Companies Act 2013: Overview

Companies Act 2013: Overview and examples. The New Company Act, 2013 replaced the Companies Act, 1956 by revising the law as per the requirements of the international best practices as well in keeping with the needs of the current economic environment in India.

Companies Act, 2013

The Indian Companies Act 2013 is an Act of the Parliament of India that specifies rules pertaining to the incorporation of a company, responsibilities of a company, directors, dissolution of a company.  The Companies Act is administered by the Government of India through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, and other bodies.

This act states and discusses every single provision requires or may need to govern a company. It mentions what type of companies their differences, constitution, management, members, capital, how should the shares should be issues, debentures, registration of charge, at the end of the act it concludes the about winding up of a company, discussing the situations a company needs to be winded up.

Differences between India’s Companies Act (2013 vs 1956)

Changes introduced in Companies Act, 2013 that has helped in better Corporate Governance in India.

Appointment of Auditors

The role of auditors is to provide assurance to investors and creditors that the company funds are handled appropriately. An important job of auditors is to protect the public from investing in companies that use corrupt business practices or that attempt to defraud investors with false financial statements.

As per Section 139 of Companies Act, 2013, auditors shall be appointed for a period of 5 years and have to compulsorily retire at the end of the 5th year (in case of firm, its 10 years). Earlier (companies Act, 1956), there was no restriction on the appointment of auditors.

The intention of this change is to ensure that Auditors do not become very friendly with the company executives which can result in auditors overlooking important things that can be a risk to the company’s funds. 

Issue of Shares

As per the Companies Act, 2013, issue of shares at a discount price is prohibited. As per the earlier act, shares could be issued at a discounted rate. However, as per the Companies Act, 2013, Sweat equity shares can be issued at discounted rate.

While it’s common for companies to issue Shares at a Premium, in the past, there were times when companies would issue shares at a discount to its creditors, in order to deal with situations where the company is unable to pay its debts. However, many companies were found to be misusing this option. Companies now have various ways to raise money so this particular clause was amended.  It is now not possible for companies to issue shares at a discounted price. Companies found flouting the rules will invite penalties and even imprisonment for its directors.

Closing Thoughts

For a lot of big companies, equity (other people’s money) is an important source of funding for their business operations. In the past there have been several instances, where the company misused the money of the creditors and shareholders. In recent years, there has been a growing realisation among companies to be more responsible towards shareholders, and to be more transparent about its business operations.

Corporate governance is about making a business work better while abiding by the various rules. The most basic function of corporate governance is to see that a business strategy is made effective by the company’s executives and workers. The companies Act was enacted to safeguard the interest of shareholders and other stakeholders of a company and ensure that efficient corporate governance practices are followed by companies.

Academic Questions

MBA (management) question on Companies Act (2013 vs 1956)

Q) The Companies Act 1956 was the first Act which governs the various Companies registered in India. However, in the year 2013, the Act was amended holistically to bring more transparency in terms of accountability, presentation and disclosure aspects in relation to various financial information of a company. However one of your friend is of the opinion that there is only one difference between the two Act , that is , the presentation of financial statements , previously it was governed by Schedule VI and now Schedule III governs it. Now, you are assigned with the task of convincing your friend that there is a huge difference between the two Acts, by briefing him on atleast five other points of differences between the two.

MOA vs AOA
Memorandum of Association’ (MOA) is the root document of a company which contains all the basic details about the company. ‘Articles of Association’ (AOA on the other hand is a document that lists all the rules and regulations developed by the company.

Q. ) What is Corporate Governance and explain any two (2) changes introduced in Companies Act, 2013 that has helped in better Corporate Governance in India.

Q) With the introduction of Companies Act 2013 for the first time CSR has been legally acknowledged. Study the section 135, CSR rules as well as Schedule VII of Companies Act 2013. According to you explain 10 benefits that will accrue to business as well as society due to this regulation.

Read: CSR and Companies Act

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