Companies Act, 2013

Companies Act, 2013

The Companies Act, 2013 is a comprehensive piece of legislation that governs the formation, functioning, and regulation of companies in India. It replaced the Companies Act of 1956 and introduced significant changes to corporate law. Here’s an overview of the key aspects:

Key Highlights of the Companies Act, 2013

1. Incorporation of Companies:

   1. Types of Companies:
      • Private Company: Can have a minimum of 2 members and a maximum of 200.
      • Public Company: Requires a minimum of 7 members, and there’s no upper limit.
      • One Person Company (OPC): Introduced under this Act, it allows a single individual to form a company.
   2. Memorandum and Articles of Association: The charter of the company that defines its objectives and internal rules.

2. Corporate Governance:

   1. Board of Directors:
      • Minimum number of directors: 2 for a private company, 3 for a public company, and 1 for an OPC.
      • Maximum: 15 directors, which can be increased by passing a special resolution.
   2. Independent Directors: Public companies of a certain size must have at least one-third of their board as independent directors.
   3. Woman Director: Certain classes of companies are required to have at least one woman on their board of directors.
   4. Audit Committee and Nomination & Remuneration Committee: Required for certain classes of companies for overseeing the financial reporting process, auditor selection, and ensuring adequate remuneration practices.

3. Financial Statements and Auditors:

   • Financial Statements: Must include a balance sheet, profit and loss statement, cash flow statement, a statement of changes in equity, and any explanatory notes.
   • Mandatory Rotation of Auditors: Listed and certain classes of companies are required to rotate auditors every 5 years for individual auditors and every 10 years for an audit firm.
   • Corporate Social Responsibility (CSR): Companies with a certain turnover, net worth, or profitability must spend at least 2% of their average net profits on CSR activities.

4. Share Capital and Members:

   • Types of Share Capital: Equity shares (with or without voting rights) and preference shares.
   • Shareholding Rights: The Act specifies the rights and duties of shareholders, including voting, dividends, and the ability to sue on behalf of the company.

5. Company Meetings:

   • Annual General Meeting (AGM): Every company (except OPC) must hold an AGM within 6 months from the end of the financial year.
   • Extraordinary General Meeting (EGM): Can be called to address urgent matters that cannot wait for the AGM.
   • Quorum: Minimum number of members required to be present for conducting a valid meeting.

6. Corporate Social Responsibility (CSR):

   • Applicability: Companies with a net worth of ₹500 crores or more, turnover of ₹1000 crores or more, or net profit of ₹5 crores or more in a financial year.
   • Expenditure: At least 2% of the average net profit of the last 3 financial years must be spent on CSR activities.

7. Fraud and Insider Trading:

   • Fraud: The Act defines fraud and provides severe penalties for fraud committed by the company or its officers.
   • Insider Trading: Prohibited for directors, key management personnel, or any other individual with access to unpublished price-sensitive information.

8. Winding Up and Liquidation:

   • Voluntary Winding Up: Can be initiated by shareholders or creditors.
   • Insolvency and Bankruptcy: Integrated with the Insolvency and Bankruptcy Code, 2016 (IBC), for the resolution of corporate insolvency.

9. Penalties and Compounding of Offences:

   • The Act introduces stringent penalties for non-compliance, including fines, imprisonment, and disqualification from holding directorships.

Important Amendments

Several amendments have been made to the Companies Act, 2013, post its enactment to simplify processes, improve governance, and align with global best practices:

• Companies (Amendment) Act, 2015: Simplified regulations for private companies, changes related to CSR, and amendments for ease of doing business.
• Companies (Amendment) Act, 2017: Reduced compliance burdens, introduction of a simplified private placement process, and easier incorporation rules.
• Companies (Amendment) Act, 2019: Strengthened corporate governance, stricter penalties for non-compliance, and decriminalization of some minor offences.

Key Definitions:

• Company: A company formed and registered under this Act or any previous company law.
• Director: A person appointed to the board of a company.
• Shareholder: An owner of shares in a company.
• Debenture: A debt instrument that is not secured by physical assets or collateral.

Salient Features:

• One Person Company: Introduced to encourage individual entrepreneurship.
• Simplified Compliance: For smaller and private companies, many compliance requirements have been simplified.
• Investor Protection: Numerous provisions protect shareholders and minority investors.

The Ministry of Corporate Affairs (MCA) oversees the implementation of the Companies Act, 2013.