Companies Act: 1956 VS 2013- New Rules to the Game

The Companies Act, 2013- a new era for corporate India.  This modern legislation is to change the rules of game in Indian corporate law in the context of changing economic and business environment. To help decode the nuances and implications of this 2013 Act, we have analysed the key changes w.r.t. 1956 Act.

The 2013 Act is more concise as compared to the 1956 Act, with just 470 sections and 7 schedules. There are over 300 references in the 2013 Act to Rules that may be prescribed to implement and operationalise those sections. Therefore, the full impact of the 2013 Act can only be understood when the related Rules get finalized and two are read together.

S.No.	Particulars	1956	2013	Comments
	Number of members of Private Company	Upto 50	Increased upto 200	Allows access to large pool of capital without the need to go public
	One Person Company	No Provision	Separate regime for ‘one person company’ introduced	Allows individuals to adopt corporate structures for carrying out business under a simplified regime
	Concept of Dormant Company	No Provision	Separate regime for a ‘dormant company’	Flexibility to create entities to house future project/ or valuable assets such as IPR ( Intellectual Property Rights) etc.
	Concept of Small Company	No Provision	Separate regime for ‘small company’ introduced	Allows individuals to adopt corporate structures for carrying out business under a simplified regime
	Recognition of ‘inter-se’ shareholders arrangements on transferability of shares of public companies	Shares of public company are freely transferable	Recognition granted to transfer restrictions inter-se shareholders- ‘right of first refusal’ will be enforceable	Would hopefully clear existing ambiguity on legal enforceability on transfer restrictions under joint venture/shareholder agreements
	Mandatory Transfer to reserves prior to declaration of dividend	Mandatory transfer of 10% profits to reserves	Requirement of mandatory transfer disposed	Provides discretion in hands of company
	Declaration of Interim Dividend	No restrictions	Interim dividend can be declared only for surplus in P&L (profit & loss) account and current year profits	Allows greater flexibility in dividend declaration
	Rights Issue	No provisions for offer of shares to ESOP (employee stock option plan) holders	Provisions created for offering rights entitlement to employees holding options	Treats employees holding option at par with shareholders and protects their rights
	Buyback of Shares	Ambiguity whether more than one buyback offer can be made in one year	Mandatory ‘cooling off period’ of one year from date of closure of preceding buyback	Prohibits undertaking multiple buybacks with minimal intervals
	Acceptance of Deposits	Companies permitted to raise deposits from public	Central government to prescribe rules for acceptance of deposits from public, including category of companies	Greater accountability/additional compliance requirement
	Loans to Directors	Applicable to only public companies. Permission required from central government in certain cases	Applies to public and private companies. Companies cannot approach central government	Creates accountability by bringing private companies under the net
	Loans & Investment by Companies	Covers loans/investment to/in body corporate/company	Scope expanded to include ‘person’	Brings into net loans given by companies to individuals
	Step Down Subsidiary	No restrictions on creating ‘multi-layered’ structures	Prohibits making investments through more than two lawyers of investment companies	Will impact the creation of multi-layered structures used for facilitating financial/strategic investments at various levels
	Statutory Auditor Certificate for accounting treatment in case of Compromise/Arrangements	No requirement	Mandatory statutory auditor certificate for listed and unlisted companies	Will prevent companies from undertaking financial reengineering contrary to accounting standards via court approval
	Notice to Authorities for Compromise/Arrangement	Notice required to be served to shareholder/creditors	In addition to shareholders and creditors, notice required to be served on regular authorities	Will ensure that all parties concerned are given due opportunity
	Class Action Suits	No Specific provisions other than for small shareholders	Specific provisions introduced for class action suit by specified number of members or depositors	Damages/Compensation can be sought against all parties who have assisted in wrongdoings
	Rationalization of Sickness Laws	Applies only to industrial undertaking	Applies to ‘any company’. Net worth criteria for determination of sickness dispensed with	Every company would get an opportunity to approach tribunal and seek a revival and rehabilitation scheme. Secured creditors can approach tribunal
	Rotation of Auditors	No specific provisions	For listed companies and other companies as may be specified, individual auditor will be changed after five years and audit firm after 10 years	Mandatory rotation of auditors will enhance auditor’s independence
	Postal Ballot	Applies only to public company	Scope extended to include ‘any company’	Increased participation by members to ensure greater transparency
	Corporate Social Responsibility	No specific provisions	Specific provisions for creating Corporate Social Responsibility- 2% of average net profits during three preceding financial years	In line with government’s focus on inclusive growth creates an almost mandatory requirement of spending 2% net profits on social activities
	Appointment of Women Directors	No specific provisions	Prescribed companies to appoint one woman director	Attempt to improve diversity and remove glass ceiling for women
	Cross Border Mergers	Only merger of a foreign company with an Indian company permitted	Permits merger of Indian companies with foreign companies in specified jurisdictions	Progressive move, will enable cross border consolidation of global businesses/assets
	Restriction on ‘Treasury Stock’	No specific provisions governing issuance of ‘treasury stock’	Holding ‘treasury stock’ (arising on consolidation) prohibited, whether trust or otherwise	Will restrict creation of ‘trust structures’ often used by listed companies to retain control or future monetization
	Merger of a Subsidiary with a Parent or between two Small Companies	No spate regime, dispensation granted based on precedents	Separate and simplified regime, no approval required from tribunal ( high court currently)	Reduction in administrative burden, timelines and related costs
	Merger of listed company with unlisted company	No specific provisions governing it	Permits merger, subject to exit opportunity being offered to shareholders of listed company	Provides ease of consolidation
	Objections to schemes by small creditor/minority shareholders	No thresholds	Objections can be raised by shareholders holding more than 10% or creditors owed more than 5%	Will ensure that only ‘serious’ objections are considered by courts
	Buyout of Minority Shareholders	No Specific provisions governing it	Detailed mechanism for acquisitions of shares by majority shareholder from balance shareholders	With adequate safeguards, this is powerful tool for effective re-organization
	Buyback of shares under a Scheme of Arrangement	Court approval route used by companies	Permitted subject to compliance with buyback norms	Will ensure that companies cannot bypass provisions of Companies Act via court approval

Our article is based on the laws of India as on date. The views mentioned above are subject to changes from time to time and any such changes may affect the article. We have no responsibility to update our article for events and circumstances occurring after the date of this note, unless specifically requested for.