Authorized capital and par value
There are no statutory limits to the amount of
authorized share capital of a company, nor is there any prescribed
minimum amount of authorized capital. The maximum capital a company
may issue is limited by the authorized capital set out in its
charter. If permitted by the bylaws, the amount of authorized
capital may be increased. The share offered to be issued is called
issued capital, the amount agreed to be subscribed is called
subscribed is called subscribed capital and the amount paid in is
termed paid-up capital. There is no legislation authorizing the
issue of shares of no par value.
Number of shareholders
A private company must have a minimum of two
shareholders, as compared with a minimum of seven shareholders for
a public company. The maximum of seven shareholders for a public
company. The maximum number of shareholders in a private company is
50. Since shares cannot be issued to a nonresident (other than a
nonresident Indian) without the approval of the Reserve Bank of
India, the initial subscribers are usually Indian nationals or
nonresident Indians.
Types of share ownership
Shares are registered with the company, which
is required to keep a register of is members. Bearer shares are not
permitted to be issued without approval by the central government.
Share capital is of two kinds: common stock,
called equity shares, and preferred stock, called preference
shares. Shares may be of any amount, but common stock usually
should have a par value of Rs 10 and preferred stock, Rs 100. Each
share must be distinguished by an appropriate distinctive number.
Preferred stock can be issued only if it is redeemable with ten
years and authorized by the company's bylaws. These shares may be
redeemed only out of profits that would otherwise be available for
dividends or out of proceeds of a fresh issue of shares made for
the purpose of the redemption. Preferred stock does not have voting
rights unless the preference dividends are in arrears.
Debentures and loans
The expression "debenture" as used
in the Companies Act includes debenture stock, bonds and other
securities of a company, whether or not they constitute a charge on
the assets of the company. A debenture is normally issued as
security for a loan and is an instrument executed under the seal of
a company, charging the whole or a part of its undertaking or
specific property in favor of the holder to secure the sum loaned
and providing for the payment of interest at a specified rate until
repayment of the principal. Debentures containing a charge must be
registered with the Registrar of Companies. Debentures are usually
redeemable at a specified date, although the Companies Act permits
the issue of irredeemable debentures into shares at specified times
and upon specified terms. Debentures may be fully transferable and
may be quoted on the stock exchange.
A company issuing debentures must create a
debentures redemption reserve in accordance with government
guidelines.
Increase and decreases in capital
The subscriber capital can be increased up to
the limit of the authorized capital by the allotment of further
shares. These further shares must be offered in proportion to the
existing shareholders unless otherwise decided at the company's
general meeting. If the bylaws permit, a company may also increase
the subscribed capital by the capitalization of profits (earning)
and the issuance of bonus shares (stock dividends) in accordance
with the prescribed rules.
Stock dividends can be issued out of free
reserves built out of genuine profits or share premiums collected
in cash. They may be issued in accordance with the guidelines of
the Securities and Exchange Board of India (SEBI). Guidelines have
been laid down for the consideration of bonus issue proposals. The
most important require that the residual reserves should be at
least 40 percent of the increased paid-up capital and that 30
percent of the average pretax profits for the previous three years
should give a return of at least 10 percent on the increased
capital.
An important series of legal requirements
consists of provisions designed to ensure that the share capital
remains intact. A company may not, there fore, pay a dividend out
of capital; and a reduction of capital, whether by refund to
shareholders or otherwise, can be made only if sanctioned by a
court, which will need to be satisfied that the interests of
creditors are protected.
Transferability of shares
A company may not purchase its own shares and
may not give directly or indirectly and financial assistance in
connection with the purchase of or subscription for any of its
shares or shares in its holding company. However, financial
assistance by the company is permitted in some circumstances to
enable the employees or their trustees to purchase or subscribe to
its fully paid shares. Except in certain circumstances, a company
may not hold shares in a company that is its holding company.
Shares may be issued at par or, in accordance
with the appropriate guidelines, at a premium or at a discount.
Where shares are issued at a premium (the excess of the total issue
price for shares over their par value). The premium must be
transferred to a share premium account and disclosed as such under
reserves and surplus. The premium may be used only for certain
specified purposes, as set out in Section 78 of the Companies Act.
Shares can be issued at a discount if certain conditions are
fulfilled, i.e., shares to be issued at a discount are of a class
already issued at a discount are of a class already issued, land at
the date of issue not less than one year has elapsed since the date
the company was entitled to commence business.
Shares may be transferred to the company by
submitting the share scrip and a transfer document signed by the
transferor and the transferee and stamped with the proper amount of
stamp duty. Shares in companies are prima facie freely transferable
unless the company's bylaws confer the power of refusal to
transfer. A private company must include this power in its bylaws.
In the case of quoted companies, the stock exchange listing
requirements insist that the shares be freely transferable.
However, transfer of shares from a resident to a nonresident can be
effected only with the prior permission of the Reserve Bank of
India. Similarly, shares in ah Indian company may be transferred
from one nonresident to another provided the transferee has
obtained an approval from the Reserve Bank of India to purchase the
shares. Transfers of shares to and by approved foreign
institutional investors and nonresident Indians may not require
prior Reserve Bank permission if they are made within certain
guidelines.
The liability of the shareholders of a company
limited by shares is limited to the par value of the shares held by
them.
Conduct of the entity
Company business is conducted by the
directors, who to large extent are subject to the same laws as
business people carrying on business on their own account,
including any laws relating to the particular trade in which they
are engaged. The obligations imposed on directors by company law
include those designed to ensure that proper information about the
company is made available to the general public and to potential
investors. Directors must consider the interests of employees as
well as those of shareholders.
Every Indiana company must have a board of
directors, and only individuals may be directors. A public company
must have at least three directors and a private company at least
two. Every public company and every private company that is a
subsidiary of a public company having a paid-up share capital of
Rs 50 million or more is required to have a managing or full-time
director or a manager.
The powers and duties of the directors are
contained in the company's bylaws. The Companies Act also contains
elaborate provisions as to the powers, duties and restrictions on
the powers of the board of directors. Every director who has an
interest in any contract or arrangement entered into by the
company must disclose the nature of the interest at a meeting of
the board of directors. The company is required to record the
directors' interest in a register that is open to general
inspection. A director, individually or along with other
directors, holds more than 2 percent of the shares of the company.
The appointment and remuneration of managing
or full-time director or a manager in a public company or a
private company that is a subsidiary of a public company are
subject to the approval of the central government, as required
under the Companies Act 1956, unless the appointment is made in
accordance with the conditions and with the ceiling limits
specified in Schedule XIII of the Act and a return is filed with
90 days from the date of the appointment.
The terms and conditions of the remuneration
and appointment of managerial personnel have been relaxed with
effect from February 1, 1994. A profit-making company can now pay
any amount as remuneration to its full time or managing directors,
provided the aggregate remuneration is within 5 percent of the net
profits or 10 percent of the net profits of the company for one or
more than one director or manager, respectively.
Remuneration payable by loss-making companies
has also been enhanced, and such companies can now pay up to Rs
87,500 per month to each director or manager. Furthermore, in the
case of loss-making companies, expatriates are allowed certain
additional benefits and allowances other than remuneration
mentioned above.
There is no statutory requirement that a
director be a shareholder of the company, but the bylaws may
require a director to hold a specified number of shares, termed
the share qualification.
The Act permits the company to fix the period
of appointment of up to one-third of the total number of
directors, subject to other provisions of the Act. The remaining
two-thirds must be persons who are liable to retire by rotation;
of these, the number nearest to one-third who have been longest in
office since their last appointment must retire at each annual
general meeting. Under the law, a managing director cannot be
appointment for a period of more than five years at a time.
Every company having a paid-up share capital
of Rs 5 million or more is required to have a full time qualified
secretary; when the board of directors of such a company comprises
only two directors, neither of them may be the secretary of the
company.
Generally, there are no restriction as to
residence or citizenship of board members. A foreigner can be
appointed as a director, subject to the usual formalities. A
foreigner can also point an alternate director to act as a
substitute if the company's article permit and if the appointment
is approved by the board of directors. The terms of appointment of
expatriates as managing or full-time directors or managers must
satisfy certain conditions and be approved by the government if
their period of stay in India prior to appointment is less than
one year.
It is also possible (but not necessary) to
provide in the articles for proportional representation for the
appointment of directors would be appointed by the foreign
shareholding company in proportion to its shareholding.
Employee representation on the board of
directors is not legally compulsory at this time.
Shareholders' and directors' meeting
Every public limited company having share
capital must hold a meeting of shareholders not less than one
month and not more than six months from the date at which it is
entitled to commence business. Such a meeting is called the
statutory meeting. At least 21 days before the date of the
meeting, the board of directors must forward a report called the
"statutory report" to each shareholder of the company,
setting out particulars specified by the Act.
An annual general meeting of shareholders
must be held at least once in every calendar year. No more than 15
months may lapse after the preceding annual general meeting.
However, the first annual general meeting may be held with 18
months after the date of incorporation of the company, and the
date of subsequent general meetings may be extended by the
Registrar of Companies by a maximum of three months. The matters
to be dealt with at the annual general meeting include the
following.
Consideration of the company's accounts
and the reports of the directors and auditors.
Declaration of dividends.
Appointment of directors to replace those
retiring.
Appointment of auditors and the fixing of
their remuneration
Within 60 days from the date of the annual
general meeting, an annual return containing particulars, as
specified, must be filed with the Registrar of Companies. An
extraordinary general meeting of shareholders may be called by the
board of directors upon the request of a specified number of
shareholders.
Directors' meetings are held as necessary.
The Companies Act provides that a meeting of a company's board of
directors must be held at least once in every three months, and at
least four such meeting must be held in every year.
Minutes must be kept of all proceedings of
general meetings of shareholders and of meetings of the board of
directors or their committees.
All equity shareholders with voting shares
have a right to a ballot vote in proportion to their individual
shares of the paid-up equity capital of the company, and on a show
of hands every shareholder present has one vote. Although entitled
to notice of meetings, holders of preferred stock are not usually
entitled to vote unless preferred dividends are in arrears.
In the budget speech for 1996/97, the Finance
Minister proposed the introduction of the following.
1. Permission for companies to issue
nonvoting shares up to 25 percent of the issued share capital.
2. Permission for infrastructure companies to
issue equity shares redeemable after 20 years.
However, these proposals are yet to be
adopted as law.
Dividends
No dividend may be declared except out of
profits arrived at after providing the prescribed minimum amount
of depreciation and after transferring a prescribed minimum
percentage of profits, not exceeding 10 percent, to reserve if the
dividend declared exceeds 20 percent. Broadly, the rules seek to
establish some relationship between dividends declared and the
profits transferred to reserve. For instance, if a company
transfers more than 10 percent of its profits to reserve, it must
ensure a prescribed minimum distribution of dividends. Also, the
amount proposed to be transferred to reserve is restricted if no
dividend is declared.
There are also rules to regulate the transfer
of past reserves for the payment of current dividends. A
revaluation surplus (a surplus arising on a revaluation of fixed
assets) is not available either for payment of dividends in cash
or for issue of stock dividends by way of bonus shares. However,
it is permissible to transfer from revaluation surplus to income
statement an amount equivalent to the depreciation on the amount
added to fixed assets upon revaluation.
Company as registered under the Companies
Act can be terminated either through the machinery of a
winding-up (liquidation), their names being struck off as defunct
companies by the Registrar of Companies, or in case of
amalgamation, by being dissolved without a winding-up. Winding-up
of a company may be done voluntarily, by the court or subject the
supervision of the court. A shareholders' voluntary winding-up
requires a declaration of solvency by the directors; otherwise,
the winding-up becomes a creditors voluntary winding-up.
The circumstances under which each mode of
winding-up can be resorted to and the winding-up provisions are
contained Part VII of the Companies Act. A liquidator is
appointed to realize the assets and discharge the liabilities
and, if there is any surplus, to distribute it to the
shareholders according to their individual interests.
Indian law prohibits partnerships of more
than 10 persons from carrying on the business of banking and
partnerships of more than 20 persons from carrying on any other
business. Limited partnerships are not legally recognized in
India at the moment, but a proposal in favor of such recognition
is currently under consideration by the appropriate authorities.
The Indian Partnership Act contains
provisions for the voluntary registration of firms with the
Registrar of Firms. Although not compulsory, registration of a
partnership ensures certain legal rights to the firm and its
partners.
A partnership is created by an agreement
among the concerned partners to share the profits of a
business. Under the Income Tax act a written agreement is
necessary to take advantage of the benefits of a partnership
firm.
A partnership is relatively simple to
form, and formation costs are low. A corporate body may also be
a partner. A partner may be a foreigner if specific permission
is obtained from the central government and the Reserve Bank of
India. In practice, partnerships with a foreigner are almost
nonexistent.
There is no minimum capital to be
subscribed in a partnership. The liability of a partner is
unlimited, land the partners are jointly and severally liable
for partnership obligations.
The rights and duties of the partners
are determined by agreement among the partners and spelled
out in the partnership agreement. Any matter not covered by
the partnership agreement would be determined by the Indian
Partnership Act 1932 or the Indian Contract Act 1872.
A partnership may be dissolved with the
consent of all the partners or in accordance with the
provisions in the partnership agreement. Special
circumstances may require compulsory dissolution of the
partnership (e.g., adjudication of all the partners as
insolvent) or dissolution by the court at the suit of a
partner. Subject to any agreement among the partners, the
assets of the partnership are applied first in paying the
debts of the firm, then to the amount due in advance to each
partner (as distinguished from capital), then to each
partner on account of capital, and finally as a distribution
of profits.
There is no legal requirement to keep
the books and records in any particular manner. However,
proper books and records must be maintained for income tax
purposes.
No audit of a partnership's accounts
is required under the Partnership Act, but an audit under
the Income Tax Act is compulsory if the turnover of the
partnership exceeds certain prescribed limits (at present
Rs 4 million for a business organization).
There are no special provisions of
law corresponding to the Companies or Partnership Act for
a sole proprietorship, except that an audit under the
Income Tax Act is compulsory if the turnover exceeds
certain prescribed limits (at present Rs 4 million for a
business organization).
The form of business most commonly
available to foreign investors is the corporation
incorporated in India. Branches (for specified
activities) and representative, site or liaison offices
may also be used, as explained above (see "Foreign
enterprise entities" above).
There is no requirement of minimum
share capital for a company, but a company that wants
to have its shares quoted on the stock exchange must
have the following prescribed minimum share capital:
(1) Rs 3 million (for listing in the Over the Counter
Exchange of India) and (2) Rs 50 million (for listing
in a stock exchange with screen board trading). For
restrictions on foreign equity participation.
The minimum number of founders,
i.e., subscribers to the share capital of the company,
should be seven for a public company and two for a
private company. The maximum number for a private
company is limited to 50. Since shares cannot be
issued to a nonresident except a nonresident of Indian
origin) without the approval of the Reserve Bank of
India, the founders are usually Indian nationals. See
"Formation procedures" above for details and
expenses involved in formation of a company.
Generally there are no
restrictions as to residency or citizenship of board
members. The terms of appointment of expatriates as
managing or full-time directors must be approved by
the government if the expatriate's period of stay in
India prior to appointment is less than 12 months.
A company incorporated in India
must have a statutory audit and normally also a tax
audit. It must comply with various formalities under
the Companies Act and the Income Tax Act and, where
foreign collaboration is involved, under the Foreign
Exchange Regulation Act. It is helpful to have
suitable advisors at an early stage to ensure smooth
setup and regulatory compliance.
General Section
