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Published by Enhelion, 2019-11-18 00:38:14

Module_1_22_

Module_1_22_

COMPANY LAW AND
COMPLIANCES

CERTIFICATE COURSE

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DEVELOPED BY

MODULE - 1

COMPLIANCE AND ABSOLUTE NECESSITY

1.1 Introduction to Company law money or money’s worth to a common stock and
employ it in some trade or business and reaps
As an emerging market, India is one of the biggest profits out of such contribution. The profits
and fastest growing markets in the world and the earned or losses incurred will be shared between
Company Act, 1956 was far below the global the persons who constitute the company. The
standards to keep up with the pace. There was a common stock which is contributed by the
dire need to strengthen the laws regarding persons forms the capital of the company and is
accountability, disclosures, investor protection denoted in money. The people who contribute the
and corporate governance. The enactment of the money to the capital of the company are known as
Companies Act, 2013 (herein referred to as the the members of the company. The proportion of
companies act) which replaced the age-old capital which is contributed by each of the
companies act of 1956 and brought in the members is known as the share of that person.
necessary changes which were required. This act
is considered to be one of the most important legal 1.3 Nature and characteristics of a company
reforms in India and brought the India Company
Law at par with the global standards. The 2013 A company is the creation of the law, it's not a
Companies Act provides for both Mandatory and human being and its an artificial juristic person.
general compliances. The company has many rights, duties, powers and
obligations prescribed by the law. The company is
1.2 What is a Company and Nature of a Company a juristic person it draws all its powers from the
Memorandum of Association which is said to be
The word ‘company’ has no no strict, technical or the Charter of the company. The Company has
legal definition. One of the conclusive definitions some distinct characteristics. Namely, it has
is given Lord Justice Lidley who defines Company distinct and separate corporate personality from
as an Association of many persons who contribute the members who constitute it. The company has

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a seal of its own, it can buy, own and sell property derive profits without being burdened with the
in its name. The most important case law which management of the company, which means to say
affirms this principle of distinct corporate that there is separate management of the
personality is the case of Salomon V Salomon and company which is formed to manage, administer
Co. Ltd., 1897.i and govern the company.

One important feature of a company is that of 1.4 Types of Companies
limited liability of the members and shareholders
of the company. Where in case of any default or Under chapter II, section 3 of the act provides for
bankruptcy of the company, the members and the the formation of the company where it provides
shareholders of the company will only be for any lawful purposes a company can be formed
responsible for the value of their share by
contributed towards the company’s capital. As the
company is the creation of the law, the company ● Seven or more persons where the
can only be closed or shut down by a law itself, company to be formed is to be a public
which means that the company will have perpetual company.
succession and death or leaving of any of its
members will not affect the companies continuity. ● Two or more persons where the company
to be formed is to be a private company or
A company like any other person can sue and be
sued for any of the breaches of contract or such ● One person, where the company to be
other damages which it incurs in particular dispute formed is to be one person company, that
between another legal entity or a person and the is to say, a private company.
company itself. A member of a company may
A company so incorporated under this section
may either be a company where the liability of the
shareholders or members is limited by shares or
limited by guarantee or unlimited liability.

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*All the sections referred to in the above diagram are companies are extensive and tedious. Amongst the
from the Companies Act, 2013. various other sections in the act, there are specific
provisions which are provided in the companies act
1.4 The main objectives of the Companies Act are which provides for clauses regarding periodic filing
of forms with the Registrar of Companies,
1. To regulate the companies affairs in a legal qualification, appointment, remuneration, removal,
manner with monitoring and controlling. retirement of directors, conducting board and
shareholders meetings. The shareholding of a
2. The Companies Act clarifies the company be mainly divided into two types namely
accountability of the promoters, directors equity shareholders and preferential shareholders.iii
and other elements Equity shareholders can be further classified into
equity shareholders with voting rights and equity
3. To regulate the appointment, remuneration, shareholders with differential rights as to dividend,
qualifications and other aspects related to voting or otherwise in accordance with such rules as
the directors. may be prescribed.iv Shareholders are further
classified into majority shareholders and the
4. To regulate aspects regarding the manner in minority shareholders.
which board meetings and shareholder
meetings should take place. The maintenance of books of accounts, the
preparation and presentation of annual accounts
5. The preparation and presentation of annual (matters to be reported upon in the annual reports of
accounts and books of account records as the companies), passing of resolutions, related party
per the standard set by the act. transactions, internal and external Audit, financial
Audit of the company, pronouncement of reports
This is to say that all these regulations set forth and yearly results, details of the creditors and
under the companies act need strict adherence and debtors, Asset of the company. These are some of
compliance failing which it would attract penalties. the rules which must be compulsorily complied with
so that the company is legally and rightfully
1.5 Necessity of Compliance incorporated and functioning smoothly. This needs
continuous monitoring so that the companies do not
Compliance means the action of obeying an order,
rule, or requestii. Even though India is one of the
largest economies in the world, new companies
rightly complain about the high complexity of
conducting business here. This is mainly because of
the reason that compliance requirements for the

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attract any penalties or the attention of the Companies Act. The Act provides for legal backing to
regulatory authorities. the various corporate governance norms so laid
down by the government and the regulatory
1.6 Types of Compliance authorities throughout the country because they are
essential for proper corporate governance,
Compliance under Companies Act is not a one-time operations, protecting the stakeholders' rights and
thing, where it requires regular and continuous interests. Non-compliance or violations of such
compliance of such rules as laid down by the law. norms so established by law is termed to be an
Compliance is one such aspect in the companies offence and is often attached with penalties.
which plays a role in running the company smoothly.
There are certain regulatory compliances which the It's not realistic or possible to expect the companies
companies or the persons responsible for its to voluntarily comply with the legal framework so
incorporation must follow pre and during the laid down by the law. There may be companies or
incorporation of the company. Post incorporation persons who are interested in making profits and
there are certain general compliances and doing businesses for legitimate costs and there are
mandatory compliances which must be followed as few others who have registered and incorporated
per the companies act. Further on, there are day-to- companies to defeat the purpose of law or to evade
day compliance and annual compliances which are to taxes or avoid certain legislation as was done in the
be met as per the requirements of the act. case of The Workmen Employed in Associated
Rubber Industries Limited, Bhavnagar v. The
To name a few, an investor or a promoter should Associated Rubber Industries Ltd., Bhavnagar and
perform certain compliances such as filing of the another, A.I.R. 1986 SC 1.
memorandum of incorporation and such other
documents with the Registrar of Companies. Post There are exclusive authorities which are
incorporation it includes conducting regular board established by the government is to keep a check on
meetings, shareholders meetings and the such activities of the companies such as the Office of
appointment of Auditors etc. the Registrar of Companies which is appointed
under section 396 of the Companies Act whose main
1.7 Why Compliance is an absolute necessity objective is to ensure that the companies comply
with the statutory requirements. The objective or
A company is a legal entity which is created by law
and it becomes important for it to comply with the

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the manner in which the law has to be laid down is maximum number of persons who should be
that the law should encourage the companies to
comply with the law through self-regulation. The appointed as directors in a company. As per
state has to discharge an important responsibility on
its part where it not only frames a law, and correctly Section 149(1)(a), the minimum number of
recognises the interests of stakeholders, but it also
has to effectively implement and administer the directors to be appointed is 3 in case of a public
same. The Companies Act provides for compliances
which are mandatory, general and optional. All these company, 2 in case of a private company and 1
three have their own importance and implications in
the law. director in case of a one person company. Section

1.7.1 Mandatory Compliance 149(1)(b) of the Act specifies that the maximum

Mandatory compliances are those activities which number of directors who can be appointed, that is
must be performed by the companies, failing which
attracts both financial penalties and penal action for 15. The Act mandates that this compliance as
the persons who were responsible for fulfilling such
compliances and have failed to do so. Few of the prescribed under Section 149(1) should be
mandatory compliances are:
● Appointment of Directors: Chapter XI (sections complied with within 1 year from the date of

149 to 172) provides for appointment and commencement.
qualifications of directors. Directors are termed to
be one of the key managerial personnel as defined ○ There must be at least one-third of the
under section 2(51) of the Companies Act, 2013.
Directors has a very important role in the persons be appointed as an ‘Independent
management and governance of the company.
Directors has an important role in policy making Director’, section 149(6) of the Act,
and decision taking aspects as well. Section
149(1)(a) and (b) specifies the minimum and the provides the qualifications of an

independent director.

○ Section 161 of the Act, provides for the

appointment of additional director,

alternate director and nominee director.

○ Section 149(1) read with Rule 3 of

Companies (Appointment and

Qualification of Directors) Rules, 2014

requires and mandates that there should

be at least one woman director to be

appointed on the Board of Directors in

every company which is listed, and in any

other public company which is having a

paid-up capital of one hundred crores or a

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turnover of three hundred crores or more. and thereafter till the conclusion of every 6th
A company must appoint within 6 months meeting and the manner and procedure of
from the date of incorporation. selection of auditors by the members as given
under rule 3 Companies (Audit and Auditors)
● Meeting of the Board of Directors: As per section Rules, 2014.
173(1) of the Companies Act 2013, mandates that
every company should hold a board meeting within ● Filing of Financial Statements: Section 129 of the
30 days from the date of its incorporation. Companies Act 2013, requires each company to
Thereafter, the company must hold a minimum of prepare its financial statements at the end of each
4 board meeting within an interval of not more financial year giving a true and fair view of the
than 120 days between 2 board meeting. The state of affairs of the company. Such filing of the
participation of the directors can be either in financial statements shall be as per the
person or through video conferencing. requirement which is laid down under section 133
of the Act and in format as specified under
● Issuance of Share Certificates: Section 46 of the Schedule III of the Act.
Companies Act 2013, provides that a share
certificate should be issued under common seal if ● Corporate Social Responsibility (CSR): As per
any of the company or signed by 2 directors or by a section 135 of the Companies Act 2013, every
director and the company secretary, specifying the company which is having a net worth of rupees five
shares held by any person and the certificate shall hundred crores or more, or a turnover of rupees
act as the prima facie evidence of the title of the thousand crores or more or net profit of rupees
person to such shares. five crores during the financial year, shall
constitute a Corporate Social Responsibility
● Appointment of Statutory Auditors: Section 139 Committee of the board consisting of three or
of the Companies that makes it mandatory that a more directors, out which one should an
company appoints an individual or a firm as an independent director. The section further
auditor, at its First General Meeting, who shall mandates that the company should ensure to
hold the office from the day of the conclusion of spend, every financial year, at least 2% of the of the
that meeting till the conclusion of its 6th meeting average net profits of the company made during

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the immediate preceding financial years as per the 1.8 Provisions under the Companies Act
Corporate Social Responsibility Policy.
One of the very first provisions in the Companies Act
1.7.2 General Compliance which provide for compliance which must be
complied with is Section 3 of the act which provides
General compliances under the company law include for the requirements to be met by the company so
obtaining a Permanent Account Number (PAN) or that it may be formed for lawful purposes. Chapter 2
Tax Account Number (TAN) in the name of the of the Act provides for clauses for compliance with
company. Complying with the Environmental laws respect to the Incorporation of company and
and norms etc. matters incidental thereto. These provisions will be
discussed in depth under chapter 2.
The PAN card has to be obtained under Section
139A of the Income Tax Act, 1961 and the TAN One of the important aspects and provisions which
under the provisions of Section 203A of the Income should be compiled and mandated by the act is that
Tax Act, 1961. The Companies have to mandatorily of appointment of Board of directors which is
register under provisions the Goods and Services provided under section 149 of the act. This specifies
Act, 2017. the number of directors to be appointed, their role
and all other duties which they have to perform after
1.7.3 Optional Compliance their appointment. Compliance under company law
is of 2 types: which is mandating the company to do
Optional compliance includes Drafting employee some necessary activity and prohibitive compliance
related documents and HR policies, drafting where it prohibits the company or the members
agreements such as Non-Disclosure Agreements, constituting it from doing something.
privacy policies etc. these compliances are not the
part of the Companies Act, however, the same are For instance, section 144 of the Companies Act,
the relevant part of the Labour Compliances. The provides for services which an auditor should not
Labour Compliances are being governed under the render under certain conditions and this clause
provisions of Labour Laws and the same is termed as becomes and prohibitive compliance where a
Human Resource Management and Employment company should make sure that they adhere to such
Rules. The HR policy has to be well drafted for the rules. Chapter 29 of the companies act prescribes
welfare of the employees and for employers, as well.

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punishments for the personnel responsible for company must comply with while publishing the
complying with such rules but failed to do so. prospectus.

1.8.1 Penal Provisions under the Companies Act Section 34 and 35 of the Act provides for both civil
and criminal liability against persons who are
The Companies Act 2013 provides for penal responsible for publishing misstatements in the
provisions punishing the persons in default of prospectus.v Section 34 of the Act holds a person
responsibility with respect to the management, criminally liable for the misstatements where
administration and compliance of certain mandatory section 34 further mentions section 447 of the act
and compulsory compliances and enforce civil which holding the person liable for fraud. The
liability. One of the very first provisions in the punishment which is subscribed is imprisonment of
Companies Act which specifies about the liability of
the persons who have published misstatements in not less than 6 months which may extend up to 10
the prospectus. The Companies Act specifies certain years and section 35 makes such persons liable for
mandatory and necessary compliances which the the fraud to pay compensation of every person who
has sustained such loss or damage.

i Salomon V Salomon and Co. Ltd., (1897) A.C.22 iv Rule 4 of the Companies (Share Capital and Debentures)
ii Pocket Oxford English Dictionary, 21st Edition Rules, 2014.
iii Section 43 of the Companies Act 2013.
v Section 26 of the Companies Act 2013 provides forPtahgee | 4

compulsory information to be included in the prospectus.


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