CLASSIFICATION OF COMPANIES
Classification of Companies part 2 – an Introduction
The Companies Act, 1956 broadly classifies companies into private and public companies and provides a regulatory environment based on such classification. However, with the growth of the economy and the increasing complexity of business operations, the forms of corporate organizations change. The law requires taking into account the requirements of different types of companies that may exist and seeks to provide general principles that all types of companies can refer to when formulating their corporate governance structure. Rigid structures, unnecessary controls, and regulations put entrepreneurs’ initiatives at risk. Private companies and small companies, which typically do not go for public issues or deposits for their financial needs, but use their personal or home resources, require flexibility and operation and independence at a low cost. Equally, public companies, which use capital from the public, should be subject to more rigorous governance of corporate governance. For the smooth transition of companies from one type to another type, the companies act should ensure the classification of companies enables the comprehensive framework of various forms of corporate organization.
One Person Company (OPC)
With the increasing use of information technology and computers, the rise of the service sector, it is time that people’s entrepreneurial abilities are given an outlet for participation in economic activity. Such economic activity can occur through the creation of an economic person as a company. Nevertheless, it would not be reasonable to expect that every entrepreneur who is able to develop his ideas and participate in the market should do so through a consortium of individuals. We feel that it is possible for individuals to work in the economic domain and contribute effectively. To facilitate this, the committee suggests that the law should recognize the formation of a single-person economic entity as a ‘one-person company’. Such a unit can be provided with a simple regime through exemption so that the single entrepreneur is not forced to divert his time, energy, and resources to procedural matters. 6.1 The concept of ‘Person One Person Company’ can be introduced in the Act with the following features: – a) OPC can be registered as a private company with one member and can also have at least one director. is; B) Adequate safeguards in case of death/disability of the sole person, another person should be appointed as the nominee director. On the demise of the original director, the nominee director will manage the affairs of the company until the date of transmission of shares to the legal heirs of that member. C) To distinguish the letter ‘OPC’ from other companies, a person will be suffixed with the name of the companies;
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In general, there is little justification for granting exemption to government companies in compliance with the company law. When such companies being listed, It is even less. Not only should such government companies be able to compete with other companies on equal terms in the market economy, but it also would not be fair to investors or creditors if such entities were allowed to present their performance on uneven parameters is.
Government companies may be subject to non-commercial / commercially disparate social responsibilities. However, the cost of such responsibilities should be transparently evaluated and provided through the budget as a subsidy by the government. It is not appropriate to relax the application of legislation or standards to allow such costs to be applied in a non-transparent manner. There may be circumstances where such companies may require special treatment in state security-related activities. There may be a competent provision for such companies to relax the operation of the Companies Act. Other companies, while engaging in commercial activity, must compete on the basis of transparency and playgrounds. Preferential treatment for such companies would be detrimental to the ability of Indian companies to survive in a competitive market.
A government company should be clearly defined in law
It should be one where there is a clear majority stake by the state – ie the central and / or state government (s). Government companies have no justification for the definition of companies to be set up by government companies during their business activities.
Holding and subsidiaries
The Companies Act should not precede a decision as to which structure is appropriate to regulate businesses. Such prescriptions will harden the environment and put Indian companies at a disadvantage to their rivals internationally. There will be restrictions of being the formation of joint ventures, international operations, and restructuring of companies side by side there will be also not facilitate sound corporate planning.
Therefore, we are of the view that there can be no restriction on the number of any subsidiary company, or for such subsidiaries which have subsidiaries. However, the Act should provide a clear definition of both holdings as well as subsidiary body corporate. In doing so, the formation of subsidiary structures through control by a holding company, direct, indirect, or through one or more subsidiaries, must be taken into account, keeping in mind international practices.
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The need to provide for transparency and control misappropriation of funds through transfer from one company to another including subsidiaries should be recognized. However, there is a need to recognize that the occurrence of waiver of funds cannot simply be due to the holding-supporting structure. Companies may use other routes/structures/affiliates to close funds. Separate examples of misuse of the holding-supporting structure should not result in doing away with this very important business model for investment and corporate planning. Instead of prohibiting the formation of subsidiaries, there should be substantial disclosure obligations in the form of the use of funds or advances made by the company to other entities. Strict disclosure and compliance criteria should be provided in relation to holding and subsidiary company structures.
The Committee is of the view that appropriate disclosures, along with compulsory consolidation of financial statements, should address those worrying about the lack of transparency in the holding-supporting structure.
There may be other provisions that transactions between the holding and the subsidiary may be treated as related party transactions and placed before the Board through the Audit Committee, where such committee exists. In the normal course of business and/or not, based on the arms-length between the holding and the subsidiary, should be disclosed in the annual report with management justification.
In its inquiry into the issue, the committee also considered the recommendations made by the JPC on the stock market scam on restricting the layers of subsidiaries. The committee said that these recommendations were in the context of stock market/banking scams in India over the past decade. At the same time, it was argued that the creation of subsidiaries for individual manufacturing entities, joint ventures was a reality and there were no restrictions on foreign companies operating internationally. Even banks may have to form subsidiaries for their non-banking / joint venture companies engaged in insurance, asset management, etc. In the present case, when Indian companies wanted to invest abroad, such a ban would adversely affect their opportunities in front of international competition. During deliberations, it was felt that the establishment of subsidiaries would result in special carvings as a result of preserving legitimate business activity under a regime and monitoring the there will be an administrative nightmare for activities of such companies. For these reasons, the committee took the view that it was not possible to limit the layers of subsidiary investment companies. Instead, to prevent misuse of this mechanism, a regime should be formulated based on transparent board procedures and disclosures under the close supervision of the regulator for listed companies.