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In India, laws governing Companies are mainly to be found in the Companies Act, 1956. Voluminous and containing 658 Sections, 15 Schedules and several Rules, the Companies Act, 1956 is modeled on the English Companies Act.
Any entrepreneur desirous of doing business in India has an option to form a Company, Private or Public with limited liability under the provisions of the Companies Act.
A Private Limited Company must have a minimum number of 2 and a maximum number of 50 shareholders whilst a Public Company needs a minimum number of 7 shareholders with no upper limit. Before commencing any business, a Public Company is obliged to obtain a certificate from the Registrar of Companies, whilst a Private Company can commence its business and exercise borrowing powers immediately upon its incorporation. The shares of a private limited company are not freely transferable and it cannot offer its shares or debentures to public for subscription. However, there are major exemptions and privileges enjoyed by a Private Limited Company under the Companies Act, 1956.
Exemptions To Private Limited Companies
- Financial assistance can be given for the purchase of or subscribing for its own shares or shares in its holding company – Sec. 77 (2).
- Further shares can be issued without passing a special resolution or obtaining the Central government’s approval and without offering the same necessarily to existing share holders – Sec.81 (3).
- Provisions as to the kinds of share capital (Sec. 85), the further issue of share of capital (Sec.86), voting rights (Sec.87), the issue of shares with disproportionate rights (Sec.88) and the termination of disproportionate excessive rights (Sec.89), do not apply to private companies – Sec. 90 (2).
- Business can be commenced immediately on incorporation without obtaining a certificate of commencement from Registrar – Sec.149 (7).
- It is not necessary to hold a statutory meeting and to send a statutory report to shareholders and file the same with the Registrar – Sec.165 (10).
- Articles of a private company may provide for regulations relating to general meetings which need not conform to the provisions of Sec 171 to 186 – Sec.170 (1).
- Any amount can be paid to the directors as remuneration and the same is not restricted to any particular proportion of the net profits – Sec.198 (1).
- A private company need not have more than two directors – Sec.252 (2).
- A proportion of directors need not retire every year – Sec.255 (1).
- Statutory notice etc., is not required for a person to stand for election as a director – Sec.257 (2).
- The Central Government’s sanction is not required to effect an increase in the number of directors beyond 12 or the number fixed by the articles of association-Sec. 259.
- The Central Government’s sanction is not required to modify any provision relating to the appointment of managing, whole-time or non-rotational directors – Sec.268.
- The Central Government’s approval is not required for appointment of managing or whole-time director or manager – Sec. 269 (2).
- Directors of a private company need not possess any share qualifications, in terms of section 270- Sec. 273.
- Restrictive provisions regarding the total number of directorships which any person may hold do not include directorships held in private companies which are not subsidiaries of public companies – Sec. 275 to 279.
- Certain restrictions on powers of board of directors do not apply – Sec. 293(1).
- The prohibition against loans to directors does not apply – Sec. 295 (2).
- The prohibition against participation in board meetings by interested directors does not apply – Sec. 300 (2).
- The date of birth of director need not be entered in the register of directors – Sec. 303(1).
- There is no restriction on the remuneration payable to directors – Sec. 309 (9).
- There is no restriction on any change in remuneration of directors – Sec. 310.
- Any increase in the remuneration not being sitting fees beyond the specified limit of directors on appointment or reappointment does not require the Central Government’s approval – Sec. 311.
- There’s also no restriction on the appointment of a managing director – Sec. 316(1) and 317 (4).
- There is no restriction on making loans to other companies – Sec. 370 (2).
- There is no prohibition against the purchase of shares, etc. in other companies – Sec. 372 (14).
- The Central Government cannot exercise its power to prevent change in the board of directors, which is likely to affect the company prejudicially – 409 (3).
Part XI of the Companies Act, 1956 containing Section 591 to 608 deals with the Companies incorporated outside India i.e. a “Foreign Company.” The provisions of this part of the Companies Act, 1956 prescribes that its Sections 592 to 602 shall be applicable to Companies who are incorporated outside India which after the commencement of the Companies Act, 1956 establishes a place of business within India and Companies incorporated outside India having established place of business within India prior to the commencement of the Companies Act, 1956 and continue to have the said establishment. It says that a Company incorporated outside India and having an established place of business in India in which 50% or more paid up share capital is held by Indians then provisions of those sections shall apply to such Companies also.
Sections 592 to 602 applicable to such Foreign companies provide that they have to file with the Registrar of Companies:
- Various documents giving particulars
- Returns regarding any alterations in the company
- Balance-sheet and Profit & Loss Accounts of the company
- Charges on any of the Companies’ properties in India.
It also provides that the following provisions shall apply to Indian business of a Foreign Company:
- Registration of charges
- Right to obtain copies of and inspect the trust deed
- Books of account to be kept by the Company
- Annual returns to be made by the Company
- Inspection of books of accounts
- Power of Central Government to direct special audit
- Audit of cost accountants
- Power of Registrar to call for inspection and investigation
(Contained in Sections 124 to 145, 125, 127, 118, 209, 159, 209-A,, 233-A, 233B, and 234 to 246 of the Companies Act)
Section 603 of the said part XI puts certain restriction on a foreign company offering documents for subscriptions in India.
Though under the Companies Act, 1956, no formalities are required to be carried out for a Foreign Company establishing place of business in India except the filing of the documents provided for in Part XI; under the provisions of Section 29 of the Foreign Exchange Regulation Act, 1973 general or special permission of the Reserve Bank of India for continuing any place of business or establishing any place of business for carrying on activities of trade and Commercial nature by a foreign company is required.
The limit of the foreign equity in an Indian Company is now increased up to 51% from the earlier 40%. In certain cases 100% foreign equity participation is also now allowed. The Government of India has entered into agreements with major foreign countries including USA for avoiding double taxation.
List of Countries with whom India has Double Taxation Agreements
- A: Austria · Australia
- B: Belgium · Bangladesh · Brazil
- C: Canada · Czechoslovakia
- D: Denmark
- F: FRG · Finland · France
- G: Great Britain · Greece
- H: Hungary
- I: Indonesia · Italy
- J: Japan
- K: Kenya · Korea(South)
- L: Libya
- M: Malaysia · Mauritius
- N: Nepal · Netherlands · New Zealand · Norway
- P: Poland
- R: Romania
- S: Singapore · Spain · Sri Lanka · Sweden · Syria
- T: Tanzania · Thailand
- U: United Arab Emirates · USA
- Z: Zambia