Concept & Meaning
A company is a voluntary association of persons formed to carry on some purpose. It is an artificial person created by law. It has a separate legal entity and enjoys perpetual succession. It is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership. For a layman, the word refers to a business organization. But not all business organizations are companies. An organization becomes a company when it is registered or incorporated under the Companies Act. A company can own property, have bank accounts, raise loans & also incur liabilities. The liability of a company is usually limited (except for unlimited companies). In the broad sense, there are various types of companies but in the narrow sense, It is basically of 3 types namely Public companies, Government companies & Private companies. As the company is an artificial person, it can act only through a human being acting as an agent. Such agents are called Directors of the company. They are the ultimate controller of the company & are vested with all the powers.
Promotion/Incorporation / Registration of a company
A company is an artificial person that comes into existence only after incorporation. A company is incorporated under the Companies Act, 1956 (now 2013) and at the ‘Registrar of Companies (ROC).
The various steps for incorporation are as follows;
- Lawful Purpose – The first & foremost requirement to start a company is the presence of a lawful purpose. When the purpose is unlawful, the Registrar may refuse to register the company.
- Application for Approval of Name: In the first step, permission is obtained for the approval of the name. The name of the company should not be prohibited under ‘Emblems and Names Act, 1950’. The name should not resemble any existing or registered company. For that purpose, the applicant gives a panel of three to five names in order to avoid delay. The registration fee for this purpose is Rs.1000.
(ii) Preparation of Memorandum of Association: The next step is to prepare the ‘Memorandum of Association’. A Memorandum of association is known as the constitution of a company & it describes its objectives and powers & scope. It should be properly stamped & signed by the members of the company.
(iii) Preparation of Articles of Association: It is a document containing the rules and regulations relating to the internal management of the company. This is required for the private and public companies but a public company can adopt Table A, Schedule I of the Companies Act, 1956 (now 2013).
(iv) Preparation of other documents: There are certain other documents which are required to be filed such as;
(i) Consent of first directors.
(ii) Power of Attorney executed by the promoter in favor of an advocate to carry out the legal formalities.
(iii) Copies of preliminary agreements,
(iv) Information regarding registered office.
(v) A statutory declaration that all the legal formalities have been complied with.
(v) Payment of Fees: The next step is the payment of requisite fees. The amount of fees varies in the case of companies with share capital and companies without share capital.
(vi) Incorporation Certificate: After filing all the documents and payment of fees, scrutiny is made by the Registrar. If everything is in order, the name of the company is registered in ‘Register of Companies’ and an Incorporation Certificate is issued. A private company can start a business after getting certificate of incorporation.
CLASSIFICATION/TYPES OF COMPANIES
According to Incorporation :
- Chartered companies : These companies are incorporated or registered under the Royal Charter issued by the king or head of the state. These are given certain rights and privileges.
Example :The East India company.
- Statutory Companies :These companies are formed under a special act of parliament or a state legislative. They may or may not use the word limited. They are given wide powers.
Example :Reserve Bank of India, Industrial Development Bank of India etc.
- Registered Companies :These are the companies which are registered under the companies Act, 2013. They may be limited by shares or guarantee.
According to Liability :
- Companies Ltd by Shares : These companies have a share capital (i.e. capital divided into shares). The liability of shareholders of such companies is limited up to the investment or unpaid amount only.
- Companies Ltd. by Guarantee :These companies have a stipulation in the memorandum clause that the members guarantee to pay a certain amount of money in case of its winding up. The amount undertaken to pay is called guarantee money.
- Unlimited Companies : These companies do not have a share capital & the liabilities of the shareholders of these companies is unlimited. Such companies are rare to find & they are not required to use the unlimited at the end of their name.
According to Transferability :
- Private Company : A private company is a company which is formed with the association of at least two members and maximum 200. They use the word ‘Pvt. Ltd’ after their name. The shareholders are basically the family members and they can’t issue shares to the public directly.
- Public Company :It is a type of company which requires at least 7 persons for incorporation & the maximum membership is unlimited. They use the word ‘Ltd.’ after their name and they are allowed to issue shares directly to the public.
On the basis of Ownership :
- Government Companies : A company owned either by the State Government or central government or both is known as ‘Government Companies’ The government may invest either the whole capital or it may purchase majority of shares (i.e. 51%)
Example : Steel Authority of India Ltd.(SAIL)
- Holding Companies :It is a company which controls the policies and internal matters of any other company.
- Subsidiary Companies : This is a company whose policies and internal matters are controlled by another company.
On the basis of Nationality :
- Indian Companies: A company which has been registered in India under the Company’s Act, 1956, is known as an Indian Company. It may or may not operate in India.
- Foreign Companies :It is a company which has been incorporated outside India but has a place of business in India.
Two new companies were introduced in the companies act, of 2013
One Person Company - One Person Company (OPC) means a company formed with only one (single) person as a member, unlike the traditional manner of having at least two members. OPC under the Companies Act, 2013 is a separate legal entity having perpetual succession, which is required to be registered as per the provisions of the Companies Act, 2013. The liability to repay the loan availed by the OPC is limited only to the OPC, unlike, a sole proprietorship which is not a separate legal entity, thus making the sole proprietor personally liable for any loan or any credit facility availed. Further, registration of a sole proprietorship is not required.
Small Company - As per the new definition of small company provided under section 2(85) of the Companies Act, 2013, the small company means and covers the company which satisfies the following two conditions-
Condition 1 – Paid-up capital of the company should not exceed INR 2 Crores; and
Condition 2 – Turnover of the company should not exceed INR 20 Crores.
However, it is important to note here that the following companies, despite satisfying both the above conditions, are not eligible to qualify as a small company-
- A public company,
- A holding company,
- A subsidiary company,
- Company registered under section 8,
- A company that is governed by any special act.
The Concept of SHARES & SHARE CAPITAL
Capital is the lifeblood of a business as it is required for earning revenue. The capital of a company is usually divided into different units of a fixed amount known as ‘shares’.
Each share is distinguished by its specific number and a certificate is issued to the shareholders under the common seal of the company. The certificate is known as‘Share Certificate’.
TYPES OF SHARES
Shares are basically of two types;
(i) Preference Shares
(ii) Equity Shares
Preference Shares :
Preference shares are those shares that carry preferential rights in respect of payment of dividend and return of capital in the event of liquidation of the company. The preference shareholders are paid dividend at a fixed rate before, dividend is paid to equity shareholders.
For example, 10% preference shares means dividends shall be paid at the rate of 10 percent on paid-up capital when the company distributes dividends to shareholders.
Types of Preference Shares:
There are different types of preference shares on the basis of (i) redemption,(ii) conversion into equity shares, (iii) accumulation of arrear of dividends, and (iv) participation in the surplus profit of the company.
On the basis of the accumulation of arrear dividends:
On this basis, preference shares may be cumulative or non-cumulative preference shares.
(i) Cumulative Preference Shares: These shares carry the right to arrear of dividend if the company had not paid dividend for any year. If the company declares dividend for a year, the cumulative preference shareholders are paid their arrear dividend first before any dividend is paid to equity shareholders. Thus, the arrear of dividend accumulates till it is paid by the company.
(ii) Non-cumulative Preference Shares: The non-cumulative preference shares are not entitled to arrear of dividend. In other words, the arrear of dividend do not accumulate and such shareholders are paid a dividend for the current year (if the company declares a dividend) before the dividend to equity shareholders is paid.
On the basis of redemption :
Preference shares may be redeemable or irredeemable on the basis of redemption (return of capital).
(i) Redeemable Preference Shares: Redeemable Preference Shares are those preference shares on which the amount is returned by the company to the shareholders after the expiry of a fixed term within the life of the company. Ordinarily, shares are not redeemable (refundable) unless the company goes into liquidation.
(ii) Irredeemable Preference Shares: The preference shares which are not redeemable within the life of the company or redeemed only at the time of liquidation of the company are called irredeemable preference shares.
On the basis of participation in surplus profit :
On the basis of participation in surplus profit of the company, preference shares may be participating or non-participating preference shares.
(i) Participating Preference Shares: The preference shares which carry the right to share the surplus profit of the company remaining after paying dividends to equity shareholders at a certain rate are called participating preference shares. The surplus profit is distributed between participating preference shareholders and equity shareholders on a certain agreed ratio.
(ii) Non-participating Preference Shares: Non-participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profit or assets of the company.
On the basis of conversion :
On the basis of conversion into equity shares, preference shares may be convertible or non-convertible preference shares.
(i) Convertible Preference Shares: The preference shares which carry the right to be converted into equity shares within a specified period or at a specified date according to the terms of the issue are called convertible preference shares.
(ii) Non-convertible Preference: The preference shares which do not carry the right of conversion into equity shares are known as non-convertible preference shares.
Equity Shares :
Shares that are not preference shares are equity shares. Such shares are also known as ordinary shares. These shares do not have any preferential right as to dividend or return of capital in the event of winding up of the company. The rate of dividend on such shares is not fixed. Equity shareholders are the real owners of the company because they bear the risk. They may not get any dividend in the year of the loss or insufficient profit and receive a relatively higher return in the year in which the company earns a higher profit. Equity shares carry voting rights on all matters and the shareholders have control over the affairs of the company.
Stock is the aggregate of fully paid up shares. It can be considered as a set of shares put together in a bundle. Stock can be split into fractions of any amount without regard to the original face value of shares. The value of the stock depends upon the number of fully paid-up shares consolidated. Conversion of shares into stock is made provided the Articles of Association of the company permit.
Features of Preference Shares :
(i) Preference shares have priority over payment of dividends and repayment of capital.
(ii) The rate of dividend on preference shares is fixed. Only in the case of participating preference shares additional dividend may be paid if profits remain after paying equity dividend.
(iii) Except in the case of redeemable preference shares, the preference share capital remains with the company on a permanent basis.
(iv) Preference shares do not create any charge over the assets of the company.
(v) Preference shareholders do not hold voting rights.
Merits / Advantages :
(i) Rate of return is guaranteed. Investors who prefer safety on their capital and want to earn income with greater certainty, always prefer to invest in preference shares.
(ii) Helpful in raising long-term capital for a company.
(iii) Control of the company is vested with the management as preference shareholders have no voting rights.
(iv) Redeemable preference shares have the added advantage of repayment of capital whenever there is a surplus in the company.
(v) There is no need to mortgage property on these shares.
(i) Permanent burden on the company to pay a fixed rate of dividend before paying anything on other shares.
(ii) Not advantageous to investors from the point of view of control and management as preference shares do not carry voting rights.
(iii) Compared to other fixed interest-bearing securities such as debentures, usually the cost of raising the preference share capital is higher.
Features of Equity Shares
(i) Equity share capital remains permanently with the company. It is returned only when the company is wound up.
(ii) Equity shareholders have voting rights and elect the management of the company.
(iii) The rate of dividend on equity capital depends upon the availability of surplus funds. There is no fixed rate of dividend on equity capital.
(i) Equity shares do not create any obligation to pay a fixed rate of dividend.
(ii) Equity shares can be issued without creating any charge over the assets of the company.
(iii) It is a permanent source of capital and the company has to repay it only under liquidation.
(iv) Equity shareholders are the real owners of the company who have voting rights.
(v) In the case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.
(i) As equity capital cannot be redeemed, there is a danger of over-capitalization.
(ii) Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
Why do Companies issue Shares to the Public?
Companies issue shares to the public in order to raise capital or to finance their business operations, expand the business, and meet other financial needs. After the acceptance of shares by the company, the applicant becomes a shareholder in the company, and they get the right to receive dividends on their investments.
TYPES OF SHARE CAPITAL
Authorized Share Capital
Authorized Share Capital is the total Capital that a company accepts from its investors by issuing shares that are mentioned in the official document of the company. It is also called Registered Capital or Nominal Capital because with this Capital a company is registered.
According to Section 2(8) of the Companies Act, 2013, the limit of Authorised Capital is given under the Capital Clause in the Memorandum of Association. The company has the discretion to take the required steps necessary to increase the limit of authorized capital with the purpose of issuing more shares, but the company is not allowed to issue shares that are exceeding the limit of authorized capital in any case.
Authorized Share = Issued Share + Unissued Share.
Issued Share Capital
Issued Share Capital is the part of Authorized Share Capital issued to the public for subscription. And this Act of issuing Shares is called Issuance, allocation, or allotment. In a simple way, you can say that Issued Share Capital is the subset of the Authorized Share Capital. After the allotment of shares, a subscriber becomes the shareholder.
Issued Capital = Subscribed + Unsubscribed Capital
Subscribed Capital is the part of issued Capital that has been taken off by the public. It is not mandatory that the issued Capital is fully subscribed to by the public. It is that part of the issued Capital for which the application has been received by the company. Let’s understand this with an example – If a company offers 16000 shares of Rs. One hundred each and the public applies only for 12000 shares, then the issued Capital would be Rs 16 lakh, and Subscribed Capital would be Rs 12 lakh. Issued Share is equal to the sum total of share outstanding and treasury shares.
NOTE: Once the Share has been issued and purchased by investors, these shares are called Shares Outstanding. This issuing of shares gives the shareholders ownership of the corporation. The Unsubscribed Share Capital can be called the Treasury Shares.
Called-up Capital is the part of the Subscribed Capital, which includes the amount paid by the shareholder. The company does not receive the entire amount of Capital at once. It calls upon the part of subscribed Capital when needed in installments. The remaining part of the Subscribed Capital is called Uncalled Capital.
The part of Called-up Capital that is paid by the shareholder is called Paid-up Capital. It is not mandatory that the amount called by the company is paid by the shareholder. The shareholder may pay half the amount of the called up Capital, which is called Reserved Capital. As the name reserve means to keep some amount in the treasury of the company. This is quite useful in the case of winding- up the company.
The Companies Amendment Act 2015, has amended that minimum requirement of the paid-up capital is not required in the Company. That signifies that at present the formation of the Company can be done with even Rs.1000 as the company’s paid-up capital. The paid-up capital shall always be less than or can be equal to the authorized share capital at any point in time and the Company is not allowed to issue shares beyond the company’s authorized share capital.
What is the difference between Capital Reserves and Reserve Capital?
There is a clear difference between Capital Reserve and Reserve Capital. Capital Reserve is the part of profit reserved by the company for a particular business purpose or to finance long-term projects. Whereas, the Reserve Capital is the part of the Authorized Capital that has not yet been called up by the company and is available for drawing anytime when necessary.
important documents issued by a company
Memorandum of Association: It is the constitution as well as the foundation upon which the whole structure of the company is built. It is the principal document without which a company can’t be registered. It defines the company’s scope of activities as well as its relation with the outside world. The purpose of the memorandum is to enable the shareholders, creditors, and those who deal with the company to know what the permitted range of the enterprise is. A company cannot do anything contrary to the memorandum. It cannot enter into a contract or engage in any trade or business which is not permitted by the memorandum. If any action is done by the company which is not permitted by the memorandum, it is known as Ultravires (which means beyond the powers).
(i) It defines the limitations of the company.
(ii) It is the foundation upon which the whole structure of the company is built.
(iii) It explains the scope of activities of the company.
(iv) It is the constitution of a company.
(v) It is a charter of the company.
(1) The Name Clause: The name of the company is mentioned in this clause. A company should select a name that does not violate the Emblems & Names Act, 1950. The words ‘Pvt Ltd’, “(P) Ltd” or only “Ltd’ must be attached after its name in the case of private or public companies respectively. The name of the company must be engraved on its official seal & also mentioned in the letterheads, bills & other official publications.
(2) Registered Office Clause: This clause consists of the registered office address of the company. It is mandatory for every company to have a registered office where necessary documents like notices, letters etc may be sent. It is also important for inspection purposes. A company must have a registered office from the day on which it commences business. If the office is shifted within the town, a special resolution is passed but if the office is shifted from one town to another, it requires an alteration in the memorandum.
(3) Object Clause: This clause determines the rights, powers and objectives of the company. The powers of the company are limited to the object clause in the memorandum. This clause enables the shareholders, creditors & all other members who deal with the company to know what its range of activities are. It should be decided carefully because it is difficult to change later on.
(4) Liability Clause: This clause mentions the shareholders liability. The liability may be up to the unpaid amount on shares or it may also be limited by a guarantee (in the case of a guarantee company). It also mentions the amount to be contributed by the members towards the assets of the company in case of its winding up. In the case of unlimited companies, the liability of the members is unlimited.
(5) Capital Clause: This clause states the amount of total capital of the company. The maximum amount of capital that can be issued/raised by a company from the market is known as nominal or authorized capital. This clause also mentions the division of capital into equity and preference shares.
(6) Association Clause: This clause contains the names of signatories to the memorandum. The memorandum must be signed by at least 7 persons in case of public and 2 persons in case of a private company.
(ii) Articles of Association: This is a document in which the rules and regulations regarding the internal management of the company are framed. It cannot contain anything contrary to the companies, Act, 2013, as well as MOA. It contains all the provisions related to day to day working of the business. Any act done violating the provisions of articles can be ratified by passing a resolution in a general meeting. It contains provisions related procedure of issuing share capital, procedure for conducting a general meeting, minimum members required to be present (Quorum) in order to conduct a meeting etc. Every company limited by a guarantee or an unlimited company needs to register its articles along with the memorandum of association with the ROC. If a public company does not register its articles, the regulation contained in Table A would be applicable.
(i) The amount of share capital issued, different types of shares, forfeiture of shares etc.
(ii) Power to alter as well as reduce share capital.
(iii) Appointment of directors, powers and their remuneration etc.
(iv) Appointment of manager, managing directors
(v) Procedure for holding a meeting.