A Company is defined as a voluntary association of persons
formed for the purpose of doing business, having a distinct name and limited
liability. Companies, whether public or private, are an indispensable
part of an economy. They are the modes through which a country grows and
expands world wide. Their performance is an important parameter of a countries
In India, the
Companies Act, 1956, is the most important piece of legislation that
empowers the Central Government to regulate the formation, financing,
functioning and winding up of companies. The Act contains the mechanism
regarding organisational, financial, managerial and all the relevant aspects
of a company. It provides for the powers and responsibilities of the directors
and managers, raising of capital, holding of company meetings, maintenance
and audit of company accounts, powers of inspection, etc. The Act applies
to whole of India and to all types of companies, whether registered under
this Act or an earlier Act. But it does not apply to universities, co-operative
societies, unincorporated trading, scientific and other societies.
The Act empowers the Central Government to inspect the
books of accounts of a company, to direct special audit, to order investigation
into the affairs of a company and to launch prosecution for violation
of the Act. These inspections are designed to find out whether the companies
conduct their affairs in accordance with the provisions of the Act, whether
any unfair practices prejudicial to the public interest are being resorted
to by any company or a group of companies and to examine whether there
is any mismanagement which may adversely affect any interest of the shareholders,
creditors, employees and others. If an inspection discloses a prima facie
case of fraud or cheating, action is initiated under provisions of the
Companies Act or the same is referred to the Central Bureau of Investigation.
The Companies Act is administered by the Central Government
through the Ministry
of Corporate Affairs and the
Offices of Registrar of Companies, Official
Liquidators, Public Trustee, Company
Law Board, Director of Inspection, etc. The
Registrar of Companies (ROC) controls the task of incorporation of
new companies and the administration of running companies.
of Corporate Affairs, earlier known as Department of Corporate Affairs
under Ministry of Finance, is primarily concerned with administration
of the Companies Act, 1956, other allied Acts and rules & regulations
framed there-under mainly for regulating the functioning of the corporate
sector in accordance with law. The Ministry has a three-tier organisational
- The Headquarters
at New Delhi,
- The Regional Directorates at Mumbai, Kolkata, Chennai
and Noida, and
- The Registrars of Companies (ROCs) in States and Union
Liquidators who are attached to the various High Courts functioning
in the country are also under the overall administrative control of the
Ministry. The set-up at the Headquarters includes the
Company Law Board, a quasi-judicial body, having the principal Bench
at New Delhi, an additional principal bench for Southern Region at Chennai
and four Regional Benches located at New Delhi, Mumbai, Kolkata and Chennai.
The organisation at the Headquarters also includes two Directors of Inspection
and Investigation with a complement of staff, an Economic Adviser for
Research and Statistics and other Officials providing expertise on legal,
accounting, economic and statistical matters.
The four Regional
Directors, who are in charge of the respective regions, comprising
a number of States and Union Territories, interalia, supervise the working
of the Offices of Registrars of Companies and the Official Liquidators
working in their regions. They also maintain liaison with the respective
State Governments and the Central Government in matters relating to the
administration of the Companies Act, 1956.
Registrar of Companies (ROCs) appointed under Section
609 of the Companies Act, covering various States and Union Territories,
are vested with the primary duty of registering companies floated in the
respective States and the Union Territories and ensuring that such companies
comply with the statutory requirements under the Act. Their offices function
as registry of records relating to the companies registered with them.
The powers vested with the ROCs are:-
- Registration of memorandum and articles.
- Registration of prospectus.
- Registration of reduction of capital.
- Call information or explanation.
- Seizure of documents.
- Investigation into affairs of a company.
- Inspection of books of accounts, etc of companies.
- To strike off defunct companies from register.
- Enforcement of duty of company to make returns, etc to
- Non-disclosure of information in certain cases.
- Winding up petition by the Registrar.
Liquidators are the officers appointed by the Central Government under
Section 448 of the Companies Act and are attached to the various High
Courts. They are under the administrative charge of the respective Regional
Directors who supervise their functioning on behalf of the Central Government.
According to the Act, a company means "a company
formed and registered under the Act or an existing company i.e. a company
formed or registered under any of the previous company laws". The
salient features of a company are:-
- Artificial legal person:- a company is an artificial
person in the sense that it is created by law and lacks the attributes
possessed by natural persons. It is invisible, intangible, immortal
and exists only in the contemplation of law. Hence, it has to operate
through a board of directors consisting of individuals.
- Separate legal entity:- a company is a distinct legal
entity, different from its members or shareholders. This implies that:-
the property of the company belongs to it and not to the members or
shareholders; no member can either individually or jointly claim any
ownership rights in the assets of the company; an individual member
cannot be held liable for the wrongful acts of the company even if he/she
holds virtually the entire share capital; the members of the company
can enter into contracts with the company.
- Perpetual succession:- a company enjoys continuous existence
and its continuance is not affected by the death, insolvency, mental
or physical incapacity of its members. It is created by law and law
alone can dissolve it.
- Limited liability of members:- the liability of its
members is limited to the amount remaining unpaid on the shares subscribed
by them. Thus, in case of fully paid-up shares, the members cannot be
asked to contribute any further, if the company goes into liquidation.
- Common seal:- a company has a common seal, which is
the signature of that company and signifies common consent of all the
members. The company's seal is affixed on all the documents executed
for and on its behalf.
- Transferability of shares:- the shares of a public company
are freely transferable without the permission of the company but in
a manner provided in the Articles. The shareholders may transfer their
shares to another person and this does not affect the funds of the company.
But, a private company imposes restrictions on transfer of its shares.
- Separate property:- all the property of the company
vests in it. The company can control, manage and hold the same in its
own name. The members have no ownership rights in the company's property,
either individually or collectively. A shareholder does not even have
an insurable right in the property of the company. The creditors of
the company can have a claim only against the property of the company
and not against the property of the individual members.
- Capacity to sue and being sued:- a company can enforce
its rights through suits and can also be sued for breach of its statutory
The basic objectives underlying the Act are:-
- A minimum standard of good behaviour and business honesty
in company promotion and management;
- To help in the development of companies on healthy
- To protect the interests of the shareholders;
- To safeguard the interests of the creditors;
- To equip the Government with adequate powers to intervene
in the affairs of a company in public interest and as per the procedure
prescribed by law;
- A fair and true disclosure of the affairs of companies
in their annual published balance sheet and profit and loss accounts;
- Proper standard of accounting and auditing;
- A ceiling on the share of profits payable to managements
as remuneration for services rendered;
- A check on their transactions where there was a possibility
of conflict of duty and interest;
- A provision for investigation into the affairs of any
company managed in a manner oppressive to minority of the shareholders
or prejudicial to the interest of the company as a whole;
- Enforcement of the performance of their duties by those
engaged in the management of public companies or of private companies
which are subsidiaries of public companies by providing sanctions in
the case of breach and subjecting the latter also
to the more restrictive provisions of law applicable to public companies;
- To help in the attainment of the
ultimate ends of the social and economic policy of the Government;
In response to the changing business environment, the
Companies Act, 1956 has been amended from time to time so as to provide
more transparency in corporate governance and protect the interests of
small investors, depositors and debenture holders, etc. For example, the
Companies (Amendment) Act, 2006 introduced an important provision
of Director Identification Number (DIN), which is an unique Identification
Number allotted to an individual who is an existing director of a company
or intends to be appointed as director of a company pursuant to section
266A & 266B of the Companies Act, 1956 (as amended vide Act No 23
of 2006). The various amendments are:-