History of company law in India | Origin and development of company
History of company law in India, Evolution of business law in India, Origin and development of company, Interesting fact about the origin of company legislation
History of company law in India
The Company Legislation in India has closely followed the Company Legislation in England. The first legislative enactment for registration of Joint Stock Companies was passed in the year 1850 which was based on the English Companies Act, 1844.
This Act recognised companies as distinct legal entities but did not introduce the concept of limited liability. The concept of limited liability, in India, was recognised for the first time by the Companies Act, 1857 closely following the English Companies Act, 1856 in this regard.
The Act of 1857, however, kept the liability of the members of banking companies unlimited. It was only in 1858 that the limited liability concept was extended to banking companies also.
Thereafter in 1866, the Companies Act, 1866 was passed for consolidating and amending the law relating to incorporation, regulation and winding-up of trading companies and other associations.
This Act was based on the English Companies Act, 1862. The Act of 1866 was recast in 1882 to bring the Indian Company law in conformity with the various amendments made to the English Companies Act, 1862.
This Act continued till 1913 when it was replaced by the Companies Act, 1913. The Act of 1913 had been passed following the English Companies Consolidation Act, 1908.
It may be noted that since the Indian Companies Acts closely followed the English Acts, the decisions of the English Courts under the English Company law were also closely followed by the Indian Courts.
Till 1956, the business companies in India were regulated by this Act of 1913. Certain amendments were, however, made in the years 1914, 1915, 1920, 1926, 1930 and 1932.
The Act was extensively amended in 1936 on the lines of the English Companies Act, 1929. Minor amendments were made a number of times.
At the end of 1950, the Government of independent India appointed a Committee under the Chairmanship of Shri H.C. Bhaba to go into the entire question of the revision of the Indian Companies Act, with particular reference to its bearing on the development of Indian trade and industry.
This Committee examined a large number of witnesses in different parts of the country and submitted its report in March 1952. Based largely on the recommendations of the Company Law Committee, a Bill to enact the present legislation namely the Companies Act, 1956 was introduced in Parliament.
This Act, once again largely followed the English Compa- nies Act, 1948. The major changes that the Indian Companies Act, 1956 introduced over and above the Act of 1913 related to :
(a) the promotion and formation of companies;
(b) capital structure of companies;
(c) company meetings and proce- dures;
(d) the presentation of company accounts, their audit, and the powers and duties of auditors;
(e) the inspection and investigation of the affairs of the company;
(f) the constitution of Board of Directors and the powers and duties of Directors, Managing Directors and Managers, and
(g) the administration of Company Law.
The Companies Act, 1956 has been amended several times since then. The major amendments were introduced in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1974, 1977, 1985, 1988, 1991, 2001, 2002, 2006, 2013, 2015 and 2017.
In the wake of economic reforms process initiated from July, 1991 onwards, the Government recognized that many provisions of the Companies Act had become anachronistic and were not conducive to the growth of the Indian corporate sector in the changing environment.
Consequently, an attempt was made to recast the Act, which was reflected in the Companies Bill, 1993. The said Bill, however, was subsequently withdrawn. As part of continuing reforms process and in the wake of enactment of the Depositories Act, 1996, certain amendments were, however, incorporated by the Companies (Amendment) Act, 1996.
In the year 1996, a Working Group was constituted to rewrite the Companies Act, following an announcement made by the then Union Minister for Finance in his Budget Speech to this effect.
The main objective of the Group was to re-write the Act to facilitate healthy growth of Indian corporate sector under a liberalized, fast changing and highly competitive business environment.
Based on the report prepared by the Working Group and taking into account the developments that had taken place in corporate structure, administration and the regulatory framework the world over, the Companies Bill, 1997 was introduced in Rajya Sabha on August 14, 1997 to replace by repealing Companies Act, 1956.
In the meantime, as part of reforms process and in view of the urgency felt by the Government, the President of India promulgated the Companies (Amendment) Ordinance, 1998 on October 31, 1998, which was later replaced by the Companies (Amendment) Act, 1999 to surge the capital market by boosting morale of national business houses besides encour- aging FIIs as well as FDI in the country.
The amendments brought about number of important changes in the Companies Act. These were in consonance with the then prevailing economic environment and to further Government policy of deregula- tion and globalisation of economy.
The corporate sector was given the facility to buy-back company’s own shares, provisions relating to investments and loans were rationalized and liberalized besides the requirement of prior approval of the Central Government on investment decisions was dispensed with, and companies were allowed to issue “sweat equity” in lieu of intellectual property.
In order to make accounts of Indian companies compatible with international practices, the compliance of Indian Accounting Standards was made mandatory and the provisions for setting up of National Committee on Accounting Standards was incorporated in the Act.
For the benefit of investors, provisions were made for setting up of “Investor Education and Protection Fund” besides introduction of facility of nomination to shareholders, debenture holders, etc.
The year 2000, witnessed another bouquet of amendments in the form of Compa- nies (Amendment) Act, 2000 in order to provide certain measures of good corporate governance and for ensuring meaningful shareholders’ democracy in the working of companies.
Companies (Amendment) Act, 2001 amended provisions of section 77A relating to buy-back of shares allowing Board of Directors (instead of through special resolu- tion) to buy-back shares up to 10% of the paid-up capital and free reserves provided not more than one such buy-back is made during a period of 365 days.
Companies (Amendment) Acts, 2002: Two Companies (Amendment) Acts were passed in December 2002, namely, Companies (Amendment) Act, 2002 and Compa- nies (Second Amendment) Act, 2002.
The Companies (Amendment) Act, 2002 provided for setting-up and regulation of cooperatives as body corporate under the Companies Act, 1956 to be called ‘Producer Companies’.
The objective of the Companies (Second Amendment) Act, 2002 was to expedite the winding-up process of the companies, facilitate rehabilitation of sick companies and protection of workers interest.
The Second Amendment Act proposed to rationalise the proce- dure relating to winding up so that resources could be utilised for better purposes rather than blocking them in sick undertakings and thus, help in reducing the hardships to workers and other interested parties.
The Second Amendment Act provided for repeal of SICA and dissolution of BIFR. At the same time, it sought to establish a National Company Law Tribunal providing it with powers for expediting the winding up procedure.
Companies (Amendment) Act, 2006 brought into force w.e.f. 1-11-2006, introduced provisions with respect to :
(A) Directors Identification Number (DIN); and
(B) Electronic filing of various returns and forms.
Companies Act, 2013: The Companies Act, 1956 has now been replaced by Companies Act, 2013, a more contemporary, simplified and rationalized legislation.
The objective behind this new Act is said to be to bring our company law at par with the best global practices. The Act of 2013 has, inter alia, introduced ideas like Corporate Social Responsibility (CSR), class action suits and a fixed term for independent directors.
It also tightens provisions for raising money from the public, prohibits any insider trading by company directors or key managerial personnel by treating such activities as a criminal offence.
However, it permits shareholders’ agreements providing for ‘Right of first offer’ or ‘Right of first refusal’ even in case of public companies. Further, it requires certain companies to earmark 2 per cent of the average profit of the preceding three years for CSR activities and make a disclosure to shareholders about the policy adopted in the process.
Companies (Amendment) Act, 2015: Companies (Amendment) Act, 2015 which received the Presidential assent on 25th May, 2015 and became operative w.e.f. 29th May, 2015 is designed to address some issues raised by stakeholders such as Chartered Accountants and other professionals. Highlights of the amendments include:
1. Omitting requirement for minimum paid up share capital, and consequential changes. (For ease of doing business)
2. Making common seal optional and consequential changes for authorization for execution of documents. (For ease of doing business)
3. Prescribing specific punishment for deposits accepted under the new Act. This was left out in the Act inadvertently. (To remove an omission)
4. Prohibiting public inspection of Board resolutions filed in the Registry. (To meet corporate demand)
5. Including provision for writing off past losses/depreciation before declaring dividend for the year. This was missed in the Act but included in the Rules.
6. Rectifying the requirement of transferring equity shares for which un- claimed/unpaid dividend has been transferred to the IEPF even though subsequent dividend(s) has been claimed. (To meet corporate demand)
7. Enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee). Disclosures for the latter category also to be made in the Board’s Report. (Demand of auditors)
8. Exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsi- diaries. (This was provided under the Rules but being included in the Act as a matter of abundant caution).
9. Empowering Audit Committee to give omnibus approvals for related party transactions on annual basis. (Align with SEBI policy and increase ease of doing business)
10. Replacing ‘special resolution’ with ‘ordinary resolution’ for approval of related party transactions by non-related shareholders. (To meet problems faced by large stakeholders who are related parties.
11. Exempt related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related share- holders. (Corporate demand)
12. Bail restrictions to apply only for offence relating to fraud u/s 447. (Though earlier provision is mitigated, concession is made to Law Ministry & ED)
13. Winding up cases to be heard by 2-member Bench instead of a 3-member Bench. (Removal of an inadvertent error)
14. Special Courts to try only offences carrying imprisonment of two years or more. (To let magistrate try minor violations).
Also Read –
COMPANIES (AMENDMENT) ACT, 2019