Category Archives: Companies Act 2013

Post written on the provisions of the (Indian) Companies Act, 2013 and matter incidental thereto

Director employed elsewhere


A director may be an employee in any organisation and may draw a salary from that other organisation. However, there may be two different situations –

  1. Director is actually an employee of that other organization and nominated by that organisation as a director in this company by virtue of an agreement;
  2. Director is a promoter director of a company but due to some reason join another organisation under a contract of employment. His employer may or may not have knowledge of his directorship in any company.

Indian law does not prohibit outside employment by a director of a company outside its own company. The prospective employer will take a call whether one of its employees should continue to be a director in its own private company.

The prospective employer will pay the employee for his 100% quality working time and 100% quality services. Where prospective employer feels, the employees should not have any other responsibilities except that of employment and of personal life, it may ask the employee to resign from other responsibilities.

The underlying question shall always remain, will that employee be able to honestly devote his time and efforts for its prospective paymaster, the employer.

According to Section 166 of the Companies Act, 2013, a director has certain duties towards the company.

DUTIES OF DIRECTORS (SECTION 166):

  1. A director of a company shall act in accordance with the articles of the company.
  2. A director of a company shall act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
  3. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
  4. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
  5. A director of a company shall not make or attempt to make any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
  6. A director of a company shall not assign his office and any assignment so made shall be void.

If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Where a director took employment outside the company, he needs to be careful in the performance of his duties towards the company. He needs to answer the following question to himself:

a. can he exercise his independent judgement in the decision making the process of the company?

b. is there any conflict of interest?

If yes, I do not find any restriction on his gainful employment.

However, a company may by way of Articles of Association restrict its directors from outside employment.

However, one should not sail in two boats unless both boats are compatible.

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Corporate Law – Post Election


Unless a general election is crucial there is no purpose to conduct such a huge exercise. The best part of democracy is to give the opportunity for new ideas. Without going to any political prediction we will discuss possible post-election scenario after 23rd May 2019. This may help us to be prepared for the volatility of corporate law in India.

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AGILE A COMPANY


This is another experiment to achieve ease of doing business. I always pointed out combining so many forms into one without cutting numbers of licences required may not actually help businesses. Form – INC – 35 names as AGILE by the Ministry of Corporate Affairs is another such step. Whether a company under incorporation want to apply GST or not, it is required to fill and file Form AGILE.  In this post, we will discuss the same.

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Drone delivery of Active Company Codes


Recently Ministry of Corporate Affairs has introduced a Form Active technically called Form INC – 22A. Noticeable features of this form are – (1) One time Form; (2) Requirement of latitude and longitude of Registered Office and (3) photograph of at least one director of the company. In this post, we will discuss the logic of this one time exercise and its logical future developments.

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Election of Directors – Companies limited by Guarantee without Share Capital


I received this interesting question on Quora and replied here. Other replies to the answer prompt me to post a short write up here on my blog. It seems it is a quite confusing and lesser explored area of most of us. We all students of corporate law at least once wonder about it and sometimes continue to do so.

The base question is – “How to decide voting rights of members in a guarantee company not having share capital?”

Here, before coming to the main question, it is prudent to discuss briefly the concept of the member under the Companies Act, 2013. Most of us use the terms members and shareholders as interchangeable. It is not so. All shareholders are generally members, but all members are not shareholders. When we say so, we usually think about shareholders pending registration of transfer or transmission. We miss 50% of the theoretical portion of the subject – Company limited by guarantee.

According to clause (55) of Section 2 the “member”, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as a member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; and

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

Membership of a company may or may not be in the form of shareholding. Membership is transferable. In the case of a company limited by shares, a member may transfer his membership by transfer of share. In the case of a company limited by guarantee, a member may transfer his membership by just transferring membership. If a reader is confused about such transfer of share, he may just discuss himself about a transfer of shares not fully paid.

As I mentioned some of my earlier answers on the Quora and on my blog, a company limited by shares and a company limited by guarantee have no practical difference except one. A reader may look into the definition given here as the footnote[1].

May you for a moment consider a company having a share capital with all members decided to pay only at the time of liquidation or winding up. It is akin to a guarantee company. A company with uncalled unpaid shares has no practical difference with a guarantee company. ( see footnote [2])

The voting rights in a guarantee company may be decided on the basis of the ratio of guarantee or say the amount of percentage of guarantee given by a member against total guarantee given to the company by all member combine.

A, B, C and D may form a guarantee company by a promising guarantee of Re.5,000/, Rs. 15,000/-, Rs. 12,000 and Rs 8,000/-respectively. They may have respectively 5, 15, 12 and 8 votes in the General Meeting of the company.

Now, you may understand how to elect directors in general meeting other than first directors.

All practical provisions related to appointment of directors and passing any resolution shall remain the same.

Note -To my understanding, there will not be any differential voting rights in the guarantee company. Readers may also discuss the same.

[1] Two other important definitions in this regards are as under

(21) “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

(22) “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

[2] It is a secondary thing that present law requires receiving of money shares subscribed in the memorandum of association by the promoters.

Donation to National funds


Corporate Social Responsibility becomes a bureaucratic and political method of harassment for Indian companies. It was introduced under “comply or explain” regime but now companies start receiving notices for not complying even if there is an explanation. Without any significant exception, authorities are finding explanations offered by companies inadequate. Recent reports suggest, CSR will virtually be a “comply or deferred comply” regime soon. Now, all critics of law backed voluntary corporate social responsibility now stand correct. Indian companies are facing “voluntarily compulsory” Corporate Social Responsibility, “Transparently Opaque” Electoral Bonds, “politely requested” political donations, as an extension of “extortionist” taxation system.

Before criticizing me for writing a hardcore anti-establishment post at this time of the general election, please check voting pattern of parties inside the parliament and tell me the difference of opinion among political parties on such legal loot. All are the same.

When I last checked Schedule VII of the Companies Act, 2013 as amended four times before being in present form, donation seems to be the best method of corporate social (ir)responsibility. Else a company may choose to fund a project established either by a well-connected politician, bureaucrat, businessperson or goon.

Present Schedule VII of the Companies Act, 2013 recommends the following funds –

  1. Swach Bharat Kosh;
  2. Clean Ganga Fund;
  3. Prime Minister’s National Relief Fund; and
  4. Any other fund set up by the central govt. for socio-economic development and relief and welfare of the scheduled caste, tribes, other backward classes, minorities and women.

Making a donation to these government funds are safe as it requires no planning, no responsibility, no social engagement, no notice, no worries, no explanation.

However, the concept of asking fund is nothing new.

Section 181 of the Act permits a company to contribute to Bona Fide and Charitable Funds etc.

Section 183 of the Act permits a company to contribute to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defence. I am happy to note in even in this hyper-nationalist and super patriotic time such donation to defence funds are not qualified to be a Corporate Social Responsibility.

Indian companies also permitted to make one more type of donation. This is under The Companies (Donations to National Funds) Act, 1951 (Act 54 of the year 1951). This forgotten Nehru era law came into force on 17th October 1951 and still operative with an objective to enable companies to make donations to national funds.

The Companies (Donations to National Funds) Act, 1951 has only one operative Section. Section 4 of this Act[1] permits Indian companies to donate to –

  1. the Gandhi National Memorial Fund;
  2. the Sardar Vallabhbhai National Memorial Fund;
  3. any other Fund established for a charitable purpose which by reason of its national importance has been approved by the Central Government for the purposes of this section.

It seems nothing was yet notified any other approved fund.

There is another law passed by the state of Gujarat referring to the Gandhi National Memorial Fund (Local Authorities Donations) Act, 1953. There is little information about this fund. Some source suggested that with an amount of $130 million it was once “perhaps the largest, spontaneous, mass monetary contribution to the memory of a single individual in the history of the world.

Sardar Vallabhbhai National Memorial Fund seems to have the same fate now. We have a great statue in the name of the great leader.

This Act is now a law in a legal coma due to a need for political correctness and corporate irresponsibility of few time donations.

I am referring to such a history of legally backed corporate donations to national funds to prove my point. This is the worst method to be socially responsible.

{Note – bura na mano holi hai – take it easy on Indian festival Holi}

[1] Section 4 of this Act read as under –

Any company may, notwithstanding anything contained in the Companies Act or in any other law for the time being in force regulating the affairs thereof, and notwithstanding that the memorandum or articles of association of the company do not enable it so to do, by an extraordinary resolution passed in accordance with the provisions contained in section 81 of the Companies Act, authorise the making of donations to the Gandhi National Memorial Fund or the Sardar Vallabhbhai National Memorial Fund, or to any other Fund established for a charitable purpose which by reason of its national importance has been approved by the Central Government for the purposes of this section.

An amendment with Wide Circulation


The recent amendment to the Companies (Incorporation) Rules, 2014 is of wide importance. The Companies (Incorporation) Second Amendment Rules, 2019 amended the Clause (a) of sub-rule (5) of Rule 30 of the Companies (Incorporation) Rules, 2014 on popular demand which certainly result in ease of doing business in India. (It may not affect the ease of doing business rating due to the structure of the rating procedure). We also earlier demanded such amendment in our earlier post, Shifting Registered Office to another state, here.

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