Historical Development | Company Law - CLAT PG PDF Download

Evolution of Companies Law in India

Influence of English Legislation: India's company law has been significantly influenced by English legislation, particularly during the colonial era. The initial framework for company law in India was modeled after the English Companies Act.

Colonization Era (1850-1913)

• 1850: Introduction of the first company enactment for the registration of joint-stock companies in India, based on the English Companies Act 1844.
• 1857: Recognition of limited liability in companies legislation, although initially excluding banking companies. This concept was introduced in the English Companies Act of 1856.
• 1858: Extension of limited liability to banking companies in India.
• 1866: Passage of the Companies Act for the incorporation, regulation, and winding up of trading companies, based on the English Companies Act 1862.
• 1882: Recasing of the 1866 Act, which remained in force until 1913.
• 1913: Enactment of a new Indian Companies Act, modeled after the English Companies Consolidation Act 1908.

Post World War II Era (1956)

• 1936: Major amendment to the Companies Act of 1913, influenced by the English Companies Act 1929. The 1913 Act governed Indian business companies until 1956.
• 1950: Establishment of the Bhabha Committee to study the Indian Companies Act in the context of Indian trade and industry.
• 1952: Submission of the Bhabha Committee report.
• 1956: Implementation of the Companies (Amendment) Act, reflecting the recommendations of the Bhabha Committee and influenced by the English Companies Act of 1948.

Opening up of Indian Markets (Post-1990)

• In 1990, India opened up its markets, leading to significant changes in its legal and regulatory framework, including company law. This period saw greater alignment with global practices and standards, reflecting the need for a more robust and flexible company law to accommodate the evolving business landscape.

Act of 1956

The period of the Second World War and the post-war years witnessed an upsurge of Industrial and commercial activity on an unprecedented scale in India and large profits were made by businessmen through incorporated companies.

Background and Rationale

• Post-World War II India saw a boom in industrial and commercial activities, leading to significant profits for businesses.
• The Indian Government recognized the need to revise Company Law based on experiences from the war period.

Formation of the Bhabha Committee

• On October 28, 1950, the Government of India formed a Committee to revise the Companies Act, chaired by Shri H. C. Bhabha.
• The committee included twelve members from various sectors to ensure a comprehensive review.

Committee Recommendations

• The Bhabha Committee submitted its report in March 1952, advocating significant changes to the Companies Act of 1913.
• The report emphasized the need for updates to support India’s evolving trade and industry landscape.

Legislative Process

• The report was debated by various stakeholders, including Chambers of Commerce,Trade associations, and leading industrialists.
• Based on these discussions, the Companies Act, 1956, was drafted and introduced in Parliament on September 2, 1953.

Joint Committee Review

• In May 1954, the Bill was sent to a Joint Committee of both Houses of Parliament for review.
• The Committee suggested several amendments, and their report was submitted in May 1955.

Parliamentary Approval

• The Bill was further amended in Parliament and passed in November 1955.
• The new Companies Act (I of 1956) came into effect on April 1, 1956.

Key Features of the Companies Act, 1956

• The Act aimed to regulate companies in India effectively, ensuring transparency, accountability, and protection for shareholders.
• It consolidated and amended previous laws, reflecting the changing business environment and legal needs of the time.

Major Changes brought forth by the Companies Act 1956

• Promotion and growth of Companies.
• Capital structure of the Companies.
• Company meetings and procedures.
• Company accounts and its presentation & powers and duties of the auditors of the company.
• Inspection and investigations of the affairs of the Company.
• The constitution of the Board of Directors,Powers and functions of directors,Managing Directors and Managers;
• Administration of the Company Law.

The Amendments in the Companies Act, 1956

As any other legislation various amendments were made to the Companies Act 1956 as mentioned below:

Timeline of Amendments

Opening of the Market Gates to the Globe-1990

Introduction of the Companies Act

• In response to the need for a modern legal framework, the Companies Bill, 1997 was introduced in the Rajya Sabha on August 14, 1997, aiming to replace the outdated Companies Act of 1956.
• The Bill aimed to facilitate the Indian corporate sector's adaptation to the new liberalized and globalized economic environment.

Presidential Ordinance and Amendment Act

• The Companies (Amendment) Ordinance, 1998 was promulgated by the President of India on October 31, 1998, but it was soon replaced by the Companies (Amendment) Act, 1999.
• The Amendment Act aimed to strengthen the capital market and attract foreign investments by reforming corporate regulations.

Key Objectives of the Amendment Act

• To enhance the capital market by boosting the confidence of national business houses.
• To promote Foreign Institutional Investors (FIIs) and Foreign Direct Investments (FDIs) in India.

Major Changes Introduced

• Buy-Back of Shares: A facility was introduced allowing companies to buy back their own shares.
• Liberalization of Investment and Loan Provisions: Provisions related to investments and loans were liberalized, removing the need for prior approval from the Central Government for certain investment decisions.
• Introduction of Sweat Equity: Companies were allowed to issue “sweat equity” shares in exchange for intellectual property contributions.
• Mandatory Compliance with Indian Accounting Standards: Compliance with Indian Accounting Standards was made mandatory, and the National Committee on Accounting Standards was established.
• Investor Protection Initiatives: The Investor Education and Protection Fund was established to safeguard investor interests.
• Nomination Provisions: Provisions for nomination to shareholders, debenture holders, and others were introduced.

Subsequent Amendments

• Companies (Amendment) Act, 2000: Further amendments to the Companies Act were made.
• Companies (Amendment) Act, 2001: Introduced Section 77A, allowing the Board of Directors to buy back shares up to 10% of paid-up capital and free reserves, with certain conditions.
• Companies (Amendment) Act, 2002: Various amendments were made to enhance corporate governance and operational efficiency.
• Companies (Second Amendment) Act, 2002: Introduced the concept of Producer Companies and expedited the winding-up process of companies for rehabilitation and worker protection.

Companies (Amendment) Act, 2006

• Enacted on November 1, 2006, this Act introduced the Director Identification Number (DIN) and mandated electronic filing of various returns and forms, enhancing transparency and efficiency in corporate governance.

The New Enactment of the New Society

The Companies Act, 2013 replaced the Companies Act, 1956. The legislators introduced ideas of the likes of:

• Corporate Social Responsibility (CSR)
• Class action suits
• Fixed term for the Independent Directors
• The provision of raising money from the public was made little stringent
• Prohibition on insider trading by company directors or key managerial personnel by declaring such activities as a criminal offence
• It permits shareholder agreements providing for the ‘Right of First Offer’ or ‘Right of first Refusal’ even in the case of Public Companies

The Companies (Amendment) Act, 2015

President signed the Companies (Amendment) Act, 2015 in May 2015, and it came into effect on 29th May 2015. This Act aimed to resolve issues faced by stakeholders like Chartered Accountants and other professionals.

No Minimum Paid-up Share Capital

• The requirement for a minimum paid-up share capital has been removed for incorporating both private and public companies in India.

Relaxation in Related Party Transactions

• In related party transactions requiring stakeholder approval, the need for a special resolution has been replaced by an ordinary resolution, allowing for greater flexibility.

Inspection of Resolutions Filed with the Registrar

• The Act limits public access to certain resolutions filed with the Registrar, primarily those related to strategic business matters. These documents will no longer be available for public review or copying.

Common Seal Optional

• Previously mandatory under the Companies Act of 2013, the use of a common seal on certain documents has been made optional. While the common seal remains a characteristic of a company, its use is no longer compulsory.

Violations of Acceptance of Deposits

• Provisions related to the acceptance, renewal, and repayment of deposits under the Companies Act of 2013 did not specify penalties for non-compliance.
• A new Section 76A has been introduced to address these non-compliances.
• Defaulting companies may face fines ranging from a minimum of INR 1 crore to a maximum of INR 100 crore, in addition to the deposit amount or part thereof along with interest.

Dividend

According to the Companies Act of 2015, a company must first offset any losses and depreciation from previous years against its profits before declaring dividends for the current financial year.

The Companies (Amendment) Act, 2017

The Companies (Amendment) Act, 2017 introduced several important changes to the Companies Act, 2013. Here are the key features:

Alignment with SEBI and RBI Rules

• Provisions in the Companies Act were amended to align with SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India) regulations.
• Sections related to insider trading and forward dealing were omitted as SEBI regulations covered these aspects.
• Disclosure requirements in the prospectus were aligned with SEBI's regulations on IPOs (Initial Public Offerings).
• The definition of "debenture" was amended to allow RBI to disqualify certain instruments from being classified as debentures.

Proportionality of Penalties

• Penalties are now determined based on factors such as company size, nature of business, public interest, and severity of the default.
• Lesser penalties were introduced for one-person companies and small companies.
• Provisions for small companies were relaxed, and penalties were made less severe.

Easier Placement Process in the Private Sector

• The placement process was simplified by eliminating certain offer letter details required to be kept in company records.
• The company cannot use funds from private placements until allotment is made and reported to the registrar.
• Disclosures under the Explanatory Statement in Private Placement Application Forms were standardized.
• The definition of private placement was expanded to include all securities offers and invitations except rights issues.
• Companies can make offers for multiple security instruments simultaneously.

Standards for Independent Directors

• Section 149 of the Act outlines qualifications and disqualifications for independent directors.
• The amendment clarified that a "pecuniary relationship" does not include the remuneration of a director whose transactions do not exceed 10% of their total income or a prescribed amount.