Module 1

Module 1
Introduction, Key definitions and Setting up of a Company

1.1 Introduction

The Companies Act, 2013 was passed by the Indian Parliament with the President’s
assent on the 29th of August, 2013. The act was enacted to consolidate and amend the
laws relating to companies. This Act regulates the incorporation of the company, the
rights, duties and responsibilities of the company and directors. This new legislation
is divided into 29 chapters, 470 sections and 7 schedules.

1.2 History

The Companies Act of 2013 was passed by the Parliament has received the
Presidential assent on the 29th of August, 2013. This Act was passed with the
objective to consolidate and amend the law concerning companies. This Act replaced
the age-old 1956 Companies Act. The Companies Acts in India are highly influenced
by the United Kingdom's Companies Acts. The first Act which was enacted in India
was the Joint Stock Companies Act which was enacted in the year 1850 which was
based on the UK’s Joint Stock Companies Act of 1844. This act provided for the
registration of the Companies and the transferability of the shares of the Company.
Since the 1844 enactment of the Joint Stock Companies Act, there was a new
enactment which was brought in by the British in consonance with the amendments
and enactments which were made in the United Kingdom. The 1913 enactment of the
Companies Act was the last enactment done by the Britishers for India. Post
Independence the first Companies Act was legislated in the year 1956 bringing major
changes to the Companies Act of 1913. These changes namely include: (a) the
promotion and formation of companies; (b) capital structure of companies; (c)
company meetings and procedure; (d) the presentation of company accounts etc. 1



1 G.K.Kapoor, Company Law and Practice, Taxmann, 23rd edition, 2018.

In the year 2013 the new Companies Act was enacted replacing the age old
Companies Act, 1956. The legislation was enacted with the main objective to
incorporate and adopt the best corporate practices. The 2013 Act, introduced
important concepts such as Corporate Social Responsibility (CSR), class action suits,
and introduced fixed terms for the independent directors. This act further introduced
more stringent rules and regulations with regard to raising capital from the public,
introduced provisions to prevent the evil practice of insider trading by the Key
Managerial Personnel (KMPs), and it also introduced criminal and civil liabilities
upon the Key Managerial Personnel for fraudulent activities and such other activities
which are derogatory to the interests of the company and its members.
The 2013 Companies Act also had some major amendments in the years 2015 and
2017. The 2015 amendment act, addressed key issues regarding Chartered

Accountants, and other professionals etc,. One of the key changes which were brought
about by the 2015 act was to remove the requirement of raising minimum capital for
incorporation of the company. The main objective of this amendment was to support
the ease of doing business campaign which was introduced by the Central
Government. The 2017 Amendment Act was introduced by the Union Parliament to
realign the provisions of the Companies Act with the global standards, improve the
corporate governance structure of the companies, strengthening the compliance and
investor protection.

1.3 Objectives of the Companies Act, 2013

● To promote and encourage entrepreneurship, bring in flexibility and efficiency
in companies which will in-turn promote the growth of economy.

● To encourage transparency, accountability and promote higher standards of
corporate governance.

● To recognise and promote the new concepts which facilitate ease of doing
business while protecting the interests of the investors.

● To bring in more stringent actions fraud and non-compliance with the
provisions of the Act.

● To establish authorities to handle and adjudicate matters related to companies.
Authorities such as the National Company Law Tribunal and National
Company Law Appellate Tribunal, Serious Fraud Investigation Agency etc.

● To provide for time bound approval of compliance requirements as provided
within the Act.

1.4 Key definitions under the Companies Act of 2013

Section 2 of the Companies Act, is the definition clause of which provides for the
important definitions necessary to understand and interpret the provisions of the
Companies Act, 2013. Section 2 of the Act provides for 95 definitions of the terms
used in this particular Act. Within these 95 definitions there are some important
definitions which every reader of the Act must be well-versed with.

1.4.1 Articles

Section 2(5) of the Companies Act, provides for the definition of Articles.
Articles of a Company means the articles of association of a company as
originally framed or as altered from time to time or applied in pursuance of
any previous company law or of this Act.2 Articles of Association of a
company play a very important role in regulation and management of the
internal affairs of the Company. It may also be considered to be the bye-laws
of the Company. Section 5 of the Companies Act, 2013 prescribes for the
content which Articles should compulsorily contain and it may contain such
other information as may be considered necessary for the smooth functioning
of the Company. Articles is one of the important documents which should be
filed with the Registrar of Company during its incorporation.

1.4.2 Associate Company

Section 2(6) of the Companies Act, provides for the definition of Associate
Company. An associated company can be defined as a company in which
another company has a significant influence, but it is not a subsidiary
company of the company having such influence and includes a joint venture
company. Here significant control means that the company having such
influence over the associate company must hold at least 20% of the total
voting power or control of or participation in business decisions under an
agreement. Here joint venture means a joint venture agreement between the
parties where they agree to have joint control and the rights to the net assets of
the company.

1.4.3 Authorised Capital or Nominal Capital

Section 2(8) of the Companies Act, defines as to what an authorised capital is.
Authorised capital means such capital which is so authorised by the
Memorandum of Association of a company and it is to be the maximum
amount of the share capital of the company. No company can collect capital
beyond the authorised capital written down in the Memorandum of
Association. As per Section 4(1)(e) every company which is having a share
capital has to mention in its memorandum the amount of the share capital
which the company will raise and register the same. The company has to
further write down the manner in which these shares will be divided and the


2 Section 2(5) of the Companies Act, 2013.

number of shares which the subscribers to the memorandum and that shall not
be less than one share.

1.4.4 Board of Directors or Board

Setion 2(10) of the Companies Act defines board of directors as the collective
body of directors of the company. The Board of Directors are one of the key
management bodies in a company which is responsible for most of the
decision making on behalf of the company, and its members. Section 149 of
the Act provides that a minimum of 3 directors in case of a public company
and a minimum of 2 directors in case of a private company should be
appointed to the Board of Directors. The maximum number of directors that
can be appointed is 15. A company can appoint more than 15 directors but that
should be done post a special resolution passed by the company.

1.4.5 Called-up Capital

Section 2(15) of the Companies Act, defines Called-up capital as that part of
the share capital which has been called for payment by the company.

1.4.6 Company

Section 2(20) of the Companies Act, defines company as a company as
incorporated under the 2013 Act or under any previous Company law.

1.4.7 Company Limited by Guarantee and Company Limited
by Shares

Section (21) of the Companies Act defines a company limited by guarantee as
a company where the liability of its members limited by the Memorandum to
such amount as the members have respectively undertaken to contribute to the
assets of the company in the event of it being wound up. Section 2(22) of the
Act defines a company limited by shares as a company having the liability of
its members limited by the memorandum to the amount if any which is unpaid
on the shares of a company under this act.

1.4.8 Control

Section 2(27) of the act, defines control to include the right to appoint a
majority of the directors or to control the management or policy decisions
exercisable by a person or persons acting individually or in concert, directly or
indirectly, including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements or in any other manner.

1.4.9 Debenture

Section 2(30) of the Companies Act, defines debenture to include debenture
stocks, bonds or any other instruments of a company evidencing for the debt,
whether constituting a charge on the assets of the company or not.

1.4.10 Director

Section 2(34) of the Act defines director to be a person so appointed to the
Board of a Company. There are various kinds of directors with different roles
and duties given to them. This will be further discussed in detail in Chapter 3
of this book.

1.4.11 Foreign Company

Section 2(42) of the Act, defines a foreign company be such company or body
incorporated outside India which has a place of business in India either by
itself or through an agent, physically or through electronic mode. The
company conducts any business activity in India in any other manner.

1.4.12 Government Company

Section 2(45) defines a government company as any company in which not
less than fifty-one per cent. of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments, and
includes a company which is a subsidiary company of such a Government
company;

1.4.13 Holding Company

Section 2(46) defines holding company as in relation to one or more other
companies, means a company of which such companies are subsidiary
companies.

1.4.14 Independent Director

Section 2(47) defines as independent director means an independent directors

referred to in sub-section 6 of section 149 of the Act. Section 149(6) of the

Act provides that an independent director in relation to a company, means a

director other than a managing director or a whole-time director or a nominee

director.

● An independent director is one who in the opinion of the Board, is a

person of integrity and possess relevant expertise and experience;

● An independent director is one who is or was not the promoter of the

company or its holding, subsidiary or associate company.

● An independent director is one who is not related to promoters or

directors in the company, its holding, subsidiary or associate company.

● An independent director is on who has or had no pecuniary

relationship other than remuneration as such director or having

transaction not exceeding ten percent of his total income or such

amount as may be prescribed.

1.4.15 Issued Capital

Section 2(50) defines issued capital as that capital the company issues from

time to time for subscriptions.

1.4.16 Key Managerial Personnel

Section 2(51) of the Companies Act defines Key Managerial Personnel in

relation to a company as:

● The Chief Executive Officer, or the Managing Director or the

Manager;

● The Company Secretary;

● The Whole-time Director;

● The Chief Financial Officer;

● Such other officer who is not below the rank of a director who is in

whole-time employment, designated as Key Managerial Personnel by

the Board of Directors

● Such other officers as may be prescribed.

1.4.17 Member

Section 2(55) of the Act defines a member to be mean:

● The subscriber to the memorandum of the company who shall be

deemed to have agreed to become a member of the company, and on
its registration, shall be entered as member in its register of members;
● Every other person who agrees in writing to become a member of the
company and whose name is entered in the register of members of the
company;
● Every person holding shares of the company and whose name is
entered as a beneficial owner in the records of a depository.

1.4.18 Memorandum

Section 2(56) of the Act defines a memorandum to be the memorandum of
association of a company as originally framed or as altered from time to time
in pursuance of any previous company law or of this Act. The memorandum
of association of a company is considered to be the constitutional document of
the company. In the words of Justice Lord Cairns “The memorandum of
association of a company defines the limitations on the powers of the
company… it contains in it both that which is affirmative and that which is
negative. It states affirmatively that ambit and extent of vitality and power
which by law are given to the corporation and it states, if it is necessary to
state, negatively, that nothing shall be done beyond that ambit.”3

1.4.19 One Person Company

Section 2(62) of the Companies Act, defines One Person Company as a
company which has only one person as a member.

1.4.20 Ordinary or special resolution

Section 2(63) read with section 114 of the Companies Act defines ordinary or
special resolution. As per section 2(63) ordinary or special resolution means
an ordinary resolution or as the case may be, special resolution referred to in
section 114. Further reading of section 114 of the Companies Act provides for
the definitions of special and ordinary resolution. Section 114(1) defines
ordinary resolution as a resolution if the notice required under this Act has
been duly given and it is required to be passed by the votes cast, whether on a
show of hands, or electronically or on a poll, as the case may be, in favour of
the resolution, including the casting vote, if any, of the Chairman, by members


3 Ashbury Railway Carriage & Iron Co. Ltd. V Riche [1875] L.R. 7 H.L. 653.

who, being entitled so to do, vote in person, or where proxies are allowed, by
proxy or by postal ballot, exceed the votes, if any, cast against the resolution
by members, so entitled and voting.

Section 114(2) defines special resolution as a resolution shall be a special
resolution when:

● the intention to propose the resolution as a special resolution has been
duly specified in the notice calling the general meeting or other
intimation given to the members of the resolution;

● the notice required under this Act has been duly given; and
● the votes cast in favour of the resolution, whether on a show of hands,

or electronically or on a poll, as the case may be, by members who,
being entitled so to do, vote in person or by proxy or by postal ballot,
are required to be not less than three times the number of votes, if any,
cast against the resolution by members so entitled and voting.

1.4.21 Paid-up share capital or share capital paid-up

Section 2(64) of the Act defines paid-up share capital as an aggregate amount
of money credited as paid-up as is equivalent to the amount received as paid-
up in respect of shares issued and also includes any amount credited as paid-
up in respect of shares of the company, but does not include any other amount
received in respect of such shares, by whatever name called.

1.4.22 Previous Company law

Section 2(67) of the Companies Act, 2013 defines as to what is the previous
company law as used the present legislation. This definition becomes
important to understand the extent of application of the 2013 Act of the
companies which are already incorporated under the previous company law.
Previous company law means any of the laws specified below:

● Acts relating to companies in force before the Indian Companies Act,
1866 (10 of 1866);

● The Indian Companies Act, 1866 (10 of 1866);

● The Indian Companies Act, 1882 (6 of 1882);

● The Indian Companies Act, 1913 (7 of 1913);

● The Registration of Transferred Companies Ordinance, 1942 (Ord. 54

of 1942);

● The Companies Act, 1956 (1 of 1956);

● Any law corresponding to any of the aforesaid Acts or Ordinances and

in force—

○ in the merged territories or in a Part B State (other than the

State of Jammu and Kashmir), or any part thereof, before the

extension thereto of the Indian Companies Act, 1913 (7 of

1913); or

○ in the State of Jammu and Kashmir, or any part thereof, before

the commencement of Jammu and Kashmir (Extension of

Laws) Act, 1956 (62 of 1956), in so far as banking, insurance

and financial corporations are concerned, and before the

commencement of the Central Laws (Extension to Jammu and

Kashmir) Act, 1968 (25 of 1968), in so far as other

corporations are concerned;

● The Portuguese Commercial Code, in so far as it relates to sociedades

anonimas; and

● The Registration of Companies (Sikkim) Act, 1961 (Sikkim Act 8 of

1961);

1.4.23 Private Company

Section 2(68) of the Companies Act defines private company to mean a
company having a minimum paid-up share capital as may be prescribed, and
which by its articles:

● restricts the right to transfer its shares;
● except in case of One Person Company, limits the number of its

members to two hundred.

Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated as a
single member.
Provided further that:
(A) persons who are in the employment of the company;
(B) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued
to be members after the employment ceased, shall not be included in the
number of members; and

● prohibits any invitation to the public to subscribe for any securities of
the company.

1.4.24 Promoter

Section 2(69) of the Companies Act defines who a promoter is. A promoter
plays a very crucial role in the inception of the idea of a company,
incorporation and functioning of the company. In the words of Chief Justice
Cockburn a promoter is anyone who undertakes the responsibility of
formation of a company with a particular object or a particular project and to
set it going and who takes necessary steps to accomplish that purpose.4
Further, section 2(69) of the act defines promoter to mean a person:

● who has been named as such in the prospectus or is identified by the
company in the annual return referred to in section 92; or

● who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or

● in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity.

1.4.25 Prospectus

A prospectus is issued by a company to advertise or invite the general public
to buy their share. Section 2(70) of the Companies Act defines a prospectus as


4 Twycross V, Grant, 1877 2 C.P.D 469.

any document described or issued as a prospectus and includes a red herring
prospectus referred to in section 32 or shelf prospectus referred to in section
31 or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of body
corporate;

1.4.26 Register of Companies and Registrar

The Register of Companies and Registrar are defined under section 2(74) and
section 2(75) respectively. The Registrar of Companies play an important role
in registering companies and discharging various functions under this Act. As
per section 2(75) registrar includes a Registrar, an Additional Registrar, a
Joint Registrar, a Deputy Registrar or an Assistant Registrar.

1.4.27 Related Party

Section 2(76) of the Companies Act defines related party with respect to the
company to mean:

● a director or his relative;
● a key managerial personnel or his relative;
● a firm, in which a director, manager or his relative is a partner;
● a private company in which a director or manager is a member or

director;
● a public company in which a director or manager is a director or holds

along with his relatives, more than two per cent. of its paid-up share
capital;
● any body corporate whose Board of Directors, managing director or
manager is accustomed to act in accordance with the advice, directions
or instructions of a director or manager;
● any person on whose advice, directions or instructions a director or
manager is accustomed to act:
● any company which is—

○ a holding, subsidiary or an associate company of such
company; or

○ a subsidiary of a holding company to which it is also a

subsidiary;
● such other person as may be prescribed.

1.4.28 Share

Section 2(84) defines share to be a share in the share capital of the company
and includes stock.

1.5 Setting-up of a Company

Having looked at the key definitions given under the companies Act of 2013. The
next part of this chapter will deal with the incorporation of a company. Setting-up of a
company in India involves many steps, namely, preparation of Memorandum of
Association, Articles of Association, raising the necessary capital for the company,
long list of compliances which should be taken care of, filing the documents with the
Registrar of Companies. These steps can be categorised under 4 main heads, those
are: Promotion of the Company, Registration of the Company with the Registrar of
Companies, Floatation and Commencement of business of the Company.

The first step in setting-up of a company is the promotion of a company. The
promotion of the company in its wide import means the initial and preliminary steps
to be taken by the Promoter for the purpose of registration and flotation of a company.
The promotion of the company include the drafting of the Memorandum of
Association and Articles of Association which are the Constitutional documents of the
Company. The Memorandum of Association provides for the objective for the
formation of the Company, the name of the company, the registered office clause of
the company, the liability clause and the capital of the company. The Memorandum of
a company is the constitution of the company based on which the company functions.
The Articles of Association is the document which lays down the regulations for the
management of the company, it can also be considered to be the bye-laws of a
company. Further, promotion of the company includes adhering to all the compliances
which are provided in the Companies Act, 2013.

The second Step in the setting-up of a company is registration of the company. The
registrar of companies is the statutory authority which is responsible for registering
the companies in the register of companies. There involves a great amount of
documentation and filing with the Registrar for his scrutiny and approval for
registering the company. Once all the necessary documents as specified under section
7 of the act are filed and approved by the Registrar then the company is said to be
registered as per the provisions of the Act.

Once the company is registered with the registrar of companies, the next step in the
process of setting-up of a company is flotation of the company. In this step it's the
duty of the promoters of the company to issue shares, issue debentures, borrow credit
from financial institutions and undertake such other activities to raise the necessary
capital for the functioning of the company. The flotation of a company is usually done
by issuing a prospectus to the general public and inviting them to buy shares and
invest in that particular company. Other methods of floatation or raising of shares
include private placement of shares, issuing bonds, debentures, borrowing credit from
financial institutions etc.

The final stage in the setting-up of a company is commencing the business or the
operation of a company. This stage is completed when the company has raised all the
necessary capital for its functioning and finally starts operating towards meeting the
objectives of the company as laid down in the Memorandum of a company.