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22 June 2020
Modes of funding
Shareholders and members
Statutory records and books
Intercorporate loans and investments
Related party transactions
Foreign companies doing business in India
Laws governing listed companies
When setting up a business in India, attention must be paid to the laws which govern companies.
The Companies Act 2013 is the primary legislation which governs companies established in India. It encompasses a wide range of provisions relating to governance, including with regard to:
The Companies Act sets out various regular and event-based obligations which companies must meet.
In order to successfully run a business, funding must be acquired in an efficient manner with the right combination of capital and debt.
A company's share capital comprises equity and preference share capital. Equity shareholders can participate and vote in shareholders' meetings and receive a share of the company's potential profits through dividends or share value appreciation. However, preference shareholders have preferential rights with respect to dividends and the repayment of capital at the time of a company's closure. In certain circumstances, preference shareholders also have voting rights.
Subject to the requisite compliances under the Companies Act, companies can borrow funds in the form of term or working capital loans from banks or financial institutions or unsecured or secured loans from other companies, investors (which are risk averse) and directors. In lieu of debt, a company may, depending on the requirements of the lending party, issue instruments such as bonds, debentures and convertible notes.
Companies must have a board of directors comprising such number of individuals as prescribed under the Companies Act. Every individual to be appointed as a director must have a director identification number and a digital signature certificate. Categories of director include:
In addition to the requirements concerning the board of directors' composition, companies must have at least one resident director (ie, an individual who has stayed in India for at least 182 days during the financial year).
Company directors have a fiduciary position since they act as shareholder-appointed agents who are charged with the management of the company. The Companies Act sets out directors' duties. Any breach of such duties will result in penalties under the act.
The Companies Act also sets out:
Pursuant to the Companies Act, directors must meet at regular intervals to manage the company's business. The act sets out the procedure to be followed for convening board meetings (including the quorum requirements and the manner of circulation of the notice and minutes).
A person who acquires shares in a company becomes a shareholder. A shareholder whose name is entered in the register of members acquires the status of a member. Any person (ie, an individual or a body corporate) can be a member or shareholder of a company. Members of a company can receive dividends, receive notice of the general meetings and vote at such meetings.
A person whose name appears in the register of members may hold shares on behalf of or for the benefit of other persons (beneficial interest). The Companies Act mandates disclosure requirements if beneficial interest is held by a person other than a member of the company.
Companies must convene a meeting of their members within six months from the end of a financial year (ie, the annual general meeting (AGM)). Any meeting of members other than an AGM is referred to as an extraordinary general meeting (EGM). The Companies Act prescribes the process to be followed for convening the AGM and EGMs, including the quorum requirements, the manner of voting, the use of postal ballots and the method of convening meetings at shorter notice.
Companies must appoint a chartered accountant or a firm of chartered accountants registered in India to audit their account books.
In order to hold office until the conclusion of the first AGM, the first auditor must be appointed within 90 days from the date of incorporation. Thereafter, auditors are appointed for a five-year term in accordance with the Companies Act. The act also prescribes the process for the removal or resignation of auditors during their five-year tenure.
Auditors must conduct the statutory audit of a company and submit a report along with the audited financials for each financial year to the members of the company.
Companies must maintain statutory registers, books and documents as per the Companies Act. Some of the key statutory records to be maintained include:
The Companies Act primarily mandates that a company's statutory records should be maintained at its registered office. However, subject to the act, certain statutory records can be maintained at a place other than the registered office.
Subject to obtaining requisite approval from the board or shareholders (if the limits prescribed under the Companies Act are breached), companies can:
However, companies cannot make investments through more than two layers of investment companies, except in certain cases as prescribed under the act.
Companies which meet the prescribed criteria in a particular financial year must spend at least 2% of their average profits (as calculated in accordance with the Companies Act) from the three immediately preceding financial years towards corporate social responsibility (CSR) activities. For this purpose, the act mandates:
The Companies Act prescribes that a company can enter into the following types of contract and arrangement (not in the ordinary course of business and at an arm's-length price) with related parties(1) only on obtaining approval from the board of directors at a board meeting:
If the value of contracts or arrangements to be entered into with related parties exceeds the prescribed limits, prior approval from the company's members is required.
The Companies Act provides various methods through which a company's existing structure can be altered, including:
The Companies Act provides for specific provisions and compliances which must be followed when undertaking any of the above restructuring processes. In many cases (eg, in mergers, amalgamations or demergers), the government's specific approval through designated regulatory bodies must be obtained prior to proceeding with the restructuring process. The Companies Act provides flexibility to investors to structure or restructure companies in India depending on their requirements.
Foreign companies (ie, companies or body corporates incorporated outside India) with a place of business in India (either physically or electronically) and conducting business activities in India must register with the Ministry of Corporate Affairs after furnishing the documents as prescribed under the Companies Act.
Further, under the act, foreign companies must:
Pursuant to the applicable laws, companies can be closed:
The mode of closure largely depends on the company's status of operations and the position of its assets and liabilities.
In addition to the Companies Act, companies whose securities (whether equity or debt) are publicly traded on a recognised stock exchange in India are governed by the Securities and Exchange Board of India (SEBI) Act 1992 and the Securities Contracts (Regulations) Act (SCRA) 1956. The SEBI is the statutory body which is entrusted with the powers of regulating and governing the functioning of listed companies in India. The SEBI, under the SEBI Act and the SCRA, has issued various rules and regulations which listed companies in India must follow. Some of the important regulations issued by the SEBI are those relating to:
For further information on this topic please contact Vineet Aneja at Clasis Law by telephone (+91 11 4213 0000) or email (firstname.lastname@example.org). The Clasis Law website can be accessed at www.clasislaw.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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