Companies Act 2013 & Corporate Governance in India.

This is a research paper in which I have tried to address some major points of amendments in Company Act 2013 and what will be the consequences of this on corporate governance.


Purpose: After long stretch of 56 years, the (Indian) Companies Act 1956 is now in the process of being substituted by a new law of Companies Act 2013. The main purpose of this paper to highlight amendments made in the law and its direct/indirect importance for the stakeholders. The paper will cover on beneficiary factors of the Act which covers the stakeholders as well as emphasis conveyed in the Clause 49 of the corporate governance.

Method: Research covers a traditional approach for analyzing journals, papers, interpretation of scholars on the topic. It also analyzes the litigation part of act which deals with principles of law and legal institutions.

Result: Findings of this paper are elementary in nature as the focus of law has shifted from the growth of the company to the benefits of the stakeholders in the company. The government has emphasized more on increasing the foreign investment thus resulting in making a strong reputation of economy in the world’s eye.

Practical Implications: Stakeholders have always been the key focus area of any company. Thus the new law enacted on the companies, not only benefits the people involved at the higher managerial level but also pushes small scale companies in the market towards easy return and benefits.

Originality/Value: The paper attempts to encourage the entrepreneurs with lucid company policy and reaping benefits.


Our society is ever changing and evolving with the period of time .We as a human need change in our behavior, style and food and so does our law. The Company Act was enacted in 1956 which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries. The Act, 1956 was administered by the Government of India through the Ministry of Corporate Affairs and the Offices of Registrar of Companies etc. Since the Act, 1956 was commenced, it was amended many times as per the need of the economy but the major amendments were made in 1988, 1990, 2000 and 2011.

The 2013 Act introduces some eminent changes in the provisions related to corporate governance, E-Management, Compliance and enforcement, Mergers and Acquisition. There are many new concepts which differentiate a current law from the previous one .The law enforced in 2013 enforces in the composition of board of directors and corporate governance. The need of the hour is to focus on the stakeholders because India is the growing economy. In order to cope up with the international economic scenario, the law needs to remain dynamic and adapt changes in business environment. The two major topics to be discussed is a) Corporate Governance and b) Board of Directors which is Clause 49.

What gets measured gets managed. Adequate disclosure thus ensures good governance. Corporate governance issues not only have its impact on the corporate sector, but are necessary condition for the long term sustainability of the development of the growing economy. The role of corporate governance mechanism in economic growth remained virtually invisible until the East Asian financial crisis (1997-1998). The global financial institution, corporations and global economies, brought with it an indisputable challenge to policy makers and thus called for development and prosecution of competent corporate governance instrument.

This paper attempts to highlight the key changes made in the Companies Act 2013 .We try to figure out the beneficial factors of the amendments along with keeping in mind the current business scenario in India.


2008: Companies Bill, 2008 was introduced on 23rd October 2008 in the Lok Sabha to replace existing Companies Act 1956.

2009: Companies Bill, 2009 was re introduced on 3rd August 2009 in the Lok Sabha. Bill was referred to the Standing Committee on Finance of the Parliament for examination and report.

2010: Report of the Standing Committee on Finance on Companies Bill, 2009 was introduced in the Lok Sabha on 31st August 2010.

2011: Companies Bill 2011 introduced in the Lok Sabha on 14th December 2011.

2012: The Companies Bill, 2012 was introduced and got its assent in the Lok Sabha on 18 December 2012.

2013: Companies Bill, 2012 was passed by the Rajya Sabha on 8th August, 2013. After having received the assent of the President of India on 29 August 2013, it has now become the much awaited Companies Act, 2013.

Literature Review


There has been a phenomenal rise among researchers and practitioners to study corporate governance over the past decade. The thought of corporate governance may seem unexplored to some people, yet its origin can be traced back to as early as the 1600’s. At that time, the Court of Directors was the executive body that ran the East India Company on behalf of the Court of Proprietors. This mirrors the modern era of corporate governance (Cadbury, 2002). On the other hand, Hann (2001) diagnosed four origins of corporate governance, which help people advance a better understanding of the terms. In the contemporary times when the corporate sector across the globe was hit by scandals and big companies like Enron, WorldCom bridled with debatable corporate policies collapsed. India too had its share of scam with Satyam being an incident thought to be the first of its kind. Though amendments in the area of corporate governance have been afoot since 1990’s, it was not until the Satyam scandal that exposed flagrant gaps in the governance structure and auditing practices in the country that acted as stimulation for a modern legislation. The Companies Act, 2013 is a move by the government to strengthen the corporate governance skeleton in a country where most of the businesses are characterized by robust shareholding and channeling of funds. The Act revitalizes good governance practices by placing the onus on independent directors to bring oversight in the functioning of the Board and protect the interest of minority shareholders.

We all know that the companies in India are monitored by the Companies Act 1956. This act is the most significant corporate legislation that entrusts the Central Government to standardize the following: Formation of the companies, Financing of the companies, Functioning of the companies, Winding up of companies. It was enacted in 1956. This act facilitates companies to be formed by registration, and arrange the responsibilities of companies, their directors and secretaries. Government of India oversees this act through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) stems the incorporation of new companies and the administration of running companies. The act is exercised to whole of India and to all types of companies, whether registered under this Act or an earlier Act.

Part One: Tight knitted Corporate Governance.

Corporate Governance is defined as the relationship between shareholders and their companies and the way in which shareholders act to encourage best practices”. There are certain key elements of corporate governance which we need to understand before understanding the difference between the Act 1956 and Act 2013.

  • Shareholders right and obligation.
  • Audit transparency and disclosure.
  • Role of Board of Directors.
  • Stakeholder’s role in Corporate Governance.
  • Shareholders equitable and treatment.

The corporate governance has different set of rules for every aspect of the business unit. It lays emphasis on safeguarding the interest of all those people who are concerned with the functioning of the business unit .The definition says that there has to be transparency in business for those who are investing in it.

The Company Act 2013 shares the same view of making the functioning if the business unit more translucent to the general public. There was a regulatory urge to control corporate governance often. As there was an increase in unethical and dishonest practices prevailing in the market and tremendous growth in the scams area. Thus the initiative taken by the Government to take some serious steps in the control of the audits and working of the company was actually a necessary step.

Part Two: Empowerment and Encouragement

Any company is run by the people who are involved in the decision making. The necessary changes as per the international standard are done as follows:

Concept of One Person Company: One person company is a company with only one person. It states that one person will be the shareholder of the company. It also avails the benefit of a private limited company such as separate legal entity, in fact protecting personal assets from business liability; the most important is perpetual succession. The benefit of this move is for the e commerce industries and for the startup companies who dream of starting their own company.

Board of Directors: Although there are many changes made in the structuring and the powers of the board of directors but the one who hold our attention is:

Woman director

The categories of companies which need to comply with the requirement of having at least of one woman director are as follows: [section 149(1) of 2013 Act]

(i) Every listed company, within one year from the commencement of second provision to sub-section (1) of section 149

(ii) Every other public company that has paid–up share capital of one hundred crore rupees or more, or a turnover of three hundred crore rupees or more within three years from the commencement of second proviso to sub-section (1) of section 149.

This is a mind boggling move from the Indian Government in order to remove gender diversity and enhance the position of women in the company.

Board Functioning

The Companies Act, 2013 provides that a public as well as a private company can have a maximum of fifteen directors on the Board and appointing more than fifteen directors would require approval of a study of corporate governance under the companies act, 2013 shareholders through a special resolution in the General Meeting.

A) It also provides for appointment of at least one woman director on the Board for such class or classes of companies as may be prescribed. The Act makes it mandatory for a company to have minimum one director who has stayed in the country for a period of 182 days in the previous calendar year


B) Disqualification of directors

The Companies Act, 2013 makes directors’ disqualification more stringent, includes more scrutiny around related party transactions. The 2013 Act includes the following additional grounds of disqualification:

(i) A person who has been convicted of an offence dealing with related party transactions at any time during the past five years.

(ii) The directorship in private companies has also been brought under the ambit of disqualification on ground for non-filing of annual financial statements or annual returns for any continuous period of three years, or failure to repay deposits for more than a year.

C) Number of Directorships

As per the provisions of the Companies Act, 2013, a person cannot become a director in more than 20 companies instead of 15 as provided in the Companies Act 1956 and out of this 20, he cannot be director of more than 10 public companies.

Part Three: (Clause 49)

To make parallel the company law with Clause 49 of Equity Listing Agreement (Clause 49), 2013 Act has popularized the concept of Independent Directors. In this respect, few of the general observations are as follows:

(a) The term independent director has been defined with certain prescribed qualification and disqualification. [Section 149(6)]

(b) Every listed company is required to have at-least one-third of the total number of directors as independent directors. Independent directors shall be entitled to sitting fees, commission from the profit and reimbursement of expenses. However, they will not be entitled to stock options. [Section 149(9)]

(c) The appointment of the independent director shall be approved by the members in a general meeting and they will not be required to retire by rotation. [Section 149(13)]

(d) An independent director can hold the office for consecutive two terms of five years each following which there should be three years break before he or she is reappointed as an independent director. [Section 149(11)]

(e) Nominee director shall not be considered as an independent director. [Section 149(6)]

(f) While the motive of 2013 Act is to coordinate itself with Clause 49, there is little countenance which is different. All listed companies will now have to comply with Clause 49 and 2013 Act which might make the compliance process more cumbersome.

(g) Independent director shall only be liable for such act of omission, commission by a company which had occurred with his or her knowledge, attributable through Board processes, and with his/ her consent or connivance or where he or she had not acted diligently. [Section 149(12)]


The committee has well analyzed the international business standards. Newton’s third law explains that every action has equal and opposite reaction. The Act 1956 was a voluminous document with 781 sections whereas the Company Act 2013 is divided into 29 chapters containing 470 sections. The conceptual paper based on finding the benefits from the Companies Act 2013 has stressed on few basic changes which were made keeping in mind the international standards. Government has stressed on transparency of the business and making the companies self responsible for their course of action. The Companies Act, 2013 is landmark legislation with far reaching consequences on all companies incorporated in India. The Act, 2013 is more outward looking and attempts to align with international requirements. It is expected to set the tone for a more modern legislation which enables growth and greater regulation of the corporate sector in India.

The 2013 Act has been developed with a view to enhance self–regulation, improve corporate governance norms, enhance accountability on the part of corporate and auditors, raise levels of transparency and protect interests of investors, particularly small investors.

  • Corporate Governance will keep the strict watch over the working of the companies.
  • Corporate Social Responsibility under corporate governance has a new clause of constituting of Corporate Social Responsibility Committee of the board consisting of three or more directors. Thus an essential step to improve the infrastructure of the economy.
  • Corporate issues require quick resolution in terms of mergers and amalgamation .Transparency in accounts and audits through corporate governance will lead to fluid transactions.
  • Capital market regulator has an eminent role to play in the public access to capital by the companies and must have the necessary space to develop suitable framework in tune with the fluidity of the capital markets.
  • Introduction of SFIO (Serious Fraud Investigating Office) is a commendable attempt. SFIO is in-charge for framing of the charges, arrest and filing of other documents.
  • India as a growing economy needed encouragement specifically in the small scale companies. The committee felt the need of changing the structure as it will be unfair to burden the small size company as large public listed companies.
  • Change in constitution of Board of Directors is the big step as the company has laid emphasis on the appointment of one Women director. This step clears the vision of government that women holds equal position to men. Also a big move in the area of empowerment and gender biasness.
  • The recession of 2008 has seen the worst phase of unemployment in private sector and thus opening the door of small scale companies or the world of E-commerce. The Act 2013 is favorable for the young entrepreneurs in every manner.
          1. Concept of Independent director.
          2. Concept of One Person Company.
          3. Fast track mergers.
          4. Listing and de-listing of the companies.


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Why MBA?

MBA is the most dignified degree of our time. But somehow this thought of WHY MBA? keeps pondering over my head. In fact I used to teach MBA students and every time I questioned them why do you want to pursue this course, the answers remained same”Just to have a master degree and increase numbers in our current salary”. I was dumbstruck hearing these.

My idea of doing MBA was to build a personality of my own.A quick decision maker, analyst and a smart business woman. However this concept is now lost in books only. In practical world, it means a degree which can change your 3 figure salary to may be 6 figure salary. Students are not trained to have a personality which influences the world. They are trained to grab a best job in the market.The concept of MBA was to make a person who has the capability to work under stress and handle a group with his own intellectual ideas. He needs to be a person with a growing perspective

We need to break the prejudice of doing MBA for all the wrong reasons.Each course is designed to improve some specific skills which are inherited in you. Courses not only help you financially but done to make you a better person with an objective. As a teacher, or students we need to look into the depth of the course offerings. MBA encourages you to be a whole person with lot many qualities of leadership,decision skills etc.

Hope the course offerings will be discussed first now.Rather than just taking a degree.

Any comments will be appreciated.Keep Reading !!!!


A real example: Right to Information Act-2005

Right to Information Act is passed by Parliament on 15th June 2005 and came fully into force on 12th October 2005. The Act is applicable in whole of the India except Jammu and Kashmir . The Act is to provide right to information for citizen of the country. It explains that there should be complete  transparency between the public authorities and the citizens. We as a citizen have a right to know about the working policies and methods of these authorities. Along with this a common person can utilize this act if any public office is not responding to his requests and applications and have a right to be heard.

Let us understand  this act by one example:

University Issues:  It is sad but truth is we do face lots of errors in marks uploading from the university . But the worst part is there is no common channel through which student issues are addressed in appropriate time.

For example- A student from MBA was a student of one university and was pursuing his course from the reputed college. When her result was declared in first semester ,she found that marks of one subject was missing and it did not evens how that she was absent in that particular exam.For correction of this error she wrote several emails and letters to the university but her marks were not uploaded till 3rd semester and neither she received any response for her letters. The result of this negligence from the public authority is been face by the student. She cannot appear for her placements because her marks sheet is not proper.Thus in order to save her future she had to travel all the way to university location from her hometown to get the correction done.

Now comes the ugly face of the public offices. The correction involved 3-4 times visit to the office . The question here is are these public offices are working properly in the favor of citizen. And if there are committees who are established for redressing requests and applications .Then why there is never response form those persons .Should we use the Right of Information Act 2005 so often ?

Interesting Fact:
1.Political parties such as Congress ,BJP, BSP, NCP etc are also covered under this act because they are working for public.We have a right to access any information from their policies and information.

2. Digital Right to Information System:  Our system has failed terribly in responding to requests digitally. Hoping, as India is going digital we wish to see our systems to respond better to applications.

Companies Act-1956

“Company is an association of collection of individual person whether natural person, legal person or a mixture of both”. Company member shares a common purpose and unite in order to focus their various talent and organise their collectively available skills or resources to achieve specific, declared goals. This act is applicable to the whole of India except Jammu and Kashmir.

Characteristics of Company:

  1. Voluntary association which may include non profit organisation.
  2.  Its own name and seal – Company is treated as an artificial purpose and is been run by the Board of Directors chosen by shareholders. Thus a common seal of the company name is needed to register the decisions on company’s name.
  3. Company is a separate legal entity.
  4. Company has its own financial and banking accounts.
  5. Perpetual succession– It means that it is never ending until and unless it has been winded up or the purpose of forming a company has been completed.Insolvency or death of the partner do not affect the life of the company.
  6. It has a capacity to sue or to be sued– It gives access to the company that it can file a court case against any person doing harm to him(business) and in return can be sued too.

Types of Companies:

Types of companies

Essentials of valid Contract

First take a look at the meaning of contract.
According to Section 2(h) of the Indian Comtract Act 1872:  “An agreement enforceable by law” is a contract. It means a contract is an object which is stated to make legal meaning.
Also, the contract is voluntary in nature because if an agreement is made, it is understood that it is made mutually.

Thus a valid contract defined in simple terms is a contract  which is acceptable by both the parties to fulfill certain objective and forming a legal relation between the parties or a valid contact is a written or expressed agreemnet between two parties to provide a product or service.There are six elements which make a contract a valid contract.These essentials are as follows:

  1. Offer and Acceptance: There must be a “lawful offer” and a “lawfu acceptance”- thus resulting to be an agreement. An offer can be made to some specific person or to the whole of the world.
    • Offer:  Section 2(a) defines an offer as, “a proposal made by one person to another to do an act or abstain from doing it.” The person who makes the offer is known as the promisor or offer or and the person to whom an offer is made is known as the promisee or the offeree. Offer made should be reasonable and logical.
    • Acceptance:  A contract comes into being from the acceptance of an offer. When the person to whom the offer is made signifies his assent thereto, the proposal is said to be accepted (Sec. 2(b). Thus, acceptance of the offer must be absolute and unqualified. It cannot be conditional.
  2. Intention to create legal relations:  Agreement of social and domestic nature do not form any legal relations and thus fails to be a valid contract.
    Ex- Rose & Frank co. v/s Crompton Brothers Ltd.
    In above case R company was appointed as the agent od the C co. One clause of the agreement was “This agreement is not entered into as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts”. It was held that there was no intention to create legal relations on the part of the parties to the agreement and hence there was no contract.
  3. Lawful Consideration:  Consideration has been defined as the price paid by one party for the promise of the other.  That means a promisor must offer the same value to the promisee value. For example if A enters into a contract with B for the sale of the scooter. Then  A should offer the price exactly of the value of the scooter in market. In other words the exchange value should be equal from both the ends.
    An agreement is legally enforceable only hwn each of the parties to it gives something and gets something.
  4. Free Consent:  Free consent of all the parties to an agreement is essential of a valid contract. “Consent -means the parties must have agreed upon the same thing in the same sense. (Sec 13)”. If an agreement is induced by:
    • Coercion
    • Under Influence
    • Fraud
    • Misrepresentation
    • Mistake

    Then contract is voidable.

  5. Lawful Object: Parties must agree for lawful object.The object for which the agreement has been entered into must not be fraudulent oe illegal or immoral or opposed to public policy or must not imply injury to the person or property of another.
  6. Capacity of Parties:The parties to an agrrement must be competent to ontract, otherwise it cannot be ebforced by law. A competent parties are the major and a person with the sound mind. Incompetent parties are minors, lunatic, idiocy, drunkness state etc.

Kinds of Partners

partners are the person who have mutually entered into the partnership firm and are liable for the liabilties of the business as well as enjoys the authority.There are six kinds of partners as listed in the act.

  1.  Active or Actual Partners: These are the partners who actively take part in the conduct of the partnership business are called “actual” or “obsentsible” partners. Such a partner must give public notice of his retirement from the firm in order to free himself from liability for acts after retirement.
  2.  Sleeping or Dormant Partners: These are the partners who merely put in the capital(or even without capital they may become partners) and do not take active part in the conduct of the partnership business. They do share profits and loss and have voice in management but their relationship with the firm is not disclosed to the general public. Not required to give notice for the retirement.
  3. Silent Partners: These partners do not have any voice in the management of the partnership business are called “silent” partners. They share profits and losses and are liable for the debts of the firm.
  4. Partners in profits only:  A partner who has stipulated with other partners that he will be entitled to certain share of profits only without being liable for the loss is “partner in profits only”.
  5.  Sub-Partners:  When a partner agrees to share his share of profits in a partnership firm with an outsider, such an outsider is called sub-partner.Such partner does not have any rights in management and also he is not liable for the debts of the firm. Important point to note here is the sub partner can only be chosen only with the consent of the other partners.
  6.  Partner by estoppel or holding out:  If a person represents to the outstanding world by words spoken or written or by his conduct or by lending his name, that he is a partner in a certain partnership firm, he is then estopped from denying his being a partner and is liable as a partner in that firm to anyone who has on the faith of such representation granted credit to the firm, Actually such a person is not s partner in that firm -no agreement, no sharing in profits and losses , no say in management , may not be knowing exact place of business, but as he holds himself out to be partner, he becomes responsible to outsiders as a partner, he becomes responsible to outsiders as a partner on the principle od estoppel or holding out.


Partnership and Company-Difference

S.No Basis of Difference Partnership  Company
1 Regulating Act Governed by provison of the Indian Pratnership Act 1932 Governed by the provison of Companies Act 1956
2 No.Of members Maximum no in case of banking business is 10 and 20 for other business No fixed limit in case of public company.In case pf pvt ltd co, maximum is 50 and minimum is 2.Minimum no of members in public co is 7.
3 Entity No separate legal entity distinct from the members composing it. It is separte legal entity different from its memebers.
4 Liability Each partner has unlimited liability and is personally liable for the debts of the firm. Shareholders has limited liability.
5 Authority of Members Each partner has an implied authority to bind his co-partneners by acts done within the ordinary course of business. Shareholders has no such authority.There is no mutual agency between various shareholders.
6 Management All partners are entitled to take part in management. Board of directors are elected by shareholders.
7 Transfer of Interest Partners cannot transfer his interest without the consent of all the partners. Pvt co-Depends upon the partnership deed.
Public co-Shareholders can transfer their interest.
8 Audit Not necessary if annual turnover is not more than 40 Lakhs. It is mandatory.
9 Registration May and may not be registered. Essential for a company to get registered.

The discussion is about the difference between partnership and company .So let us discuss each point in detail.

1.Regulating Act: Partnership firm is governed by the regulating act of Indian partnership Act 1932 and in Company case it is governed by Company’s Act 1956.

2.Number of Members: There is an ambiguity in number of members in partnership firm . It is stated in the act that in banking business the number of partners is 10 and in other kind of business ,the maximum number is 20.
In company the number of person in private limited company is maximum number is 50 and minimum is 2.Whereas in minimum number in public company is 7.

3.Entity: “Separate legal entity means that a company holds a different identity other than the members of the company”. In partnership firm there is no significance of seperate legal entity. But in the case of company  ,a company holds one unique identity of its own. It is treated as one individual.

4.Liability:  Each partners in the partnership firm is liable for each  of the act in the ordinary course of action.
In the case of the company ,shareholders of the firm are not responsible because as studied earlier , company is different from its owners.It has its own individual identity.

5.Authority of members: Each partners has an implied authority which means that as per the partnership deed(agreement) every partner enjoys his share of authority over the business.
In company, shareholders does not hold any authority over the running of the business.

6.Management: As each partner in partmership firm enjoys authority which gives him right to particpate actively in management.
In company, shareholders appoint board of directors based on the experience and these directors particpate in the management process.

7.Transfer of interest: Once an individal enters into agreement and is entitled as a partner , he cannot transfer his interest without the consent of the others partners.
Whereas in the case of the company, sareholders can transfer their interest.i.e buyingg and selling of the shares.

8.Audit:  In a partnership firm , it is not mandatory to go for audit(checking of financial statement by an chartered accountant)of the firm if the turnover is not more than 40 lakhs.
But in the case of the company, it is an essential part. Company must go for annual audit.

9.Registration:  A partenrship may and may not be regsitered but is important for a company to be registered under Company’s Act 1956.