BASIC UNDERSTANDING ABOUT COMPANIES

1. Define Company. Explain a Special Features of Company Compulsory registration under t e Companies A!t Pursuant to section 11(2) of the Companies Act, 1956, where more than twenty persons jointly desire to carry on any usiness (!en person in case of an"in# company) with the o ject of ac$uisition of #ain, they can #o a out to pursue that o jecti%e only if they form a company and #et it re#istered under the pro%isions of the Act& " at is a !ompany# Company is a %oluntary association of persons formed for the purpose of doin# usiness ha%in# a distinct name and limited lia ility& 't is a juristic person ha%in# a separate le#al entity distinct from the mem ers who constitute it, capa le of ri#hts and duties of its own and endowed with the potential of perpetual succession& As per definition #i%en y Companies Act, 1956, a (company( includes company formed and re#istered under the Act or an e)istin# company i.e. a company formed or re#istered under any of the pre%ious company laws& Ad$antages or %eatures o% a !ompany (i ) A company is a le#al entity, distinct and independent of those persons who from time to time are its mem ers& (ii) !he lia ility of the company(s mem ers can e limited to the e)tent they ha%e a#reed to contri ute towards the capital of the company with reference to the num er of shares and*or the amount of #uarantee respecti%ely underta"en y them& (iii) 'ts mem ers are not personally lia le for any act or omission on the part of the company, unless the law e)pressly pro%ides otherwise& (iv) !he company ein# a juristic person, distinct from the mem ers constitutin# it, can ac$uire, own, enjoy and alienate property in its own name& (v) !he company ein# a le#al entity can sue and also e sued in its own name& (vi) !he continuity of the company is not effected y the death or disa ility of any of its mem ers& !his feature is referred to as +perpetual succession+& (vii) !ransfer of mem er(s interest in the company can e readily attained without in any way ad%ersely affectin# its property, usiness, or e)istence&
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(viii)

(ix)

(x)

!he mem ers of the company e$uita ly share the profit y way of di%idend and the company(s assets in the e%ent of its windin# up in proportion of its capital respecti%ely contri uted y them& 'ncorporation of company pro%ides etter orrowin# facilities as the company can raise lar#e amount, on comparati%ely easier terms& ,%en an"in# and financial institutions prefer to render financial assistance to incorporated companies& -nce the company is rou#ht into e)istence on its incorporation, it can only e dissol%ed with the pro%isions of the law&

Disad$antages o% a !ompany %orm o% organisation (i ) .nlimited lia ility/ 't is pertinent to note that while the mem ers( lia ility is limited, the company itself is fully lia le for its de ts and thus has unlimited lia ility& (ii) Personal lia ility of directors and mem ers arises in followin# cases/ (a ) when the num er of mem ers of a pri%ate company is reduced elow two and in case of a pu lic company reduced elow se%en and the company continues to carry on usiness for more than 6 months, e%ery person who is a mem er of the company and has "nowled#e of the fact, shall e se%erally lia le for the de ts contracted durin# that time0 (b ) when in any act or contract, the name of the company has een mis1 descri ed, those who ha%e actually done the act or made the contract, shall e personally lia le for it0 (c) holdin# and su sidiary companies are #enerally %iewed as independent entities& 2owe%er, this independence is reduced to a certain e)tent when such companies are re$uired to present accounts and financial position of the #roup as a whole to its creditors, shareholders and pu lic& (iii) 3ormalities and e)penses/ 4any formalities li"e o tainin# 5irectors 'dentification 6um er, 5e#ital 7i#nature and e)penses are in%ol%ed in the incorporation of the company and 5ay1to1day mana#ement and compliance of the company, such as holdin# meetin#s of the 8oard of directors and #eneral meetin#s, preparation of accounts and auditin#, passin# of resolutions, preparation of statutory re#ister and records, filin# of on1line documents with the 9e#istrar, etc& (iv) Company is not a citi:en& C ara!teristi!s o% a !ompany A company re#istered under the Companies Act has the followin# features/ ; (i) separate le#al entity0 (ii) incorporated ody0 (iii) artificial le#al person0
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(iv) perpetual succession0 (v) limited lia ility0 (vi) common seal0 (vii) ri#ht to own property0 (viii) ri#ht to sue0 (ix) ri#ht to enter into contracts0 (x) fle)i ility of in%estment0 (xi) separation of control from the ownership&

2. What do you mean by corporate Veil and lifting of the corporate eil! Discuss the circumstances under "hich corporate Veil may be lifted. LIFTING OF THE CORPORATE VEIL Company is a person distinct and separate from its members# and subscribers of the memorandum. $ %he company is not agent of the subscribers or trustees for them. $ &embers are not liable for any act of the company except to the extent and in the manner pro ided by the 'ct. %he abo e concept is called corporate eil. When the abo e concept in case of any company ceases# it is called lifting of corporate eil. (i.e. loo)ing behind the company as a legal separate person* The following are the ca e where cor!orate "eil can #e lifte$% 1* for determining "hether a company is a enemy co.# considering the shareholding of it# 's trading "ith an enemy company is oid. +as company is called enemy company# if the control of its affairs is "ith the persons "ho are enemy., -Daimler Co. .td. s. Continental %yres / 0ubber Co.1 2* if a company is formed for the purpose of reducing the tax liability or any other liability. -(2uggilal . Commissioner of 3ncome tax*.1 4* formation of a company as an agent (transport license to subsidiary co.* 5* Where the number of the shareholders falls belo" the minimum no. of members. 6* Where incorporation is adopted for some illegal or improper purpose. 7* Company for a oiding legal obligation (contract not to do similar business in case of sale of business* 8* for in estigation of o"nership. (e.g. go t. co. or non go t. co.*

4. Explain the procedure of form formation of the company.

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PROCEDURES &OR INCORPORATION AND REGISTRATION O& COMPANIES

A company is a %oluntary association of persons formed for the purpose of usiness acti%ities& A company has distinct name and limited lia ility, it is a juristic person ha%in# a separate le#al entity different from its mem ers who constitute it, capa le of ri#hts and duties of its own and endowed with a potential or perpetual succession& !he Companies Act, 1956 prescri es specific procedures for incorporation and re#istration of companies& A company can e formed either y/; (i) incorporation of a new company0 or (ii) con%ersion of e)istin# usiness (sole proprietorship concern or partnership firm or co1operati%e societies) into company under the pro%isions of Chapter '= and Chapter '=A of the Companies Act, 19560 or (iii) companies incorporated under section 25 of the Companies Act, 1956& !he incorporation ( irth) and windin# up and dissolution (death) of a company are #o%erned y the pro%isions of the Companies Act, 1956& !herefore each company is su ject to the pro%isions of the Companies Act, 1956, as may e amended from time to time& !he followin# procedure in%ol%es for incorporation of a company& STEP "ISE &ORMA'ITIES &OR &ORMATION O& A NE" COMPAN( Persons desirous o% %orming a !ompany must adhere to the step y step procedure as discussed elow/; '& 7election of type of the company& ''& 7election of name for the proposed company& '''& Apply for 5irectors 'dentification 6um er and 5i#ital 7i#natures, if does not ha%e '>& 5raftin# of 4emorandum and Articles of Association& >& 7tampin#, di#itally si#nin# and e1filin# of %arious documents with the 9e#istrar& >'& Payment of 3ees& >''& - tainin# Certificate of 'ncorporation& >'''& Preparation and filin# of Prospectus*7tatement in lieu of Prospectus and e13orm 19*2? (in case of pu lic companies) for o tainin# the certificate of commencement of usiness& '=& - tainin# Certificate of Commencement of usiness (in case of pu lic limited companies)& Sele!tion o% t e type o% !ompany !he promoters of a company may e indi%iduals or odies corporate en#a#ed in efforts to incorporate a company& !hey ha%e the power of definin# the o ject of the company and decidin# %arious connected matters re#ardin# incorporation& Proposed scale of operations, capital in%ol%ed, etc& depend upon the purposes for which the company is to e incorporated& !he promoters are at li erty to select type of the company viz. pri%ate
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company, pu lic company, nonprofit ma"in# company, etc& (7ee my pre%ious Article A8A7'C .65,97!A65'6B A8-.! C-4PA6',7C) Re)uirement %or a$ing DIN As per pro%iso to section 25< of the Companies Act, 1956, inserted y the Companies (Amendment) Act, 2??6, w&e&f& 111112??6, no company shall appoint or re1appoint any indi%idual as director of the company unless he has een allotted a 5irector 'dentification 6um er under section 2668& 6ew section 266A has een inserted y the Companies (Amendment) Act, 2??6 which pro%ides that e%ery indi%idual, intendin# to e appointed as director of a company shall ma"e an application for allotment of 5irector 'dentification 6um er (5'6) to the Central Bo%ernment in the prescri ed 5'6 3orm& !herefore, efore su mission of e13orm 1A all the directors of the proposed company must ensure that they are ha%in# 5'6 and if they are not ha%in# 5'6, it should e first o tained, howe%er on the asis of the pro%isional 5'6 allotted online will ser%e the purpose& 7pecific care should e ta"en that a person cannot ha%e more than one 5'6, therefore, a 5'6 once o tained shall ser%e the re$uirement for all the companies in which he is director or intended to e a director& Re)uirement %or a$ing digital signatures After 16th 7ept&, 2??6, e%ery documents prescri ed under the Companies Act, 1956 is re$uired to e filed with the di#ital si#nature of the mana#in# director or director or mana#er or secretary of the Company, therefore, it is compulsorily re$uired to o tain di#ital si#natures of at least one director to si#n the e13orm 1A and other documents& Sele!tion o% name 7i) names are re$uired to e selected in order of preference after ta"in# notes of numerous clarifications, circulars and rules made y the 4inistry of Company Affairs (5CA), etc& 'n case "ey word is re$uired, si#nificance of each "ey word should e #i%en in the e13orm 1A& APPLYING FOR ASCERTAINING THE AVAILABILITY OF THE SELECTED NAME !he promoters are re$uired to ma"e an application to the concerned 9e#istrar of Companies e su mitted electronically to the 4inistry of Company Affairs on the portal of 4CA& An application shall e in e13orm 1A as prescri ed y 6otification 6o& B79 56(,) dated 1?th 3e &, 2??6 duly di#itally si#ned y any one promoter or mana#in# director or director or mana#er or secretary of the company alon#with the re$uired fee of 9s& 5?? only for ascertainin# whether the selected name is a%aila le for adoption y the promoters of the proposed company& APPROVAL OF THE NAME After receipt of completed application in e13orm 1A, the 9e#istrar shall intimate whether the proposed name is a%aila le for adoption or not& !he confirmation of the name made a%aila le y the 9e#istrar shall e %alid for a period of si) months from the date of letter issued in these re#ards& 'n case, if the promoters fails to su mit all the re$uired
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documents for incorporation within that period, then they are re$uired to su mit another application for re%alidation of name with fresh filin# fee of 9s& 5?? only& Preparation of the Memoran !m of A""o#iation *MOA+ an Arti#$e" of A""o#iation *AOA+ 5raftin# of the 4-A and A-A is #enerally a step su se$uent to the a%aila ility of name made y the 9e#istrar& 't should e noted that the main o jects should match with the o jects shown in e13orm 1A& !hese two documents are asically the charter and internal rules and re#ulations of the company& !herefore, it must e drafted with utmost care and with the ad%ise of the e)perts and the other o ject clause should e drafted in a %ery roader sense& Estimate o% registration %ees %or a ne, !ompany !he fees paya le to the 9e#istrar at the time of re#istration of a new company %aries accordin# to the authorised capital of a company proposed to e re#istered as per 7chedule = to the Act& 3ees can e calculated at the 4CA portal usin# fees calculator& &iling o% do!uments ,it t e Registrar 6e)t step for the promoters is to file the followin# documents with the 9e#istrar for incorporation of the company& !he followin# documents shall e su mitted to the 9e#istrar alon#with the ade$uate filin# fees as applica le for re#istration of the company electronically on line asis within a period of si) months from the date of intimation of a%aila ility of name/; *i+ Memorandum o% Asso!iation, duly si#ned y the su scri ers and witnessed, showin# the num er of shares a#ainst their names electronically attached in P53 file& 't should also e properly stamped as per the stamp duty applica le in the 7tate, where the re#istered office of the company is to e situated& Photo#raphs of the su scri ers shall also e attached& 7imultaneously ori#inal stamped copy of the 4emorandum of Association shall e su mitted (physical su missoin) with the 9e#istrar of Companies concerned& *ii+ Arti!les o% Asso!iation should also e duly si#ned y the su scri ers and witnessed, showin# the num er of shares a#ainst their names electronically& 't should also e properly stamped accordin# to the authorised share capital& Photo#raphs of the su scri ers shall also e attached& 7imultaneously ori#inal stamped copy of the Article of Association shall e su mitted with the 9e#istrar of Companies concerned& *iii+ Copy o% t e agreement- i% any, which the company proposes to enter into with any indi%idual for appointment as its mana#in# or whole1time director or mana#er shall e attached in the P53 file& *i%+ De!laration in e.&orm / y an ad%ocate or company secretary or chartered accountant en#a#ed in whole time practice in 'ndia or y a person named in the Articles as a director, mana#er or secretary of the company, that all the re$uirements of the
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Companies Act, 1956 and the rules made thereunder ha%e respect of re#istration& 0Re%e Se!tion 11*2+3

een complied with in

*%+ Po,er o% Attorney for should e furnished y all the su scri ers in fa%our of any one su scri er or any other person authorisin# him to file these documents and to with the 9e#istrar and to o tain certificate of incorporation& !he power of attorney should e #i%en on 6on1Dudicial stamp paper of appropriate %alue and shall e su mitted to the 9e#istrar& *%i+ Ot er agreement i% any- which has een stated in the 4emorandum or Articles of Association shall also e filed in the P53 file with the 9e#istrar ecause in such cases the a#reement will form part of this asic document& *%ii+ E.&orm /4 is to e filed with the 9e#istrar electronically with the di#ital si#natures in re#ard to location of the re#istered office& ,13orm 1E shall also e certified y the company secretary or chartered accountant or cost accountant in whole1time practice& F7ection 1@6(2)G *%iii+ E.&orm 12 is re$uired to e filed with the 9e#istrar electronically for filin# particulars of directors& !he personal details should match with the information pro%ided in the 5'6& 3ollowin# additional details are also re$uired to #i%en in e13orm <2/ ,13orm <2 is re$uired to e di#itally si#ned y the director or mana#in# director or mana#er or secretary of the company& ,13orm <2 shall e filed alon# with the ade$uate filin# fee as prescri ed under 7chedule =''' of the Companies Act, 1956& SUBMISSION O& E.&ORM / ,13orm 1 has to e su mitted with followin# enclosures/ (1) 4emorandum of Association (4oA) and Article of Association (AoA) of the company F6ot re$uired for a company licensed under section 25G0 (2) Anne)ure containin# details of su scri ers (-ptional)0 (<) Power of Attorney*Authority letter #i%en y the su scri ers*promoters*directors to the professional i.e. ad%ocate or attorney or pleader or C7 or CA (in whole1time practice) for formation of a company& (@) Copy of 4emorandum of Association (4oA) and Article of Association (AoA) after stampin# and physically si#ned y all the su scri ers should e deli%ered at the 9oC office where company is to e re#istered& 6ote/ 'n case, if any su scri e put his name, and other descriptions and si#n in a lan#ua#e other than, in which the 4emorandum and Articles of Associates, then it is re$uired y the witness to #i%e statement that he had e)plained the contents of all the documents in such lan#ua#e and the su scri er has si#ned the same after proper understandin# of the same& 3urther that an Affida%it on the stamp paper of ade$uate %alue that he had een e)plained the contents of the 4emorandum and Articles of Association and all other rele%ant documents for incorporation of the company and he*she had put
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his*her si#nature after proper understandin# of the same and this affida%it should also e furnished with the 9e#istrar alon# with all the documents as descri ed a o%e& Certi%i!ate o% In!orporation *Se!tions 11 and 15+ -n the satisfaction of the 9e#istrar that the re$uirements specified in sections <<(1) and <<(2) ha%e een complied with y the company, he shall retain the documents and re#ister the 4-A, A-A and other documents& 7ection <@(1) cast an o li#ation on the 9e#istrar to issue a Certificate of 'ncorporation, normally within H days of the receipt of documents& 't is ad%isa le to authorise some person to collect the certificate personally from the 9-C -ffice& Commen!ement o% Business A Pri%ate limited company and a company not ha%in# share capital may commence its usiness acti%ities from the date of its incorporation& 2owe%er, a Pu lic Iimited Company ha%in# share capital is also re$uired to o tain a separate certificate of commencement of usiness accordin# to section 1@9(2A) of the Companies Act, 1956& &% Gi"e a Cla ification of a Co'!an( Classi%i!ation o% !ompanies Companies under the Companies Act, 1956 may #rounds as under/ e classified on %arious

I6 On t e 7asis o% 7usiness a!ti$ities underta8en9 */6+ Manu%a!turing Companies9 Companies mainly en#a#ed in any type of manufacturin# acti%ities are primarily classified as manufacturin# companies& !hese companies are re$uired to comply with the pro%isions of Companies Act, 1956 alon#with the Companies (Auditor's Report) Order, 2003 (CARO)& *26+ Ser$i!e Companies9 Companies mainly en#a#ed in any type of ser%ice acti%ities li"e consultancy, mana#ement, information technolo#y, etc&, althou#h they may ha%e other usinesses, are termed as ser%ice companies& !hese companies ha%e to comply with the pro%isions of Companies Act, 1956 alon#with the rules prescri ed in the Companies (Auditor(s 9eport) -rder, 2??< (CA9-)& *16+ Non.Ban8ing &inan!e Companies9 Companies, which are not an"in# companies ut are en#a#ed in the usiness acti%ities, related to loan, finance, in%estment, leasin#, hire purchase and other fund1 ased acti%ities, are termed as 6on18an"in# 3inancial Companies& !here are certain criteria for 683C Companies viz& Compulsory re#istration with the 98' for commencement*continuance of 683C acti%ities, minimum 6et -wned 3und,
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re$uirement of compulsory ratin# and 98' compliance deposits, etc&

efore acceptance of

*56+ Non.pro%it ma8ing Companies9 Any association desirous of ein# incorporated as a company with limited lia ility, without the addition of word +Iimited+ or the words +Pri%ate Iimited+ as the case may e shall ma"e an application electronically to the Centra$ Go%ernment &po'er" e$e(ate to the Re(iona$ Dire#tor) on ehalf of such company*proposed company as the case may e, for #rant of licence under section 25& 't is usual to form such companies whose o jects may e to protect and promote the interests of traders and usiness #roups or to promote art, science, reli#ion, charity or such other #eneral purpose, which is in the o%erall interest of the community& 7ection 25 of the Companies Act, 1956 deals with the powers of the Central Bo%ernment to dispense with (Iimited( in the name of charita le or other companies on fulfillments of certain conditions and is entrusted with the power to #rant licence to association that for the companies proposed to e formed without the word +Iimited+ or +Pri%ate Iimited+ in their names or to companies already formed to delete the said words from their names where the Central Bo%ernment is satisfied that/; (a) the o ject for which the company is proposed to e formed or already formed is to promote commerce, art, science, reli#ion, charity or any other useful o jects0 (b) profits, if any, earned in carryin# out the o ject and other income are proposed to e applied only for promotin# its o jects0 and (c) the company intends to prohi it the payment of di%idend to its mem ers& II6 On t e 7asis o% lia7ilities o% t e mem7ers and dire!tors9 */+ Companies ,it 'imited lia7ility / 'n such types of companies, the lia ilities of mem ers are always limited su ject to some e)ceptions& Companies limited 7y s ares !hese types of companies are $uite common in commercial, tradin# and industrial world& 7uch companies are characterised with an authorised share capital of a certain amount, which is di%ided into shares& !he authorised share capital may comprise of more than one "ind of shares, viz& ordinary or e$uity shares (%otin# and non1%otin#) and preference shares& !he lia ility of each mem er of such company is limited to the unpaid amount of shares and premium, if any, held y him& Companies limited 7y guarantee and a$ing s are !apital 7uch a company y way of underta"in# in its 4emorandum of Association restricts the lia ilities of its mem ers to a certain fi)ed amount, for payment of the de ts and lia ilities of the company in the e%ent of windin# up& !he mem ers are
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lia le only for the amount contracted efore he ceased to e a mem er or payment of the de ts and lia ilities within one year after he ceased to e a mem er& 7uch companies may also ha%e share capital whene%er necessary& 'n that e%ent, the mem ers will e lia le for the amount, if any, remainin# unpaid on the shares su scri ed y them, in addition to the a o%e #uaranteed amount& Companies limited 7y guarantee ,it out a$ing s are !apital Companies limited y #uarantee without ha%in# share capital are e)actly similar in nature to the #uarantee companies as referred a o%e e)cept that there will e no share capital& !he mem ers will e lia le, in the circumstance referred to a o%e, to contri ute an amount not e)ceedin# the sum specified in the 4emorandum of Association& *2+ Companies ,it unlimited lia7ility9 ,%ery mem er in such a company is jointly and se%erally lia le for all the de ts and lia ilities of the company& III6 On t e 7asis o% mem7ers ip pattern:si;e9 */+ Pu7li! 'imited Companies9 !he Company defined under section <(1)(iv) of the Companies Act, 1956 is a pu lic company which; (i) is not a pri%ate company0 (ii) has a minimum paid1up capital of 9s& 5 la"hs or such hi#her capital as may e prescri ed0 (iii) is a pri%ate company ut su sidiary of a pu lic company& *2+ Pri$ate Companies9 7ection <(1)(iii) defines a pri%ate company as one which ; (a) has a minimum paid1up share capital of 9s& 1 Ia"h or such hi#her capital as may e prescri ed0 and (b) y its Articles of Association/ (i) restricts the ri#ht to transfer its shares0 (ii) limits the num er of its mem ers to 5? which will not include/; A& mem ers who are employees of the company0 and 8& mem ers who are e)1employees of the company and were mem ers while in such employment and who ha%e continued to e mem ers after ceasin# to e employees0 (iii) prohi its any in%itation to the pu lic to su scri e for any shares or de entures of the company0 and (iv) prohi its any in%itation or acceptance of deposits from persons other than its mem ers, directors or their relati%es& A pri%ate company, in addition to the earlier conditions, shall ha%e a minimum paid1up share capital of 9upees -ne Ia"h or such hi#her capital as may e prescri ed and its Articles shall prohi it in%itation or acceptance of deposits from
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persons other than its mem ers, directors or their relati%es& 'n case of such companies, pu lic interest is not in%ol%ed& !he asic characteristics of a pri%ate company in terms of section <(1)( iii) of the Act do not #et altered just ecause it is a su sidiary of a pu lic company in %iew of the fiction in terms of section <(1)( iv)(c) of the Act that it is a pu lic company& 4ay e it is a pu lic company in relation to other pro%isions of the Act ut not with reference to its asic characteristics& !herefore, all the pro%isions in the articles to maintain the asic characteristics of a pri%ate company in terms of section <(1)(iii) will continue to #o%ern the affairs of the company e%en thou#h it is a su sidiary of a pu lic company& 'n a decided case of Hi$$#re"t Rea$t* SDN+BHD $ Hote$ ,!een Roa *P+ Lt + *2<<=+ >2 C'A 25? *C'B+ it was held that one of the asic characteristics of a pri%ate company in terms of that section is restriction on the ri#ht to transfer and the same will apply e%en if a pri%ate company is a su sidiary of a pu lic company& *1+ Go$ernment Companies9 7ection 61H of the Companies Act, 1956 defines Bo%ernment Company on the asis of amount in%ested in the capital of the company& 7uch types of companies may e pri%ate limited, pu lic limited whether listed or not& 'f not less than fifty1one per cent of the paid1up share capital of the company is held y the Central Bo%ernment or y a 7tate Bo%ernment or 7tate Bo%ernments or partly y the Central or partly y one or more 7tate Bo%ernments, then the company shall e treated as Bo%ernment Company and includes any su sidiary of a Bo%ernment Company& Bo%ernment Companies is e)empted from certain pro%isions of the Companies Act, 1956& I@6 On t e 7asis o% pla!e o% registration9 (1) 'ndian Company ('ncorporated in 'ndia) (2) 3orei#n Company (Company incorporated outside 'ndia ut ha%in# place of usiness in 'ndia) @6 On t e 7asis o% !ontrol o$er t e management9 (1) 2oldin# Company (2) 7u sidiary Company Ho$ in( an S!-"i iar* Companie" A Company shall e deemed to e su sidiary of another if the other company controls the composition of the 8oard of directors of the former0 or the other company e)ercises or controls more than half of the total %otin# power of the former where that former company was incorporated prior to the commencement of the Companies Act, 1956 in which the holders of the preference shares issued prior to such commencement ha%e the same %otin# ri#hts as e$uity shares0 or the other holds more than half in nominal %alue of the e$uity shares of the
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former0 or the former company is a su sidiary of any other company which is the su sidiary of the other& F7ection @(1)G Compo"ition of ire#tor" in the "!-"i iar* #ompan* !he composition of a 8oard of directors of the company shall e controlled y the another company if the latter y the e)ercise of some power e)ercisa le y it at its discretion without the consent or concurrence of any other person can appoint or remo%e the all or majority of the directors of the former company, if any of the followin# conditions is satisfied/ (i) that a person cannot e appointed as a director of a former company without the e)ercise in his fa%our of the power y the latter company0 (ii) that a person(s appointment as a director in the former company follows necessarily from his appointment as director or mana#er of, or to any other office or employment, in the latter company0 (iii) that the directorship is held y an indi%idual nominated y the latter company or its su sidiary& An agreement to pro$ide aut ority to t e lenders to appoint dire!tors in t e !ompany may 7e deemed to 7e !ontrol o$er t e !omposition o% t e Board o% dire!tors 't is possi le to o tain control in re#ard to composition of the 8oard y a#reement y which one company may a#ree to ad%ance funds to another company and in return e #i%en control to appoint all or majority of the 8oard of directors in the orrowin# company& !his ri#ht would e sufficient to constitute the lendin# company as holdin# company and the orrowin# company as su sidiary& A"#ertainment 'hether the #ompan* i" a "!-"i iar* of another #ompan* !o ascertain whether one company is a su sidiary of another, followin# points may also e noted/ (i) Any shares held in a company in a fiduciary capacity on ehalf of some other person will not come under the shareholdin# held y the other& (ii) Any shares held y a nominee for the other company will e included in the other company(s shareholdin#& 3urther, shares held y a su sidiary or y a nominee for the su sidiary shall e treated as held or e)ercisa le y that other company& (iii) Jhere the ordinary usiness of the other or its su sidiaries includes lendin# of money and shares are held or power e)ercisa le y way of security only, such shares shall not e ta"en to e the shareholdin# of the other& Jhere a ody corporate is incorporated in a country outside the country, a su sidiary or holdin# company of the ody corporate under the law of that country shall e deemed to e a su sidiary or holdin# company of the ody
12

corporate within the meanin# of this Act, whether the re$uirements of section @ are fulfilled or not& F7ection @(6)G Pro !#er Companie" 8y the Companies (Amendment) Act, 2??2, a new Part '=A has een inserted under the Act with the main o jecti%e to pro%ide pro%isions for formation of co1 operati%e society as a company and to con%ert e)istin# co1operati%e societies into companies as the pro%isions a%aila le under Part '= were a%aila le for con%ersion of a partnership firm into a company& !he con%ersion of co1operati%es into producer companies is purely %oluntary& !he con%ersion option y co1operati%e society can e e)ercised only if two1thirds of the mem ers of the concerned society %ote in fa%our of the resolution to that effect& !he producer company indicate that only certain cate#ories of persons can participate in the ownership of such companies, the mem ers of the producer company ha%e necessarily to e +primary producers+, that is persons en#a#ed in an acti%ity connected with, or relata le to, primary produce& !he Companies (Amendment) Act, 2??2 pro%ides a statutory and re#ulatory framewor" that creates the potential for producer1owned enterprises to compete with other enterprises on a competiti%e footin# y way of %arious forms of companies& !his will pro%ide an opportunity to cooperati%e institutions to %oluntarily transform themsel%es into new form of producer companies& S!ope o% t e A!t !he Companies Act applies to all tradin# and other corporations, which are incorporated under the Act or any of the earlier Companies Act& 8ut it does not apply to uni%ersities, co1operati%e societies, unincorporated tradin#, scientific and other societies&

% )* +hat $o (o, 'ean #( -e'oran$,' of A ociation. E/!lain in $etail of the "ario, Contain of the -e'oran$,' of A ociation 0-OA*

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