Companies Act 2013

The Companies Act, 2013 passed by the Parliament has received the assent of the
President of India on 29th August, 2013. The Act consolidates and amends the law
relating to companies.

Why to Form a Company

• Limited Liability The main reason for forming a corporation is to limit the liability
of the owners. In a sole proprietorship or partnership, the owners are personally
liable for the debts and liabilities of the business, and in many instances, creditors
can go after their personal assets to collect business debts. If a corporation is
formed and operated properly, the owners can be protected from all such liability.
• Perpetual Existence A corporation may have a perpetual existence. It means
that they are can continue indefinitely, until dissolved by either the corporation itself
or the state (=dissolution). The life and continuation of a business will not be
affected by the withdrawal or death of one of the owners.
• Stock Stock is the ownership interest in the corporation. The corporation issues
shares of its stock to the people or entities who will own the corporation. A
corporation can have very few shares of stock or millions of shares. The shares
can all represent the same rights in the corporation or there can be different classes
of shares with different rights, such as common stock or preferred stock. Stock can
be designated with or without par value, which is usually the minimum amount paid
for stock.
• Ease of Transferability A corporation and all of its assets and accounts may
be transferred by the simple assignment of a stock certificate. With a sole
proprietorship or partnership, each of the individual assets must be transferred,
and the accounts, licenses, and permits must be individually transferred.
• Extra Tax There are several tax advantages that are available only to
corporations, such as:
• Medical insurance for families may be fully deductible<
• Tax-deferred trust can be set up for a retirement plan
• Losses are fully deductible for a corporation, whereas an individual must
prove there was a profit motive before deducting losses
• Raising Capital A corporation may raise capital by selling stock or
borrowing money. A corporation does not pay taxes on money it raises by the sale
of stock.
• Control By distributing stock, the owner of a business can share the profits of a
business without giving up control.
Companies Act 2013 Salient Features
 Women empowerment in the corporate sector: The Companies Act
2013 stipulates appointment of at least one woman Director on the Board (for
certain class of companies).
• Corporate Social Responsibility: Section 135 of the Act which deals with
Corporate Social Responsibility. The Companies Act 2013 stipulates certain class
of Companies to spend a certain amount of money every year on
activities/initiatives reflecting Corporate Social Responsibility.
• Increase in number of Shareholders: The Companies Act 2013 increased the
number of maximum shareholders in a private company from 50 to 200.
• Limit on Maximum Partners: The maximum number of persons/partners in any
association/partnership may be up to such number as may be prescribed but not
exceeding one hundred. Under the Companies Act 1956, there was a limit of
maximum 20 persons/partners and there was no exemption granted to the
professionals.
• One Person Company: The Companies Act 2013 provides new form of private
company, i.e., one person company. It may have only one director and one
shareholder. The Companies Act 1956 requires minimum two shareholders and
two directors in case of a private company.
• Electronic Mode: The Companies Act 2013 proposed E-Governance for various
company processes like maintenance and inspection of documents in electronic
form, option of keeping of books of accounts in electronic form, financial statements
to be placed on company’s website, etc.
• Indian Resident as Director: Every company shall have at least one director who
has stayed in India for a total period of not less than 182 days in the previous
calendar year.
• Independent Directors: The Companies Act 2013 provides that all listed
companies should have at least one-third of the Board as independent directors.
No independent director shall hold office for more than two consecutive terms of
five years.
• Serving Notice of Board Meeting: The Companies Act 2013 requires at least
seven days’ notice to call a board meeting. The notice may be sent by electronic
means to every director at his address registered with the company.
• Duties of Director defined: The Companies Act 2013 has defined the duties of a
director.
• Liability on Directors and Officers: The Companies Act 2013 does not restrict
an Indian company from indemnifying (compensate for harm or loss) its directors
and officers like the Companies Act 1956.
• National Company Law Tribunal: The Companies Act 2013 introduced National
Company Law Tribunal and the National Company Law Appellate Tribunal to
 replace the Company Law Board and Board for Industrial and Financial
Reconstruction. They would relieve the Courts of their burden while simultaneously
providing specialized justice.

Role of Directors
• To establish the Vision & Mission Statement: Approval of company’s
philosophy, vision and mission statement is done by the board of directors.
• Strategic Direction and advice: Board is to review and approve management’s
strategy, plans and decisions, financial objectives and extra-ordinary business
transactions. Boards are in an excellent position to provide input and advice to the
CEO and the top management regarding the company’s strategic direction.
• Overseeing Strategy Implementation and performance: Developing a valid
strategy is only the first step in creating an effective organization. The board plays
a crucial role in advising, evaluating and monitoring strategy implementation.
Boards can best monitor strategy implementation by setting benchmarks to
measure progress and by drawing on objective sources of information.
• Appointing and evaluation of CEO and Senior management: It is the duty as
well as the power of the Board to appoint the CEO, other officers to the senior
management and specialist officers of the company.
• Ensuring Stakeholder Relations: To serve as a communications link with
members and other stakeholders of an organization - organization can accomplish
this by informing people of upcoming events, promoting items of interest and
providing newsworthy information.
• Risk Mitigation: Directors are expected to identify and manage obstacles that
may prevent the organization from reaching its goals. The entire board must be
involved in risk management, particularly around financial matters and legal
compliance.
• Procuring resources: Financial resources, human resources, technological
resources and business relationship are the key resources that are essential to an
organization’s success. Boards play an important role in helping the organization
in procuring the resources.

Duties of Directors
(I) He has to act in good faith in order to promote the objects of the company for the
benefit of its members as a whole.
(ii) He has to act in the best interest of the company, its employees, shareholders,
community and for the protection of environment.
(iii) He has to carry on his duties with due and reasonable care, skill and diligence
and exercise independent judgment.
(iv) He shall not involve in a situation in which he may have a direct or indirect interest
that conflicts or likely to conflict with the interest of the company.
(v) He shall not achieve or attempt to achieve any undue gain or advantage either to
himself, his relatives, partners or associates.
(vi) He shall not assign his office to any other person.
• If he contravenes any of the above provisions of section 166, he shall be
punishable with fine which shall not be less than Rs.1 lac which may extend to Rs.5
lacs. It is also provided that if he is found guilty of making any undue gain during
the course of discharging his duties as a director, he shall be liable to refund an
amount equal to such gain to the company.
• Section 172 provides that if a company contravenes any of the provisions of
chapter XI (sections 149 to 171), for which no specific punishment is provided, the
company and every officer of the company who is in default shall be punishable
with minimum fine of Rs.50000/- which may extend to Rs. five lacs.