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Classes of Companies under The Companies Act, 2013

Classes of Companies under The Companies Act, 2013 :

The growth of the economy and increase in the complexity of business operation in the corporate world has lead to the emergence of different forms of corporate organizations. To regulate them the Companies Act, 2013 has broadly classified the companies into various class.

A company may be incorporated as a one person company, private company or a public company, depending upon the number of members joining it. Again it may either be an unlimited company, or may be limited by shares or by guarantee or by both. On the basis of control, companies can be classified as associate company, holding company and subsidiary company. Some other forms of classification of companies are: foreign company, government company, small company, dormant company, nidhi company and company formed for charitable objects.

Companies may be classified into various classes on the following basis:

1. On the basis of liability:

(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines that when the liability of the members of a company is limited by its memorandum of association to the amount (if any) unpaid on the shares held by them, it is known as a company limited by shares. It thus implies that for meeting the debts of the company, the shareholder may be called upon to contribute only to the extent of the amount, which remains unpaid on his shareholdings. His separate property cannot be encompassed to meet the company’s debt.

It may be worthwhile to know that though a shareholder is a co-owner of the company, he is not a co-owner of the company’s assets. The ownership of the assets remains with the company, because of its nature – as a legal person. The extent of the rights and duties of a shareholder as co-owner is measured by his shareholdings. Thus, all the shareholders of the company are its proprietors, the amount due from all of them is the issued capital of the company. A company limited by shares needs fund for its working, it raises its fund by issuing shares. When the shares are issued, these may be subscribed by the signatories to the memorandum or may be therefore allotted to applicants therefore, either for cash or for consideration in kind.

(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as the company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up. Thus, the liability of the member of a guarantee company is limited upto a stipulated sum mentioned in the memorandum. Members cannot be called upon to contribute beyond that stipulated sum.

Similarities and dis-similarities between the Guarantee Company and the Company having share capital:

The common features between a ‘guarantee company’ and ‘share company’ are legal personality and limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

However, the point of distinction between these two types of companies is that in the former case the members may be called upon to discharge their liability only after commencement of the winding up and only subject to certain conditions; but in the latter case, they may be called upon to do so at any time, either during the company’s life-time or during its winding up.

It is clear from the definition of the guarantee company that it does not raise its initial working funds from its members. Therefore such a company may be useful only where no working funds are needed or where these funds can be held from other sources like endowment, fees, charges, donations, etc.

Further to note, the Supreme Court in Narendra Kumar Agarwal vs. Saroj Maloo (1995) 6 SC C 114 has laid down that the right of a guarantee company to refuse to accept the transfer by a member of his interest in the company is on a different footing than that of a company limited by shares. The membership of a guarantee company may carry privileges much different from those of ordinary shareholders.

(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines such unlimited company as a company not having any limit on the liability of its members. In such a company the liability of a member ceases when he ceases to be a member.

The liability of each member extends to the whole amount of the company’s debts and liabilities but he will be entitled to claim contribution from other members. In case the company has a share capital the articles of association must state the amount of share capital and the amount of each share. So long as the company is a going concern the liability on the shares is the only liability which can be enforced by the company, though the liability of the members is unlimited so far as creditors are concerned. [Re. Mayfair Property Co. Bartlett vs. Mayfair Property Co. [1898] 2 Ch. 28].

2. On the basis of members:

(a) One person company: The Companies Act, 2013 introduces a new class of companies which can be incorporated by a single person. Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company which has only one person as a member. One person company has been introduced to encourage entrepreneurship and corporatization of business. OPC differs from sole proprietary concern in an aspect that OPC is a separate legal entity with a limited liability of the member whereas in the case of sole proprietary, the liability of owner is not restricted and it extends to the owner’s entire assets constituting of official and personal.

The procedural requirements of an OPC are simplified through exemptions provided under the Act in comparison to the other forms of companies.

According to section3(1)(c) of the Companies Act, 2013, OPC is a private limited company with the minimum paid up share capital of Rs. 1 lakh and has at least one member. Here the member can be the sole member and director.

Comparison between OPC and Private company:

Basis of difference Private company OPC
Incorporation Requires 2 or more persons 1 person alone
Paid-up share capital Minimum paid up share capital of Rs 1 lakh or such higher paid up share capital as may be prescribed under the articles Has Paid up share capital of Rs. 1lakh.
Number of members 2 members 1 members
Right to transfer share Right of member to transfer the shares can be restricted by article Choice to restrict the right to transfer share is available to OPC

(b) Private Company [Section 2(68)]: Means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) limits the number of its members to two hundred (except in case of One Person Company):

The clause provides that where two or more persons hold one or more shares in a company jointly, they shall be treated as a single member:

However following shall not be included in the number of members:

♦ persons who are in the employment of the company; and

♦ 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.

(iii) prohibits any invitation to the public to subscribe for any securities of the company. Small company given under the section 2(85) of the Companies Act, 2013 which means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Exceptions: This section shall not apply to :

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

(c) Public company [Section 2(71)]: The Companies Act, 2013, defines public company as a company which-

• is not a private company

• has a minimum paid up share capital of 5 lakh rupees or such higher paid up capital as may be prescribed

• Seven or more members are required to form the company.

This section provides that a company which is subsidiary of a company(not being a private company) shall be deemed to be public company even where such subsidiary company continues to be a private company in its articles.

3. On the basis of control:

(a) Holding and subsidiary companies: ‘Holding and subsidiary’ companies are relative terms. A company is a holding company in relation to one or more other companies, means a company of which such companies are subsidiary companies.[section 2(46)].

Whereas section 2(87) defines “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

*Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

[* Yet to be notified]

For the purposes of this section —

(I) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(II) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(III) the expression “company” includes anybody corporate;

(IV) *“layer” in relation to a holding company means its subsidiary or subsidiaries;

* yet to be notified

Any of the three circumstances illustrated below must exist to constitute the relationship of holding and subsidiary companies.

(A) A will be subsidiary of B, if B controls the composition of the Board of Directors of A, i.e., if B can, without the consent or approval of any other person, appoint or remove a majority of directors of A. B will be deemed to possess the power to appoint majority of persons as directors of A: (i) when these persons cannot be appointed in that capacity without B’s consent, or (ii) when their appointments follow necessarily from their appointment as directors, manager or the holder of any office in B company, or (iii) when the holding company (i.e., B) itself or its another subsidiary holds the directorship in ‘A’ company [Section 2(46) and 2(87)].

(B) (i) A will be a subsidiary of B, if B is entitled to exercise control over more than half the total voting power of A, where A is an existing company in respect of which the holders of preference shares, issued before the commencement of the Companies (Amendment) Act, 1960 had the same voting rights in all respects as the holders of equity shares.

(ii) Again, A will be subsidiary of B, if B holds more than half of total share capital, where A is any company other than the one specified under (i) above. In other words, B must hold more than 50% of the share capital on the basis of the nominal capital whatever may be the amount paid up on the shares [Sections 2(46)and(87)].

For the purpose of condition described in para (ii) above, the shares that a company holds must be held in its own right and not merely in fiduciary capacity. Thus, the shares held in trust for an individual are to be excluded. On the other hand, shares held by another person as a nominee for the company or any of its subsidiaries should be regarded as being held by the company for the purpose.

In order to determine whether a company is a subsidiary of another, shares held by any person under the provisions of any debentures are not to be taken into account. Also, where a company’s ordinary business includes money-lending, shares of other company held as security in a normal business transaction are to be disregarded.

(C) A company will be subsidiary of another company called holding company, if it is a subsidiary of a subsidiary of the holding company. For example, B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be the subsidiary of A. In the like manner, if D is a subsidiary of C, D will be subsidiary of B as well as of A and so on [Section 2(87)].

It may be noted that the phrase “controls the composition of board of directors’ is to be read in accordance with and only in accordance with Sub-section (87) of Section 2 of the Companies Act, 2013 and that sub-section conceives of control if but only if, the company which claims control can appoint or remove the holders of all or a majority of the directorships by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person. Section 2(87) of the Companies Act, 2013 envisages the existence of subsidiary companies in different circumstances. It may be that by acquiring sufficient share capital of a company sufficient control may be obtained over that company to enable control in the composition of board of directors. But it is also possible to obtain such control in regard to the composition of the board without making such an investment in equity capital of the company. Such a control may be by reasons of an agreement such as where one company may agree to advance funds to another company and in return may, under the terms of an agreement surrender control over the right to appoint all or a majority of the board of directors. The first of the cases envisaged in section 2(87)(i) is the case where a control is obtained by a company in the matter of composition of the board of directors of another company. That would be sufficient to constitute the former as holding company and the other as subsidiary. The second type of case given in section 2(87)(ii) is where more than half of the total share capital is held by another company. By virtue of such holding that other company becomes a holding company and the one whose shares are so held becomes a subsidiary company. That other company is also a subsidiary of the holding company of the subsidiary.

Status of private company, which is subsidiary to public company: In view of Section 2(71) of the Companies Act, 2013 a Private company, which is subsidiary of a public company shall be deemed to be public company for the purpose of this Act, even where such subsidiary company continues to be a private company in its articles.

Subsidiary company not to hold shares in its holding company: Normally, a subsidiary company cannot be a member of its holding company. Where, however, it was a member before it becomes subsidiary, it shall not have the voting right at a meeting though it may exercise other rights of members [Section 19 (c) of the Companies Act, 2013].

Section 19 of the Companies Act, 2013, specifies the circumstances that constitute the relationship of the holding and the subsidiary company. Section 19 deals with the restrictions on the subsidiary company with respect to holding of shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiaries companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

According to section 19 of the Companies Act, 2013, no company shall, either by itself or through its nominees-

(i) hold any shares in its holding company, and

(ii) no holding company shall allot or transfer its shares to any of its subsidiary companies,

– and any such allotment or transfer of shares of a company made to its subsidiary company, shall be void.

Following are the exceptions –

(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or

(b) where the subsidiary company holds such shares as a trustee; or

(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

The subsidiary company referred to in the above exceptions shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b) of the said exceptions.

The reference in this section to the shares of a holding company which is a company limited by guarantee or an unlimited company, not having a share capital, shall be construed as a reference to the interest of its members, whatever be the form of interest.

(b) Associate company: In relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

The term “significant influence” means control of at least 20% of total share capital, or of business decisions under an agreement. [section 2(6)]

The term “Total Share Capital”, means the aggregate of the –

(a) paid-up equity share capital; and

(b) convertible preference share capital.

This is a new definition inserted in the 2013 Act.

The 1956 Act does not prescribe any definition of the ‘Associate’, the relationship between the entities may be established either by way of establishment of holding- subsidiary relationship or by defining companies under same management. So this definition is added in the new law to limit all the shortcomings and provide a more rational and objective framework of associate relationship. Thus, specific definition of associate company is given in the 2013 Act to provide more governance in corporate transaction. The concept of associate has been inserted in the definition of related party for determining the related party transactions, Disclosure with its respect in the financial statements, Ascertaining independence of independent director and auditor during the appointment.

Vide General Circular no. 24/2014 dated 25th of June 2014 Ministry of Corporate Affairs issued a clarification with regard to holding of shares in a fiduciary capacity by associate company under section 2(6) of the Companies Act, 2013.

It is clarified that the shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of determining the relationship of ‘associate company’ under section 2(6) of the Companies Act, 2013.

4. On the basis of access to capital:

(a) Listed company: As per the definition given in the section 2(52) of the Companies Act, 2013, it is a company which has any of its securities listed on any recognised stock exchange. Whereas the word securities as per the section 2(81) of the Companies Act, 2013 has been assigned the same meaning as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

(b) Unlisted company: means company other than listed company.

5. Other companies:

(a) Government company: ” means any company in which not less than fifty- one per cent. of the paid-up share capital is held by-

(i) the Central Government, or

(ii) by any State Government or Governments, or

(iii) partly by the Central Government and partly by one or more State Governments,

And the section includes a company which is a subsidiary company of such a Government company;

(b) Foreign Company: means any company or body corporate incorporated outside India which—

(i) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(ii) conducts any business activity in India in any other manner

According to the Companies (Specification of definitions details) Rules, 2014, “electronic mode”, given here in the definition means carrying out electronically based, whether main server is installed in India or not, including, but not limited to-

(i) business to business and business to consumer transactions, data interchange and other digital supply transactions;

(ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;

(iii) financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;

(iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and

(v) all related data communication services,

whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise;

(c) Formation of companies with charitable objects etc:

Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc. Such company intends to apply its profit in promoting its objects and prohibiting the payment of any dividend to its members.

Power of Central government to issue the license -This section allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions as it deems fit. The registrar shall on application register such person or association of persons as a company under this section.

As per the Notification S.O. 1353(E), dated 9th Of July, 2014. In exercise of powers conferred by Section 458 of the Companies Act, 2013 & in supersession of the notification of the Government of India, MCA, dated the 10.07.2012 published in the Gazette of India, Extraordinary, Part-II, Sec-3, sub-sec (ii) vide no. S.O. 1538(E), dated 10.07.2012, in so far as it relates to items (a) to (b) & items (d) to (e), except as respect things done or omitted to be done before such supersession, the Central Government. hereby delegates to the ROC the power & functions vested in it under the this section[i.e. section 8(1)] of the said Act, subject to the condition that the Central Government may revoke such delegation of powers or may itself exercise the powers & functions under the said sections, if in its opinion, such course of action is necessary in the public interest.

On registration the company shall enjoy same privileges and obligations as of a limited company.

Revocation of license: The Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.

Vide Notification S.O. 1352(E) dated 21.05.2014 in exercise of powers conferred by Section 458 of the Companies Act, 2013 & in supersession of the notification of the Government of India, MCA, dated the 10.07.2012 published in the Gazette of India, Extraordinary, Part-II, Section 3, Sub-Section (ii) vide no. S.O. 1539(E), dated 10.07.2012, in so far as it relates to items (a) to (f) & items (n), except as respect things done or omitted to be done before such supersession, the Central Govt. hereby delegates to the RD at Mumbai, Kolkata, Chennai, Noida, Ahmedabad, Hyderabad & Shillong, the power & functions vested in it under the following sections of the said Act, subject to the condition that the Central Govt. may revoke such delegation of powers or may itself exercise the powers & functions under this section [i.e.8(5)], if in its opinion, such course of action is necessary in the public interest,:-

A company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion.

[The Companies (Incorporation) Rules, 2014]

Order of the Central Government: Where a licence is revoked there the Central Government may, in the public interest order that the company registered under this section should be amalgamated with another company registered under this section having similar objects, to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order, or the company be wound up.

Penalty/ punishment in contravention: If a company makes any default in complying with any of the requirements laid down in this section, the company shall, be punishable with fine varying from ten lakh rupees to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine varying from twenty-five thousand rupees to twenty-five lakh rupees, or with both. And where it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

(d) Dormant company: Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

“Significant accounting transaction” means any transaction other than—

(i) payment of fees by a company to the Registrar;

(ii) payments made by it to fulfil the requirements of this Act or any other law;

(iii) allotment of shares to fulfil the requirements of this Act; and

(iv) payments for maintenance of its office and records.

(e) Nidhi Companies: Company which has been incorporated as a nidhi with the object of cultivating the habit of thrift (cost cutting) and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefits and which complies with such rules as are prescribed by the Central Government for regulation of such class of companies.[Section 406 of the Companies Act,2013]

(f) Public financial institutions: By virtue of Section 2(72) of the Companies Act, 2013 the following institutions are to be regarded as public financial institutions.

(i) the Life Insurance Corporation of India, established under the Life Insurance Corporation Act, 1956;

(ii) the Infrastructure Development Finance Company Limited,

(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;

(iv) institutions notified by the Central Government under section 4A(2) of the Companies Act, 1956 so repealed under section 465 of this Act;

(v) such other institution as may be notified by the Central Government in consultation with the Reserve Bank of India:

Provided that no institution shall be so notified unless—

(A) it has been established or constituted by or under any Central or State Act; or

(B) not less than fifty-one per cent of the paid-up share capital is held or controlled 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.

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