Suryansh Kumar, a 3rd-year law student from HNLU Raipur Chattisgarh India has written this article. It explains all about the Types of Companies Under the Companies Act, 2013
“Business opportunities are like buses, there’s always another one coming.”Richard Branson
The Industrial Revolution led to the emergence of large-scale business organizations. These organizations require big investments and the risk involved is very high.
The Indian economy has a variety of companies existing in its market such as public companies, private companies, investment companies, limited liability companies etc. The giant Indian Companies may include the names like Reliance, Talco Bajaj Auto, Infosys Technologies, Hindustan Lever Ltd., Ranbaxy Laboratories Ltd., and also Larsen and Tubro etc.
The companies can be divided into different types based on the parameters such as the size of the company. The number of its members, control of ownership, liability to shareholders, also the need for capital from the public and on the basis of the manner in which capital can be accessed. A company is popular referred to as a group of people coming together with resources in terms of capital, manpower and skill for the common objectives of making profits.
The Companies Act, 2013 is landmark legislation with far reaching consequences on all companies incorporated in India. The Act, 2013 is also more outward looking and attempts to align with international requirements.Moreover, It is expected to set the tone for a more modern legislation which enables growth and greater regulation of the corporate sector in India.
WHAT IS A COMPANY?
The word ‘company’ is derived from the Latin word where Com means with or together and Panis means bread hence it originally referred to an association of person who took their meals together. Thus, in popular parlance, a company denotes an association of like-minded persons formed for the purpose of carrying on some business or undertaking. Moreover, A company is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it.
Lord Justice Lindley defined company as “an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share”.
In the legal sense, a company is an association of both natural and artificial persons incorporated under the existing law of a country. In common law, a company is a “legal person”, or “legal entity” separate from and capable of surviving beyond the lives of its members.
There are numerous definitions of company by different legal experts. As per section 2(20) of the Companies Act, 2013 “company” means a company incorporated under this Act or under any previous company law. Moreover, a company may be defined as “an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal (if any), and a common capital compromised of transferable shares and limited liability.”
COMPANY LAW IN INDIA
To guarantee the smooth working of a business undertaking, there were laws framed to maintain the straightforwardness and also responsibility towards its investors and was called Company Laws. It gives an outline of how a company must function as a lawful element and how it must be overseen.
The Companies Act, 2013 (hereinafter referred as “the Act”) has replaced The Companies Act, 1956. The Act was enacted on 29th August 2013 and was also enforced on 12th September 2013 which notified only certain provision of the Act. The Act contains 29 Chapters divided into 470 Sections and includes 7 schedules. The law provides the guidelines in which a company must be managed and formed. A company is a legal entity which enters into transaction with other parties regularly due to which protecting their interest as well as the company’s interest is a necessity. A company comes into existence when it is registered with the registrar of companies.
THE COMPANIES ACT, 2013
The Act is shaped to consolidate and amend the laws identifies with the companies and it extended to entire of India. It similarly applies to everyone of the companies that are consolidated under this Act and any organization which is joined before the enforcement of this Act. Also infer to all the insurance companies aside from one which is exempted under the Insurance Act, 1938. It additionally infers to all the banking companies aside from one’s exempts under the Banking Regulation Act, 1949. Additionally infers to everyone of the companies which are occupied with generation or supply of electricity aside from the ones that are conflicting with generation or supply of electricity aside from the ones that are conflicting for its provision under Electricity Act, 2003.
NEED FOR CLASSIFICATION OF COMPANIES
Classification refers to recognizing, naming, and describing units or elements to be mapped. The objective of all classifications is the orderly arrangement of a large array of objects so that their differences and similarities can be better understood. We classify land and water resources for any number of reasons, including: Separating like things from unlike things by increasing homogeneity. This in turn also increases accuracy in classification and decreases sampling effort. Setting the boundaries of a study area or an area we hope to influence. Looking for identifiable patterns or identifying spatial context and allowing extrapolation.
It aids in the development of restoration endpoints by developing identifiable and compatible classes within the classification. Displaying or communicating complex relationships more effectively for planning, restoration, and management. Similarly, with this, under the Companies Act 2013 a company is a separate legal entity which is incorporated in association with different people for commercial or business purposes. A company is incorporated with unique features that differentiate it from a partnership or sole proprietorship model, such as transferability of shares, sharing of profits and losses, tax benefits and also limited liability.
DIFFERENT TYPES OF COMPANIES
The corporate form can take many shapes in order to respond efficiently to the environment. Company Law should therefore recognize a multiple classification of companies. The criteria for classification on the basis of the forms is discernible but recognizes that such classification can never be exhaustive. It is necessary to recognize the potential for diversity in the forms of companies and rather than seeking to regulate specific aspects of each form, seek to provide for principles that enable economic inter-action for wealth creation on the basis of clear and widely accepted principles.
Companies form business organization have become very popular over the years. The Indian economy has a variety of companies existing in the market such as public company, private company, investments company, limited liability company etc. These are based upon factors such as liability, control, incorporation, transferability of shares etc. Incorporation is the day when the company acquires a legal identity that is the day when a company takes birth in the eyes of law. Section 2 of the Companies Act, 2013 defines the various kinds of the companies and their description.
Following are the classification of the companies under this Act:-
- Classification of companies on the basis of incorporation
- Classification of companied on the basis of liability of members.
- Classification of companies on the basis of the number of members
- Classification of companies on the basis of domicile
- 1Classification of companies on the basis of Control
- Classification of companies on the basis of ownership
1) CLASSIFICATION/TYPES OF COMPANIES ON THE BASIS OF INCORPORATION
Royal Charter Company
It may be better understood as the company born out of the authorization of the sovereign or the crown. This was the mode of incorporation which was followed earlier to the Registration under the Companies Act. A charter is granted by the crown to the people requesting to form a cooperative or a company. To name a few, The Bank of England (1694), also The East India Company (1600) were formed by the means of charters passed by the then Crown of England. The authorization given by the sovereign gives legal existence to these companies by means of the body of the charter. This mode of incorporation is no more recognised in any Companies Act to incorporate new Companies.
As the name suggests, these are the companies that are formed by the means of a special statute passed by the Parliament or the State Legislature. Moreover, The examples of statutory companies in India are the Reserve bank of India, the Life Insurance Corporation of India Act, etc.
The Statutory origins of these companies also provide power to such companies to be bound by their own statute, i.e. whenever there is any dispute between statute under which these companies were formed and the Companies Act 2013, the statute being special legislation persists over the general law of Companies Act. The parliaments both State and Centre are also empowered to make such legislation for incorporation under the power endowed to them by the Constitution of India.
As defined under Section 2(20) of the Companies Act, 2013, registered companies are the companies which get registered under the statute of the Companies Act. These types of Companies are also provided with a certificate of incorporation by the Registrar of the Company.
2) CLASSIFICATION/TYPES OF COMPANIES ON THE BASIS OF LIABILITY OF MEMBERS
The liability upon the members is also used to classify the companies, it describes the limit to which member will be liable if such liability were to befall upon the company. On the basis of liability of the members, the companies may be classified into:
Companies limited by shares:
These types of companies are mentioned in Section 2(22) of the Companies Act, 2013. The liability of the members of such a company is based upon the number of shares kept unpaid. This liability against the shares kept may be brought to the authority. Once the payment towards the security is made by the shareholder or member then no liability beyond that is placed upon such member. The liability may be enforced during the company’s existence and even during its winding-up process.
A company limited by shares is a registered company having the liability of its members limited by its memorandum of association to the amount, if any, unpaid on the shares respectively held by them. The amount remaining unpaid on the shares can be called up at any time during the lifetime of the company or at the time of winding up. However, a shareholder cannot be called upon to pay more than the amount remaining unpaid on his shares. His personal assets cannot be called upon for the payment of the liabilities of the company, if nothing remains to be paid on the shares purchased by him. Such a company is also known as a ‘Share Company.’
Companies limited by Guarantee
These types of companies are mentioned in Section 2(21) of the Companies Act, 2013. In a Company where the liability is limited by guarantee, it means the member of the Company has agreed on the Memorandum of Association to repay the same amount during winding up of such Company. In such companies, also the liability of the members is limited to the undertaking given by them and the members of a guarantee company are, in effect, placed in the position of guarantors of the company’s debts up to the agreed amount. Trust research associations, etc. are examples of companies liability limited by guarantee.
Therefore, a company limited by guarantee is also one having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up. The liability of the members of a guarantee company is limited by a stipulated sum mentioned in the memorandum. The guaranteed amount can be called up by the company from the members only at the time of winding up if the liabilities of the company exceed its assets.
A pure ‘guarantee company’ does not have a share capital. The working funds, if required, are raised from source like fees, donations, subsidy, endowments, grants, subscriptions and the like. Such a company is generally formed for the purpose of promotion of art, science, culture, charity, sport, commerce or for some similar purpose.
Unlimited Liability Company
An unlimited company as defined under Section 2(92) of the Companies Act, 2013 do not have a cap on the amount of liability that may add on their members in case the company has to repay any debt. For any amount that the company owes these members, the unlimited liability company shall be liable to the extent of their interest in the company. These companies do not draw any popularity when it comes to Indian Market.
The members of such a company are liable, in the event of its being wound up, to the full extent of their fortunes to meet the obligations of the company. However, the members are not liable to the company’s creditors. The company, being a separate legal entity from the persons who constitute it, is liable to its creditors. If the creditors cannot obtain payment from the company, they may petition the court for the winding up of the company. The Liquidator will then call upon the members to contribute to the assets of the company without limitation of their liability for the payment of the debts of the company.
Difference between limited and unlimited companies
|Aspect||Limited Company||Unlimited Company|
|Legal structure||Separate legal entity||Separate legal entity|
|Liability||Limited liability of shareholders||Unlimited liability of shareholders|
|Ownership||Owned by shareholders||Owned by shareholders|
|Directors||Must have at least one director; can be shareholders||Must have at least two directors; can be shareholders|
|Disclosure||Must file annual accounts and other documents with Companies House||Not required to file annual accounts or other documents|
|Financing||Can issue shares and raise funds||Can issue shares and raise funds|
|Profit sharing||Profit can be distributed to shareholders as dividends||Profit can be distributed to shareholders as dividends|
|Legal formalities||Must follow strict legal formalities||Less strict legal formalities|
|Taxation||Taxed as a separate entity||Taxed as a partnership|
3) CLASSIFICATION/TYPES OF COMPANIES ON THE BASIS OF THE NUMBER OF MEMBERS
The number of members in a company is looked upon while classifying them. This classification of the company has been discussed in detail under the below-mentioned headings. On the basis of the number of members in the companies may be classified into:
The private companies as defined under Section 3(1)(b) of the Companies Act, 2013 are very restrictive in nature wherein it may in its Articles of Association restrict the right to transfer shares. The number of members in such a company might be a maximum of 50. The shares and debentures of such companies are not available for the public at large. Moreover, The number of members in a company to be called a private company is two persons by subscribing their names to the Memorandum of Association. wherein it is clearly set that two members jointly holding a single share shall be considered as one member and not two members.
Moreover, These types of companies can be formed by merely two It means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed The easy identification of Private companies is the ‘Pvt. Ltd.’ attached to its name. Private companies represent a different set of relationships in terms of ownership, risk and also reward as compared to public companies. A Private Company has been described as an incorporated partnership, combining the advantages of the privacy of partnership and the permanence and origin of the corporate constitution. Private Companies can keep their affairs to themselves.
Characteristics or Features of a Private Company. The main features of a private of a private company are as follows:
i) A private company restricts the right of transfer of its shares. The shares of a private company are not as freely transferable as those of public companies. The articles generally state that whenever a shareholder of a Private Company wants to transfer his shares. He must first offer them to the existing members of the existing members of the company. The price of the shares is determined by the directors. It is done so as to preserve the family nature of the company’s shareholders.
ii) It also limits the number of its members to fifty excluding members who are also employees or ex-employees who were and continue to be the member. Where two or more persons hold share jointly they are treated as a single member. The minimum number of members to form a private company is two.
iii) A private company also cannot invite the public to subscribe for its capital or shares of debentures. Moreover, It has to make its own private arrangement.
It enjoys special privileges also-
- It can be started with only two members (minimum members)
- It is not required to prepare a prospectus and it can start its operation immediately after receiving the certificate of incorporation.
As defined under Section 2(71) of the Companies Act, 2013, Public Companies are the ones which are not a private company. As mandated under Section 3(1)(a) of the Companies Act, 2013, there should be at least 7 members to form a public company. It is the intrinsic nature of the public company that there is the right to transfer shares and debentures of the public company to the public at large. A public company means a company which has minimum paid up share capital of Rs. 5 lakh and which is not a private company but it had been removed under Companies Act of 2015.
In these types of companies there is no restriction on transfer of shares in case of public company. A Public Company having a share capital shall file with the Registrar. A statement in lieu of prospectus signed by all the directors named therein. In case it has not issued a prospectus. A Public company cannot commence its business unless certificate to commence business is issued by the Registrar of Companies in accordance with Section 149 of the Companies Act.
Western Maharashtra Development Corpn. Ltd v Bajaj Auto Ltd
The concept of free transferability of share in public and private companies is also very succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd v Bajaj Auto Ltd. It was held that the companies Act, 2013 makes a clear distinction in regard to the transferability of shares relating to private and public companies.
The provision contained in the law for the free transferability of shares in a public company is also founded on the principle that members of the public must have the freedom to purchase an every shareholder the freedom to transfer. The leads to specific consequences and the imposition of obligations envisaged in law. Moreover, Those who promote and manage public companies assume those obligations. Corresponding to the public who subscribe to shares. A privte company which is a subsidiary of a public company will also be considered a public company under this Act.
Characteristic of the Public Company: –
- It does not restrict transferability of shares
- At least 7 members are required to form a public company
- There is no restriction on the number of members
- It has at least 3 directors
- Its name end with the word “limited”
- It can accept public deposits and invite public for subscription of its share and debentures.
Example of Public Companies:-
Bharat Heavy Electricals Ltd. Hindustan Petroleum Corporation Ltd
Bharat Petroleum Corporation Ltd (BPCL) Indian Oil Corporation Ltd.
Coal India Ltd. NTPC Ltd.
Oil and Natural Gas Corporation Ltd (ONGC) also Punjab National Bank.
4) CLASSIFICATION/TYPES OF COMPANIES ON THE BASIS OF DOMICILE
On the basis of their domicile the companies may be classified into:
A Company which is situated outside India but has a registered place in India may be physical or electronic address or perhaps company has ownership itself or through the agents, representatives or managers of the company is known as a foreign company under Section 2 (42) of the Companies Act, 2013. The aforementioned definition included in the new Companies Act has widened the scope of the definition of foreign companies extending the same to the entities having their electronic presence in India. The list of foreign companies listed in India has names of the corporate giants such as Whirlpool of India Ltd., Timex Group India Ltd., also Ambuja Cements Ltd., etc.
Within 30 days of its establishment, it has to furnish important document to the registrar as per section 380 as mentioned below:
- A certified copy of the charter of the company
- Memorandum and articles of association of the company
- Address of the registered office
- List of directors and secretary
- Full address of the principle place of business in India
- Name and the address of the authorised person to do business on behalf of the company in India.
Indian Company has been defined under Section 2(20) of the Companies Act, 2013 as any company registered under the Companies Act, 2013, or any other previous law is known as an Indian Company. An Indian company may prove its locus standi with the help of its office address and the legislation provides a guideline to be followed while using such powers by an Indian company.
5) CLASSIFICATION//TYPES OF COMPANIES ON THE BASIS OF CONTROL
On the basis of control following are the types:
Under Section 2(46) of the Companies Act, 2013, a company is known as the holding company of another company if it has administrative control over another company. Such control may be regarding the affairs of the company. A company may become a holding company of another company in either of the following three ways:-
- By holding more than fifty per cent of the normal value of issued equity capital of the company; or
- By holding more than fifty per cent of its voting rights; or
- By securing to itself the right to appoint, the majority of the directors of the other company, directly or indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the two companies remain separate legal entities, yet the affairs of both the companies are managed and controlled by the holding company. A holding company may have any number of subsidiaries. The annual accounts of the holding company are required to disclose full information about the subsidiaries. A Holding Company is not allowed to interfere in the disinvestment decision of a sub-subsidiary company even if one of the effect of disinvestment could have been the loss of position as a Holding company.
Under Section 2(87) of the Companies Act, 2013, a company is known as a subsidiary company of another company when control is exercised by the other company over the subsidiary company. A company is known as a subsidiary of another company when its control is exercised by the latter (called holding company) over the former called a subsidiary company. Where a company (company S) is subsidiary of another company (say Company H), the former (Company S) becomes the subsidiary of the controlling company (company H). It is a company whose parent is a majority shareholder. For the purposes of liability, taxation and regulation, subsidiaries are distinct legal entities.
These types of companies may lose its separate identity to a certain extent in two cases. The Legislature may brush aside the legal forms and require the companies in a group to present a joint picture. Thus, Section 212-14 contain provisions “designed primarily to give better information of the accounts and financial position of the group as a whole to the creditors, shareholders and public.
Secondly, the Court may on the facts of case refuse to grant a subsidiary company an independent status. “It may not be possible to put in a straitjacket of judicial definition. As to when the subsidiary company can really be treated as a branch, or an agent , or a trustee of the holding company. Circumstances such as the profits of the subsidiary company being treated as those of the parent company, the control and conduct of business of the subsidiary company resting completely in the nominees of the holding company”.
A company is deemed to be a subsidiary company of another:
(1). If the other company
- exercises or controls more than 50% of the total voting power i.e. where the holders of preference shares have the same voting rights as the equity shares holder, or,
- 50% in nominal value of its equity share capital held, or,
- Possesses power regarding the composition of the Board of directors.
(2) If it is a subsidiary of a company which is a subsidiary of the controlling company. The holding power also includes another kind of Company known as Associate Company, which is now being explained with respect to the above-mentioned Holding and subsidiary company.
These types of Companies as defined under Section 2(6) of the Companies Act, 2013 are the one in which the other company has significant influence but these Companies are not the subsidiaries of such influencing companies known as the Associate Company. The Joint Venture Companies are such associate companies.
The significant control can be inferred directly from the explanation attached to the provision. Which requires the influencing company to hold 20% of the share capital or any agreement. Whereby the decision making of the associate is placed upon such Influencing Company. The Associate Company concept has been seen as a harbinger of transparency in the working of the Company. Since it provides a more rationale grundnorm for an associated relationship between the two companies.
6) TYPESOF COMPANIES ON THE BASIS OF OWNERSHIP
As defined under Section 2(45) of the Companies Act, 2013, any company in which a minimum of 51 per cent of the paid-up share capital is held by the Central/State Government, and/or held fractionally by the Central Government and also partly by one or more State Governments is known as a Government Company. The major drawback of having a government company is the lack of autonomy.
The share capital of a government company may be wholly or partly owned by the government, but it would not make it the agent of the government. Moreover, the staff members of the company are not the Government employees and hence, the Government is not liable to pay the salary of the staff of a Government Company.The auditors of the government company are also appointed by the government on the advice of the Comptroller and Auditor General of India. The Annual Report along with the auditor’s report is placed before both the House of the parliament.
Some of the examples of Government companies are – . Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. and also Hindustan Aeronautics Ltd.
All other companies, except the Government Companies, are called non-government companies. They do not satisfy the characteristics of a government company as given above. Some of the example of Non-Government Companies are- Reliance Industries Limited, also WIPRO Limited etc.
One man Company
Under Section 2(62) of the Companies Act,. A company in which one person is the whole and sole owner of the share capital of the company is known as a “One Man Company”. In order to meet the statutory requirement of a minimum number of members. Some namesake company shareholders hold one or two shares each. Moreover, The namesake shareholder members are usually nominated by the principal shareholder. The principal shareholder enjoys all the profits of the business with the protective shield of limited liability. These types of companies have also been given legal sanctity. Some of the example of such companies are- . Sujatavilas Export (Opc) Private Limited, Rsj Ecoconcepts (Opc) Private Limited, Mvsd Agri Plus (Opc) Private Limited, etc,.
The Investment Companies as defined under section 186 of the Companies Act, 2013, are the companies which have a fundamental business or transaction relating to the securities of other companies. Securities may be of a nature of shares or debenture or other securities offered by such entity. The word investment in its predominant sense means to acquire a resource and also hold it for the interest earned over it, but in the case of an investment company, the investment is aimed not only at the acquisition and holding but perhaps to even the sale of the securities whenever they reach a better price.
These types of companies under Section 186 of the Companies Act, 2013 are based upon the market trend relating to the shares analyses the maximum profit investment for the Company. The commonly used terminology of stock market relating to the bear and bull market and also the understanding of the trend plays a crucial role to attain profits aimed at by the company.
There are still two perspectives towards the investment company functioning and the characteristics of the transactions made by such company. One set of claims suggests that the Investment Companies are only supposed to purchase security and earn interest by maintaining them. The other school of thought also suggests that the investment company may earn not only by purchase and hold but also selling of the securities.
7) NEW TYPES OF COMPANIES RECOGNISED UNDER THE ACT, 2013
Where a company is formed under Section 455 of the Company Act, 2013 for-
To hold an asset which may be a physical or intellectual property and has no significant accounting transaction. Such company can make application to the Registrar for obtaining the status of the dormant company.
The explanation attached to this provision states about the inactive company. Prescribing a period of 2 years of inactivity in terms of business transactions, operations etc, or the companies. Which have not filed their annual returns or the financial statement in the last 2 years. Such transactions do not include all the necessary payment. Which are made by the company to the Registrar and other payments which are supposed to be made under any other law.
The Registrar allows the certificate of the inactive company to the applicant company. The registrar must maintain the list of dormant companies. A company to remain a dormant company on the books of the registrar has to pay the required sum. The Company on request may make the Dormant Company back to an active company.
CONCLUSION-Types of Companies Under the Companies Act, 2013
We saw that each one is important and is one of a kind. Every company is important for Global development. We can hereby conclude that The Companies Act, 2013 is extremely important. As it gives a boundary to companies because of which their legal scope remains defined. This defined scope, ultimately helps the end-users. As the companies have a legal framework under which they are bound to work. Hence, these companies remain under a certain boundary wall and hence they don’t misuse their power.
It helps in many ways. Like the employees get protected in terms of their labour rights, the end-users get quality products. And the society as a whole face less company-related fraudulent issues. Because the law has got it all in its hands.
Companies Act is required because it provides for class action suits for shareholders. This means that The Companies Act, 2013 narrates concept of class actions suits. In order to make shareholders and other stakeholders, more informed and knowledgeable about their rights.
The said Act provides more power to shareholders. It stipulates appointment of at least one woman Director on the Board. (for certain class of companies), Hence it improves women’s employment in the corporate sector. Also stipulates certain class of companies for spending a certain amount of money every year. On activities or initiatives which reflects corporate social responsibility. It has introduced the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal. This replace the company Law Board for industrial and financial reconstruction. Such tribunals relieve the courts of their burden and simultaneously provides specialised justice. It permits cross border mergers, in both ways; a foreign company merging with an Indian Company and vice versa. But with the prior permission of RBI. No independent director shall hold office for more than two consecutive terms of five years.
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