any Director holds a top-most position which grants them holds a lot of responsibilities. Although Directors and Company are two separate entities there are certain situations where Director can be held responsible, such as,
- In the situation of Tax liability
- False Statement mentioned in the Company’s prospectus
- Fraudulent Business Conduct
- Liability to pay for qualification share
- Share application money refund
On the other hand, lifting the corporate veil is one of the concerns. This means that when a person is involved in fraudulent activity cannot be protected under the corporate umbrella. The court has the right to conduct a survey into the matter and bring out the real face behind it.
As stated earlier, out of the various types of directors, one of the focused is the Independent Director.
Under the new Companies Act 2013, a separate criterion has been established for the companies to have an Independent Director.
As to improve the corporate performance of the company a non-executive director is appointed. The director in this role doesn’t have any direct relationship with the company or its working, which opens up opportunities for him/ her to express unbiased features about the company.
Any listed public company can have one-third of the director as the independent Director and unlisted public companies can have at least 2 independent directors (given that, paid-up share capital is Rs. 10 crore or more/ turnover is Rs. 100 crore or more/ aggregate deposits, debentures and the outstanding loan is exceeding Rs. 50 crores)
An Independent director is basically a watchdog or a visionary, who guides the company to further improve performance, credibility and standard practices. For a tenure of 5 years Independent Director is appointed (and cannot serve for more than 2 consecutive terms). If the position of Independent Director is vacant then in the next board meeting it is filled up or within 3 months after the vacancy (whichever is earlier).
The importance of the Board of Directors is such that if due to some urgency Board meeting is planned and any number of Independent directors could not be part of it. In that case, the decision will be circulated to all the companies’ directors and will be passed only when any one of the Independent directors approves it.
As Directors are the professional people acting on behalf of the companies functions. But there are many aspects when directors can be disqualified, some of them are-
- One who is of unsound mind and also declared by a court of law
- One who had failed to get Director Identification Number
- One who is in the process of declaring insolvency and his application is pending
- He has been convicted by a court of any offence (whether or not involving moral turpitude) and has been imprisoned for at least six months. However, if a person has been convicted of any offence and has served a period of seven years or more, he shall not be eligible to be appointed as a director in any company.
- If an order has been passed disqualifying him from being appointed as a director by a court or Tribunal.
- He has not paid any calls with respect to any shares of the company held by him, whether alone or jointly with others, and a period of six months has elapsed from the last day fixed for the payment of the call.
- He has been convicted of offences dealing with related party transactions at any time during the last preceding five years.
In a case when one is disqualified is not eligible to be appointed as the Director of the company for a period of 5 years. Ministry of Corporate Affairs (MCA) has enforced a list on the Government website where the names of the disqualified directors are mentioned.
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Share Capital Under Companies Act
All the companies irrespective of the size, the sector in which they operate has share capital classified into two fundamental categories:
- Authorised Share Capital
- Paid-up Share Capital
Authorised Share Capital is the maximum amount of shares that a company can issue. This maximum number is mentioned in the Memorandum of Association of the Company under the “Capital Clause” heading. This maximum number of shares limit can be increased by carrying out the desired steps. With the growth of the company the number of Authorised shared capital trends to increase.
Whereas Paid-up Capital is the number of shares that are issued to the shareholders. As per the Companies Amendment Act 2015, there is no minimum requirement of paid-up capital, which means even if a company has paid-up capital of Rs. 1000. But taking care of the aspect that Paid-up capital should not be greater than the Authorised Capital.
If there are any changes that have to be implemented then in the files of the Registrar of Companies changes has to be made before making it functional.
For getting up share there is a number of steps that have to be carried out. A share certificate is one of the important documents which is issued by the company indicating that the person whose name is mentioned in the certificate is the owner of the companies share. Any company can issue the shares only after being incorporated (that is within 2 months of incorporation) and with respect to the transfer of share certificate, it should be issued to the transferees within a month of receipt of the instrument.
Some of the details which are mentioned in the share certificate are- Name of the share issuing company, the Company’s Corporate Identification Number, the Company’s registered address, names of the owner of the share, folio number, number of shares, the amount paid on such share, and distinct number of the shares.
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