They say “change is the only constant”. Nothing remains the same, and the laws also need to be dynamic rather than static, to serve the needs of those subject to such laws. With advancements in the corporate sector, the Companies Act, 1956 had some gaps which affected the corporate efficiency. To curb this, the much awaited and brainstormed Companies Act, 2013 was brought into force. The new Company Law had its own objectives to make things better for those who wished to start a new business, those who were already running and succeeding corporates, and those who had invested in running the corporate sector. To get into the depths of what the new laws targeted and served, let’s have a look!
Newly Introduced Concepts in 2013 Act
While the Companies Act, 1956 was comprehensive, there were certain aspects which required to be polished to ensure corporate democracy and enhance confidence among investors. The major concepts introduced in Company Law in 2013 are as follows:
- One Person Company
- Small Company
- Dormant Company
- Inactive Company
- Changes to Private Company
- Changes to Subsidiary Company
What are the main provisions of the Companies Act 2013?
The New Company Laws are lengthy, comprising 470 Sections. Thus, everything cannot be addressed even in a comprehensive guide to Companies Act 2013. There are particular provisions of the New Company Law which people running a company need to be aware of, whether it is about specific liabilities, compliance, privileges, etc. Hence, we have compiled the most searched provisions of the Companies Act hereunder:
Section 8 of Company Law 2013 lays about the formulation of companies with charitable objects. So if a proposed Limited Company’s objects focus upon promotion of commerce, science, education, sports, research, etc, or the intention to apply its profits in promoting such objects, or prohibit payment of dividend to its members, the same needs to be proved to the Central Government. If so proved, the Central Government may issue a license and allow it to be registered as a Limited Company under Section 8 of Companies Act without adding the word “Limited” to it’s name. Such a company enjoys the privileges of a Limited Company. What can be understood from the specific provision is that a Section 8 Company is established to promote non-profit activities. Therefore, the Central Government supports the cause by extending privileges like Tax Exemption, Capital Requirement, etc.
For an existing company having a share capital plans on increasing the subscribed capital, Section 62 lights the path. It provides for further issue of share capital. The provision specifies in to whom such shares can be offered, along with other formalities.
While businesses aim at making huge profits, there is a bar of net worth/turnover beyond which, the profits need to be navigated towards social welfare. This is crux to the concept of corporate social responsibility (CSR) under Section 135 of Companies Act 2013. The provision requires setting up of a CSR Committee to formulate a policy indicating activities to be undertaken.
A company aims at conducting a particular business, and ensuring accuracy in the company’s financial statements and regulatory compliance is required. Therefore, Companies Act Section 139 requires every company to appoint an auditor at its first Annual General Meeting (AGM). The said Auditor or Firm holds office from the conclusion of first AGM till it’s 6th AGM. The members of the company prescribe about how the auditors are selected. Section 139 of Companies Act also restricts the appointment or reappointment of an auditor for more than 5 consecutive years to a particular class of companies as prescribed. The said restriction goes up to 2 terms of 5 consecutive years. There are other specifications regarding appointment of an auditor for the company.
- Section 179 of Companies Act, 2013
A company, though being a separate legal entity, is run by its Directors. Hence, their powers and functions need to be certain. Companies Act Section 179 outlines the powers of the Board of Directors of a company. They are required to act within the vires of the Company Law 2013, or Memorandum of Association/Articles of Association, or any Regulations thereof made during General Meeting.
A company is a legal person, but every company acts through certain humans. Mostly, the Directors of a company shape a company’s business. At times, they even take advantage of separate entity and make financial benefits for themselves. To curb this menace, Section 185 of Company Law 2013 restricts a company from extending loans to any of the directors. The restriction even extends to anyone related to the directors or give guarantee/security for such loan. There are some additional clauses to the said restriction.
Stating about loan and investment by the company, Section 186 of the Companies Act mandates a maximum 2 layers of investment companies. The concept surrounds subsidiaries and holding companies. The reason behind such restriction is to avoid scams in the name of subsidiaries and investments.
- Schedule 3 of Companies Act 2013
Company being a legal entity has a lot of financial transactions to keep track of to stay in business. Schedule III of the Companies Act highlights the manner in which a company has to prepare its Balance Sheet, Statement of Profit and Loss. It’s a set of general instructions on all kinds of disclosures a company has to make pertaining to the finances.
Inference
In a comprehensive guide to Companies Act, 2013, it is important to have an overall understanding of what provisions of the new law made all the difference. However, for those who still have some doubts, given below are the insights:
- New Structures for Companies
- Enhanced Transparency through governance
- Societal Commitment through CSR
- Financial Reporting
- Compliance Review
To have a better understanding, here are some frequently asked questions around the 2013 Company Laws.
FAQs on the Companies Act, 2013
- When was Companies Act 2013 enforced?
The 2013 Companies Act was not notified all at once, but several provisions were enforced gradually. Some provisions of the New Company laws came into force on September 12, 2013, while a majority of 184 Sections were enforced on April 1, 2014.
- What are the key differences between the Companies Act 1956 and the Companies Act 2013?
The major difference introduced by the 2013 Act was to bring flexibility to the corporate sector. Experts say that the Companies Act of 1956 was more rigid. Thus, to deal with this, the 2013 Companies Act introduced varied structurization of companies, protection for investors, emphasised upon Corporate Social Responsibility and majorly promoted the ease of doing business in India.
- What is a small company as per Companies Act?
Section 2(85) of the Companies Act, 2013 defines a small company as one other than a public company. Hence, a company with a paid-up share capital of 50 lakhs (not more than 5 crores in specific cases), turnover within 2 crores (not more than 20 crores in specific cases) can be categorised as a small company as per the definition. The same excludes a holding/subsidiary company, one registered under Section 8 of Companies Act, or a company/body corporate governed by any special Act.
- How many Sections in Companies Act, 2013?
The total number of Sections in the Companies Act is 470, with 7 schedules.
- What is a key feature of the Companies Act 2013?
The difference which the Company Law 2013 sought to bring as against the 1956 Act was to strengthen corporate governance, bringing transparency and accountability, promoting ease of business, etc. It also sought to streamline the regulatory framework, particularly for Startups and Small Company as per Companies Act (SMEs – Small and Medium Enterprises).
