New Companies Act 2013 – Starting a new Company

New Companies Act 2013 – Starting a new Company

The new Companies Act 2013 introduces a new form of entity ‘one-person company’ and incorporates certain new provisions in respect of memorandum and articles of association. For instance, the concept of including entrenchment provisions in the articles of association has been introduced.New Companies Act 2013 – Starting a new Company

INCORPORATION OF A COMPANY UNDER NEW COMPANIES ACT 2013

1. One-person company

The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity ‘one-person company’ (OPC). An OPC means a company with only one person as to its member  [section  3(1) of 2013 Act]. The draft rules state that only a natural person who is an Indian citizen and resident in India can incorporate an OPC or be a nominee for the sole member of an OPC. *

2. MEMORANDUM OF ASSOCIATION

Content: The 2013 Act specifies the mandatory content for the memorandum of association which is similar to the existing provisions of the 1956 Act and refers inter-alia to the following:

• Name of the company with the last word as limited or private limited as the case may be

• State in which registered office of the company will be situated

• Liability of the members of the company

However, as against the existing requirement of the 1956 Act, the 2013 Act does not require the objects clause in the memorandum to be classified as the following:

(i) The main object of the company

(ii) Objects incidental or ancillary to the attainment of the main object

(iii) Other objects of the company [section  4(1) of the 2013 Act]

The basic purpose in the 1956 Act for such a classification as set out in section 149 of the 1956 Act, is to restrict a company from commencing any business to pursue  ‘other objects of the company’ not incidental or ancillary to the main objects except on satisfaction of certain requirements as prescribed in the 1956 Act like passing a special resolution, filing of the declaration with the ROC to the effect of the resolution.

Reservation of name: The 2013 Act incorporates the procedural aspects for applying for the availability of a name for a new company or an existing company in sections 4(4) and 4(5) of the 2013 Act.

3. Articles of association

The 2013 Act introduces the entrenchment provisions with respect to the articles of association of a company.  An entrenchment provision enables a company to follow a more restrictive procedure than passing a special resolution for altering a specific clause of articles of association. A private company can include entrenchment provisions only if agreed by all its members or, in case of a public company,  if a special resolution is passed[section 5 of the 2013 Act].

4. Incorporation of the company

The 2013 Act mandates inclusion of declaration to the effect that all provisions of the 1956 Act have been complied with, which is in line with the existing requirement of the 1956 Act.

Additionally, an affidavit from the subscribers to the memorandum and from the first directors has to be filed with the ROC, to the effect that they are not convicted of any offense in connection with promoting, forming, or managing a company or have not been found guilty of any fraud or misfeasance, etc., under the 2013 Act during the last five years along with the complete details of name, address of the company,  particulars of every subscriber and the persons named as first directors.

The 2013 Act further prescribes  that if a person furnishes false information, he or she, along with the company will be subject to penal provisions as applicable  in respect of fraud i.e. section 447 of 2013 Act [section  7(4) of 2013 Act; Also refer the chapter on other areas]

5. Formation of a company with charitable  objects

An OPC with charitable objects may be incorporated in accordance with the provisions of the 2013 Act. New objects like environment protection, education, research, social welfare, etc., have been added to the existing object for which a charitable company could be incorporated.

As against the existing provisions under which a company’s license could be revoked, the 2013 Act provides that the license can be revoked not only where the company contravenes any of the requirements of the section but also where the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to the public interest. The 2013 Act thus provides for more stringent provisions for companies incorporated with charitable objects[section 8 of the 2013 Act].

6. Commencement of business, etc

The existing provisions of the 1956 Act as set out in section 149 which provide for the requirement with respect to the commencement of business for public companies that have a share capital would now be applicable to all companies.

The 2013 Act empowers the ROC to initiate action for removal of the name of a company in case the company’s directors have not filed the declaration related to the payment of the value of shares agreed to be taken by the subscribers to the memorandum and that the paid-up share capital of the company is not less than the prescribed limits as per the 2013 Act, within 180 days of its incorporation and if the ROC has reasonable cause to believe that the company is not carrying on business or operations [section  11 of 2013 Act].

7. The registered office of the company

Where a company has changed its name in the last two years, the company is required to paint, affix or print its former names along with the new name of the company on business letters,  billheads, etc. However, the 2013 Act is silent on the time limit for which the former name needs to be kept [section  12 of the 2013 Act].

8. Alteration of memorandum

The 2013 Act imposes additional restrictions on the alteration of the object clause of the memorandum for a company that had raised money from the public for one or more objects mentioned in the prospectus and has any unutilized money. The 2013 Act specifies that along with obtaining approval  by way of a special resolution, a company would be required to ensure the following if it intends to alter its object clause:

• Publishing the notice of the aforesaid resolution stating the justification  of variation in two newspapers

• Exit option can be given to dissenting shareholders by the promoters and shareholders having control in accordance with the regulations to be specified by the Securities and Exchange Board of India (SEBI) [section  13 of the 2013 Act].

9. The subsidiary company not to hold shares in its holding company

The existing provision of section 42 of the 1956 Act which prohibits a subsidiary company to hold shares in its holding company continues to get acknowledged in the 2013 Act. Thus, the earlier concern that if a subsidiary is a body corporate, it may hold shares in another body corporate which is the subsidiary’s holding company continues to apply[section 19 of 2013 Act].

The prospectus and public offer

The 2013 Act has introduced a new section [section  23] to explicitly provide the ways in which a public company or private company may issue securities. This section explains that a public company may issue securities  in any of the following manners:

• To public through prospectus

• Through private placement

• Through rights issue or a bonus issue.

For private companies, this section provides that it may issue securities through private placement, by way of rights issue or bonus issue.

Section 23 also provides that compliance with provisions of part I of chapter III is required for the issue of securities to the public through the prospectus. For private placement compliance, with the provisions of part II of chapter III is required.

The 2013 Act also introduces certain changes with respect to prospectus and public offers aimed at enhancing disclosure requirements as well as streamlining the process of issuance of securities.

1. Issue of prospectus

Currently, the matters and reports to be included in the prospectus are specified in parts I and II of Schedule  II of the 1956 Act. In the 2013 Act, the information to be included in the prospectus is specified in section 26 of the 2013 Act. The 2013 Act mandates certain additional disclosures:

• Any litigation  or legal action pending or taken by a government department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company

• Sources of promoter’s contribution

The 2013 Act has also relaxed the disclosure requirements in some areas. Examples of certain disclosures not included in the 2013 Act are as follows. Particulars regarding the company and other listed companies under  the same management, which made any capital issues during the last three years

– Export possibilities and export obligations

– Details regarding collaboration

The 2013 Act states that the report by the auditors on the assets and liabilities of business shall not be earlier than 180 days before the issue of the prospectus [section  26 (1) (b)(iii) of 2013 Act]. The 1956 Act currently requires that the report will not be earlier than 120 days before the issue of the prospectus.

2. Variation in terms of contract or objects

The 2013 Act states that a special resolution is required to vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued [section  27 (1) of 2013 Act]. The 1956 Act currently requires approval in a general meeting by way of an ordinary resolution. The 2013 Act also requires that dissenting shareholders shall be given an exit offer by promoters or controlling shareholders [section  27 (2) of the 2013 Act].

3. The offer of sale of shares by certain members of the company

The 2013 Act includes a new section under which members of a company,  in consultation with the board of directors, may offer a part of their holding of shares to the public. The document by which the offer of sale to the public is made will be treated as the prospectus issued by the company. The members shall reimburse the company all expenses incurred by it [section  28 of the 2013 Act].

4. Shelf prospectus

The 2013 Act extends the facility of shelf prospectus by enabling SEBI to prescribe the classes of companies that may file a shelf prospectus. The 1956 Act currently limits the facility of shelf prospectus to public financial institutions, public sector banks or scheduled banks [section  31 (1) of 2013 Act].

6. Global depository receipts  (GDR’s)

The 2013 Act includes a new section to enable the issue of depository receipts in any foreign country subject to prescribed conditions [section  41 of 2013 Act]. Currently, the provisions of section 81 of the 1956 Act relating to further issue of shares are being used in conjunction with the requirements mandated by SEBI for the issuance of depository receipts.  In several aspects across the 2013 Act, it appears that the 2013 Act supplements the powers of SEBI by incorporating requirements already mandated by SEBI.

7. Private placement

The 2013 Act requires that certain specified conditions are complied with in order to make an offer or invitation of the offer by way of private placement or through the issue of a prospectus.

• The offer of securities or invitation to subscribe securities in a financial year shall be made to such number of persons not

exceeding  50 or such higher number as may be prescribed {excluding qualified institutional buyers, and employees of the company being offered securities under a scheme of employees stock option in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed}. This provision of the 2013 Act is in line with the existing provision of the

1956 Act.

• The allotments with respect to any earlier offer or invitation may have been completed.

• All the money payable towards the subscription of securities shall be paid through cheque, demand draft or any other banking channels but not by cash.

• The offers shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe,  and that such persons shall receive the offer by name.

• The company offering securities shall not release any advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer [section  42 of 2013 Act].

Share capital and debentures

The chapter on share capital and debentures introduces some key changes in the 2013 Act. To illustrate, the 2013 Act does not give any cognizance to the existing requirement of section 90 of the 1956 Act that provided some saving grace to private companies. Therefore, the applicability of the following sections of the 2013 Act is no longer restricted to public companies and private companies which are subsidiaries of a public company and are now applicable to private companies also.

• Two kinds of shares capital

• New issue of shares capital to be only of two kinds

• Voting rights

1. Voting rights

The provisions of the 2013 Act regarding voting rights are similar to the existing section 87 of the 1956 Act. The only change noted in the 2013 Act is the removal of distinction provided  by the 1956 Act with respect to the entitlement to vote in case the company fails to pay a dividend  to its cumulative and non-cumulative preference shareholders [section  47 of 2013 Act]

The provisions regarding private placement and additional disclosures in the prospectus will also help to strengthen the capital markets.

The 2013 Act proposes to re-instate the existing concept of shares with differential voting rights. Pursuant to this section the company may face hardship with regards to the computation of proportionate voting rights.

2. Variation of shareholder’s rights

Similar to the other provisions of the 1956 Act, the 2013 Act acknowledges the requirements of section 106 of the 1956 Act with an additional requirement in respect of those classes of shareholders whose rights are affected pursuant to any variation. The proviso to section 48(1) of the 2013 Act states that if the variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation.

3. Application  of premiums received on issue of shares

The 2013 Act lays down a similar requirement in section 52 as that of section 78 of the 1956 Act in respect of the application of premiums received on the issue of shares;  however,  the section of the 2013 Act has a non-obstante provision in respect of a certain class of companies which would be prescribed at a later date. The 2013 Act states that these classes of companies would not be able to apply the securities  premium towards the below-specified purposes unless the financial statements are in compliance with the accounting standards issued under  section 133 of the 2013 Act:

• Paying up unissued equity shares of the company as fully paid bonus shares

• Writing off the expenses of or the commission  paid or discount  allowed on any issue of equity shares of the company

• Purchase  of its own shares or other securities

The 2013 Act restricts the application of securities premium for a certain class of companies if they fail to comply with the accounting standards. The 2013 Act continues to state that securities premium amount can be utilized for the purpose of writing off preliminary expenses. However, in view of the requirements of accounting standard 26, intangible asset, the requirement of this sub-section appears to be superfluous.

4. Prohibition on issue of shares at a discount

Companies would no longer be permitted to issue shares at a discount. The only shares that could be issued at a discount are sweat equity wherein shares are issued to employees in lieu of their services[section 53 and Section 54 of the 2013 Act].

Further, explanations I and II to the existing section 79A of the 1956 Act that prescribes the provisions in respect of sweat equity have not been included in the 2013 Act. The explanation I defined the company for the purpose of this section and explanation II defined sweat equity.

5. Issue and redemption of preference shares

The existing requirement of sections 80 and 80A of the 1956 Act with respect to the issue and redemption of preference shares continues to be acknowledged by the 2013 Act. The 2013 Act reiterates the existing requirement that a company cannot issue preference shares with a redemption date of beyond 20 years. However, it gives an exemption for cases where preference shares have been issued in respect of infrastructure projects. Infrastructure projects have been defined in Schedule  VI of the 2013 Act and these shares would be subject to redemption at such percentage as prescribed on an annual basis at the option of such preference shareholders.

Further, the 2013 Act adds another administrative requirement of obtaining special resolution with respect to the preference shares which could not be redeemed by a company.  The 2013 Act states that where a company is not in a position to redeem any preference shares or to pay a dividend, if any, on such shares in accordance with the terms of issue, it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal issue further redeemable preference shares equal to the amount due, including the dividend thereon, with respect to the unredeemed preference shares. On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

The 2013 Act does not envisage any penalty in respect of non-compliance with the provision of this section, as was prescribed in subsection (6) and (3) of section 80 and 80A of the 1956 Act respectively  [section  55 of 2013 Act].

6. Refusal of registration and appeal against  registration

The provision relating to the refusal of registration of transfer or transmission of securities by private and public companies has been separately clarified in the 2013 Act. The private and public companies are required to send notice of refusal within 30 days of the receipt of the instrument of transfer, and the aggrieved party may appeal to the Tribunal against the refusal within the specified number of days [section  58(2) of the 2013 Act].

7. Further issue of share capital

The existing requirement of section 81 of the 1956 Act in regard to further issue of capital would no longer be restricted to public companies and would be applicable to private companies also since sub-section  3 of section 81 of the 1956 Act has not been acknowledged in the 2013 Act.

Further, the 2013 Act provides that a rights issue can also be made to the employees of the company who are under a scheme of employees’ stock option, subject to a special resolution and subject to conditions as prescribed. Further, the price of such shares should be determined using the valuation report of a registered valuer, which would be subject to conditions as prescribed [section 62 of the 2013 Act].

8. Issue of bonus shares

The existing 1956 Act does not have any specific provision dealing with the issue of bonus shares although it has referred to the concept of bonus shares at many places. The 2013 Act includes a new section that provides for the issue of fully paid-up bonus shares out of its free reserves or the securities premium account or the capital redemption reserve account, subject to the compliance with certain conditions such as authorization by the articles, approval in the general meeting and so on [section  63 of 2013 Act].

9. Unlimited  company to provide for reserve share capital on conversion into a limited company

This section corresponds to section 32 of the 1956 Act and seeks to provide that an unlimited company having a share capital may be re-registered as a limited company by increasing the nominal amount of each share, subject to the condition that no part of the increased capital shall be capable of being called up, except in the event and for the purposes of the company being wound up. The 2013 Act further provides that a specified portion of its uncalled share capital shall not be capable of being called up except in the event and for the purposes of the company being wound up[section 65 of 2013 Act].

10. Reduction of share capital

The 2013 Act gives cognizance to one of the amendments made in the listing agreement by SEBI. A new clause 24(i) was inserted to the listing agreement which provided that a scheme of amalgamation or merger or reconstruction, should comply with the requirements of section 211(3C) of the 1956 Act. A similar requirement has been introduced in section 66 of the 2013 Act, which states that no an application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such a reduction is in conformity with the accounting standards specified in section 133 or any other provision of the 2013 Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.

Further, the 2013 Act clarifies that no such reduction shall be made if the company is in arrears in repayment of any deposits accepted by it, either before or after the commencement of the 2013 Act, or the interest payable thereon.

11. Power of the company to purchase its own securities

The existing provision of section 77A of the 1956 Act has been acknowledged by the 2013 Act. The only difference is that the option available to the company for a buy-back from odd lots is no longer available [section  68].

The 2013 Act provides flexibility in management and administration by recognizing the electronic mode for notices and voting, which is in line with the MCA’s efforts to give cognizance to the use of electronic media as evident from a number of green initiatives’ introduced recently,  maintenance of registers and returns at a place other than the registered office.

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