This article has been written by Ms. Ankita Bharti, a 2nd year LL.B student from Faculty Of Law, Delhi University.
The Companies Act is a crucial piece of legislation in India that governs the formation, functioning, and management of companies. The act was first introduced in 1956 and has undergone several amendments since then. The latest amendment was made in 2020, which aimed to bring more transparency and accountability in corporate governance. In this article, we will discuss the application of the Companies Act in India.
Formation of a Company
The first step in forming a company in India is to register it under the Companies Act. The act prescribes various requirements for the formation of a company, such as the minimum number of directors and shareholders, the maximum number of shareholders, and the minimum paid-up capital. Once the company is registered, it becomes a legal entity separate from its shareholders and directors.
Corporate Governance
The Companies Act lays down the principles of corporate governance that companies in India must follow. These principles include the composition and roles of the board of directors, the appointment and remuneration of key managerial personnel, the conduct of board meetings and general meetings, and the disclosure of information to shareholders and other stakeholders. The act also mandates the formation of various committees, such as the audit committee, nomination and remuneration committee, and stakeholder relationship committee, to ensure that the company’s affairs are managed in a transparent and accountable manner.
Shareholders’ Rights
The Companies Act gives significant importance to the rights of shareholders. Shareholders have the right to attend general meetings, vote on resolutions, and receive dividends. They also have the right to inspect the company’s books and records and to sue the company for any wrongdoing. The act also provides for the protection of minority shareholders’ rights and prevents any oppressive or prejudicial action against them by the majority shareholders.
Corporate Social Responsibility
One of the significant changes brought about by the 2013 amendment to the Companies Act is the introduction of the concept of Corporate Social Responsibility (CSR). The act mandates that companies with a net worth of Rs. 500 crores or more, or a turnover of Rs. 1,000 crores or more, or a net profit of Rs. 5 crores or more, must spend at least 2% of their average net profits of the preceding three years on CSR activities. These activities may include eradicating hunger and poverty, promoting education and healthcare, protecting the environment, and supporting social welfare programs.
Mergers and Acquisitions
The Companies Act lays down the legal framework for mergers and acquisitions of companies in India. The act requires that the merger or acquisition must be approved by the board of directors and the shareholders of both companies. It also provides for the appointment of an independent valuer to determine the fair value of the shares of the company being acquired. The act also prescribes the procedure for the amalgamation of companies and the transfer of their assets and liabilities.
Insolvency and Bankruptcy
The 2016 amendment to the Companies Act introduced a new chapter on insolvency and bankruptcy. The act provides for a time-bound resolution process for companies that are in financial distress. It also establishes the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI) to oversee the insolvency process. The act also provides for the liquidation of companies that cannot be revived.
Application of Companies Act in India
The Companies Act applies to all companies incorporated in India, including public and private companies. It also applies to foreign companies operating in India. The Act provides guidelines for the formation and registration of companies, their management and administration, shareholder rights and responsibilities, and the dissolution of companies.
One of the key features of the Companies Act is the requirement for companies to maintain proper books of accounts. The Act outlines the requirements for maintaining proper books of accounts, including the types of books that must be maintained, the frequency of maintenance, and the format of the accounts. Failure to maintain proper books of accounts can result in penalties and fines for the company and its directors.
The Act also outlines the duties and responsibilities of company directors. Directors are required to act in the best interests of the company and its shareholders. They must exercise due diligence and care in the management of the company’s affairs. Directors who fail to fulfill their duties can be held liable for losses suffered by the company.
The Act also provides for the protection of shareholder rights. Shareholders have the right to participate in the management of the company by attending and voting at general meetings. They also have the right to receive dividends, inspect the company’s books of accounts, and initiate legal action against the company if their rights are violated.
Case laws and Examples
Tata vs. Mistry
The case of Tata vs. Mistry is one of the most high-profile corporate legal battles in India. In 2016, Cyrus Mistry was appointed as the chairman of Tata Sons, the holding company of the Tata Group. However, in 2016, the Tata Sons board voted to remove Mistry as chairman, citing differences in management style and a lack of performance. Mistry challenged the decision in court, claiming that he had been unfairly removed and that the board had acted in an oppressive manner. The case raised several issues related to corporate governance, including the role of the board of directors in decision-making, the duties and responsibilities of directors, and the protection of shareholder rights. The case also highlighted the importance of transparency and accountability in corporate governance.
Satyam Computer Services Ltd.
The Satyam Computer Services Ltd. scandal was one of the largest corporate frauds in India’s history. In 2009, the company’s founder, Ramalinga Raju, admitted to falsifying the company’s accounts and inflating its profits. The scandal resulted in the collapse of the company, and Raju was arrested and charged with fraud. The case raised several issues related to corporate governance, including the importance of maintaining proper books of accounts, the role of auditors in detecting fraud, and the need for effective regulation and oversight of companies.
Kingfisher Airlines Ltd.
The Kingfisher Airlines Ltd. case was another high-profile corporate scandal in India. The airline, owned by Vijay Mallya, was heavily indebted and had been unable to pay its employees and creditors. In 2012, the airline’s operating license was suspended by the Indian aviation regulator, and the company was eventually declared bankrupt.
The case raised several issues related to corporate governance, including the need for effective management and financial control, the importance of maintaining adequate cash reserves, and the need for transparency and accountability in financial reporting.
Conclusion
In conclusion, the Companies Act is a crucial piece of legislation that governs the formation, functioning, and management of companies in India. It provides a legal framework for corporate governance, protects the rights of shareholders, promotes corporate social responsibility, regulates mergers and acquisitions, and provides for the resolution of insolvency and bankruptcy. Companies in India must comply with the provisions of the act to ensure that their affairs are managed in a transparent and accountable manner. The recent amendment to the act has brought in several changes to the companies act which as per the changes in society is very helpful and thoughtful.
REFERENCES:
- www.mca.gov.in
- https://taxguru.in
- www.indiacode.nic.in
- https://indiankanoon.org
- Tata vs. Mistry case
- Satyam Computer Services Ltd. case
- Kingfisher Airlines Ltd. case