Company Law

1 Incorporation of company

Formation of a company involves following procedures –

(a)     Approval of name.

(b)     Drafting of Memorandum of Association, typed on stamp paper and signed

(c)     Articles of Association duly typed on stamp paper and signed (not essential in case of public limited company limited by shares, but still almost invariably submitted).

(d)     E-filing of documents

(e)     Submission of required papers like Statutory declaration of compliance, Power of Attorney

(f)      Payment of filing Fees.

(g)     Correcting Memorandum and Articles if required by ROC by person holding Power of Attorney

(h)     Filing final copy of Memorandum and Articles in pdf format, if corrections were made.

(i)       Collect certificate of incorporation by holder of Power of Attorney.

1-1 Approval of name – The first step in formation of a company is getting the proposed name approved from Registrar of Companies of the State where the company is to be incorporated.  Availability of a name can be checked using the ‘Check Company Name’ service under ‘Other Services’ tab on homepage of MCA i.e. www.mca.gov.in. Once this is done, chances of rejection of proposed name will be much less.

Name should be indicative of the main object of the proposed company.

Purpose of application is to confirm that the proposed name is not undesirable as per section 20. Same procedure applies for change of name also.

The procedure for approval of name of company has been changed w.e.f. 16-11-2007. Application for approval of name should be made to regional ROC electronically in form 1A with fees of Rs 500.

If some key words or coined words are used, its significance should be stated. If proposed name is based on registered trade mark or application has been made for registration of trade mark, details should be furnished.

Two persons in case of a private company and seven persons in case of public company should be named as promoters/subscribers. They should have obtained DIN.

Registrar of Companies is required to inform approval of name / rejection of proposed name within seven days.

Six names are required to be submitted. If none of these names is found to be acceptable, ROC will give opportunity to propose new names. These are to be submitted within three days. Two opportunities will be given for re-submission of names. If despite this, none of the names is found to be acceptable by ROC, the fees paid will lapse. Then fresh application for name approval with fresh fees should be paid.

Name approved is valid for 60 days. The approval can be renewed once for a period of 30 days by paying fees of Rs 250. If the company is not incorporated within 60 days (or within further 30 days if extension s obtained), the name approved will lapse. Of curse, fresh application with fresh fees can be made  [Rule 4A as amended w.e.f. 16-11-2007].

As per circular No. 1/95, dated. 16-2-1995, the persons who have applied for approval of name as promoters should be subscribers to the memorandum and articles. If not, at least one person should be common and others should have no objection.

SRN after submission of application - Applicant will get SRN (Service Request Number), which can be used to trace position about approval of name.

Words private limited or Limited - Name of a company must contain the word 'Limited' or 'Private Limited' at the end. Exemption from this provision is given only to section 25 companies. Such company is termed as' licensed company'. The license is given to chamber of commerce, trade associations, charitable organisations etc. which are not for profits. A Government company formed as a private company can delete the word 'Private' from its name.

Criteria in approving a name - Name should be indicative of the main object of the proposed company. If some key words or coined words are used, its significance should be stated. If proposed name is based on registered trade mark or application has been made for registration of trade mark, details should be furnished. Name should not be identical or should not too nearly resemble the name of another registered company.

Name should not be considered undesirable by Central Government [section 20(1)] Offensive name or name suggesting unlawful activity is not permissible.

Name should not violate provisions of Emblems and Names (Prevention of Improper Use) Act, 1950.

Name misleading i.e. key word suggesting a great scale while company is with small resources. Thus, following are restrictions - word ‘Corporation’ permitted when authorised capital is Rs 5 crores. Words like International, Global, Asia etc. is permitted if authorised capital is Rs 1 crore. Words like Hindustan, India, Bharat permitted when authorised capital Rs 50 lakhs. Words like Industries/Udyog permitted if capital is Rs 1 crore. Words like ‘Enterprise’, ‘Business’ ‘Manufacturing’ permitted when capital is Rs 10 lakhs.

Change of name of company to reflect business of software (e.g. name containing words like Infosys, Software, Cyber, Cyberspace, Computers etc.) will be permitted only if a substantial portion of its income is derived from software business. - PIB press release dated 16-8-1999.

Consent of other companies in group for using group name in name of a company - If a company intends to use group name as part of its name (e.g. Kirloskar, Birla, Tata, Reliance etc.) it is standard practice of ROC to obtain no objection letters from other group companies.

1-2 Procedure after obtaining approval of name

Following  documents are to be submitted electronically as scanned attachment to e-form No. 1.  After submission, a SRN (Service Request Number) will be generated by system.

(a)     Memorandum of Association duly stamped as per State Stamp Act [section 33(1)(a)]  Memorandum and articles have to be signed by all signatories, writing (by hand) their names, address, occupation and number of shares they are subscribing to.

(b)     Articles of Association, if any, duly stamped as per State Stamp Act [compulsory for private company, optional for public company, but almost always filed]

(c)     If company proposes to appoint a person as Managing Director or wholetime director or Manager, a copy of agreement is to be enclosed [section 33(1)(c)]

(d)     Statutory Declaration of Compliance in form 1 u/s 33(2) on stamp paper. The declaration can be signed by Advocate, Practising Company Secretary, practising Chartered Accountant, or by a person named in the articles as Director, Manager or Secretary of the company. The stamp paper should be purchased in name of applicant-subscriber and not in name of company which is yet to be incorporated

(e)     Power of attorney to correct memorandum and Articles and to collect certificate of incorporation (PoA should be on stamp paper as per State Stamp Act. The stamp paper should be purchased in name of applicant-subscriber and not in name of company which is yet to be incorporated).

(f)      If Articles of public company having share capital specify names of directors, their written consent as attachment to e-from 32.

(g)     Original letter of ROC approving name of company

(h)     Notice of registered office as required u/s 146(1) – It can be filed within 30 days from incorporation in e-form 18. However, as per instructions to e-form 1, e-from 18 is to be filed along with form No. 1.

(i)       Proof of payment of filing fees. The fee payable is specified in Schedule X.

Submission of original papers in physical form - The original memorandum of association and articles of association duly stamped signed should be submitted to ROC of concerned State, giving reference to SRN. Original Statutory Declaration of Compliance in form 1 u/s 33(2) on stamp paper and Power of attorney should also be submitted.

1-3 Fees payable for registration of a company

Fees payable for registration of a company having share capital depends on nominal share capital and varies from Rs 4,000 to Rs 2,00,04,000. [Rs two crore and four thousand], as follows –

Company not having a share capital – Fee payable is Rs 5,000 when number of members as stated in Articles is unlimited. Fees for filing or registering a document is Rs 50.

Section 25 companies – Companies licensed under section 25 will have to pay same registration fees as above [Till 31-12-2007, they were required to pay nominal fee of Rs 50].

Fee for increase in nominal capital - If nominal share capital is increased, difference in fees is payable, while filing notice of increase in nominal capital. The differential fees payable is equal to fees payable on increased capital as per Schedule less the amount payable on share capital equal to nominal capital before the increase, at the rates prevailing on date of filing the notice. [Thus, if nominal share capital is increased from Rs 10 lakhs to Rs 50 lakhs, calculate fees payable on Rs 50 lakhs, calculate fees payable if nominal capital was Rs 10 lakhs and then pay the difference].

1-4 Procedure after e-filing and submission of original documents

The documents are scrutinised by ROC.  If the Memorandum/Articles is corrected as required by ROC, final soft copy in PDF format will have to be submitted.

After correction and completion of all requirements, certificate of incorporation will be issued by ROC with CIN (Corporate Identity Number).

Certificate of commencement of business - A private company can commence business immediately, while a public company can commence business only after obtaining certificate of commencement of business.

1-5 Alterations to Memorandum and Articles of Association

Any provision in Articles can be changed by a special resolution.

Provisions in respect of change of Memorandum are as follows.

Overall control of company by Shareholders

2 The body of members (shareholders) are real owners of the company. However, they have no authority to look after day to day affairs of the company or enter into contracts on behalf of company. They have limited powers. They must meet at least once a year at Annual General Meeting. (AGM).

Ordinary Business at AGM - Following is the ordinary business of the company. Normally, this business should be transacted at every AGM. [section 173(1)]—

·          Consideration of accounts - to receive and adopt annual accounts of the company.

·          Consideration of report of Board of Directors and auditors - To receive and adopt Report of Board of Directors and Auditors

·          To declare dividend

·          To appoint directors in place of retiring directors

·          To appoint auditors for ensuring year and fix their remuneration.

Special Business - All business at the meeting other than the aforesaid ‘ordinary business’ is termed as ‘special business’.

2-1 Businesses in which the resolutions shall be passed through Postal Ballot only

As per rule 4, following business of public listed company shall be transacted through postal ballot. -

Alteration of Object clause - alteration in the Object Clause of Memorandum [section 17(1)] – Requires special resolution.

Alteration of Articles defining private company - alteration of Articles of Associations in relation to insertion of provisions defining private company.  [This is meaningless as the provision of postal ballot is only for listed company and a listed company cannot be a ‘private company’ ]. – Requires special resolution.

Buy back of shares - buy-back of own shares by the company under section 77A(1). [However, postal ballot is not required for buy back of ‘other specified securities’ which includes Employees Stock Option]. [Buy back of shares upto 10% of total paid up equity capital and free reserves can be made every year with resolution of Board, as per amendment to section 77(2)(b) w.e.f. 23-10-2001. In such cases, postal ballot will not be required]. – Requires special resolution.

Issue of sweat equity to promoters - Issue of Sweat equity shares to promoters u/s 79A(1)(d) in case of listed company – It should be by passing ordinary resolution through postal ballot. Promoters will not participate in such resolution, i.e. resolution shall be passed excluding the voting of promoters. [SEBI (Issue of Sweat Equity) Regulations, 2002].

Issue of shared with differential voting rights - issue of shares with differential voting rights as to voting or dividend or otherwise under section 86(a)(ii) – Requires ordinary resolution.

Change of registered office outside city but within State - change in place of Registered Office outside local limits of any city, town or village as specified in section 146(2) – Requires special resolution.

Sale of substantially whole undertaking - sale of whole or substantially the whole of undertaking of a company as specified under section 293(1)(a). [The words ‘lease or otherwise dispose of’’ are missing. Thus, postal ballot is not required for usufructuary mortgage of the undertaking. Lease of undertaking is also excluded from provision of postal ballot]. – Requires ordinary resolution.

Loans or guarantees in excess of limits - giving loans or extending guarantee or providing security in excess of the limit prescribed under section 372A(1). [The words inter corporate investment is missing. Thus, for making corporate investment exceeding the limit u/s 372A, postal ballot is not necessary] – Requires special resolution.

Election of small shareholders - election of a  small shareholders’ director under proviso to section 252(1) – Requires ordinary resolution

Variation of rights to class of shares or debentures - variation in the rights attached to a class of shares or debentures or other securities as specified under section 106 [In fact, section 106 only provides for variation of rights of shareholders. Thus, extending it to debentures by rules does not seem to be correct]. – Requires special resolution.

Waiver of public offer in case of takeover - Under SEBI code, in case of takeover, the acquirer is required to make public offer to purchase at least 20% of shares. Such public offer is not necessary if change in control takes place in pursuance to special resolution of target company. Such special resolution should be passed by postal ballot. [second proviso to regulation 12 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997] ) – Requires special resolution as per SEBI guidelines

2-2 Resolutions which are required to be passed as special resolutions

Some important sanctions requiring special resolution are as follows -

In addition, in some cases, approval of Central Government, Court or CLB is required.

2-3 Resolutions requiring special notice

Special notice is required for following resolutions - (a) Resolution appointing an auditor other than the retiring auditor or resolution that the retiring auditor shall not be appointed (section 225) (b) Resolution to remove director before expiry of his period and a resolution to appoint another director in place of removed director (section 284).  - - Interestingly, in both the cases, only ordinary resolution is required to pass the motion and not special resolution.

As per section 190 of Companies Act, a member intending to move such resolution has to give at least 14 days’ clear notice to the company before the general meeting. ‘Clear notice’ means date of giving notice and date of the general notice will have to be excluded for calculating period of 14 days. On receipt of such intimation, the company must give its members notice of the resolution in the same manner as notice of general meeting is given. If this is not practicable, notice should be given by advertisement or other mode as may be prescribed in Articles of Association. Such notice must be given at least seven clear days before the meeting.

2-4 Resolutions which can be passed as ordinary resolutions

Some important sanctions requiring ordinary resolution are as follows—