Comprehensive Study Guide on Company Form of Business Organisation

Context and Overview of the Company Form

Historical and Industrial Context: During the second five-year plan in India, five major steel plants were established in underdeveloped regions to stimulate industrialization. These plants are owned by the Government of India, which established a Joint Stock Company known as Steel Authority of India Limited (SAIL) for this purpose.
Prominent Examples: Famous examples of large business units organized as Joint Stock Companies include: * State Bank of India (SBI) * National Thermal Power Corporation (NTPC) * Grasim Industries Limited (GIL) * Reliance Industries Limited (RIL) * Tata Steel Limited
Need for the Company Form: Previous forms of organization like Sole Proprietorship, Partnership, Joint Hindu Family Business, and Cooperative Societies are suitable for small to medium businesses. However, capital-intensive industries (like Iron and Steel) require massive investment and involve high risks that cannot be met by these forms due to: * Unlimited liability of partners. * Limited financial resources of individuals. * Restrictions on the number of partners.
Mobilization of Small Savings: A Joint Stock Company allows small savers to participate in ownership. For instance, if the face value of a share is $Rs.\,10$ , an individual can invest $Rs.\,1000$ to purchase $100\,\text{shares}$ and become an owner.

Meaning and Definitions of a Joint Stock Company

Basic Definition: A Joint Stock Company is a voluntary association of persons with a large and fluctuating membership. It requires an elaborate organization and confers a corporate personality (a distinct legal position) upon the association.
Legal Governance: In India, these companies are governed by the Companies Act, 2013.
Statutory Definition: Section 2 (20) of the Companies Act 2013 defines a "Company" as a company incorporated under this Act or under any previous company law.
Definition by Prof. L.H. Haney: Prof. Haney defines a company as "an artificial person created by law, having separate entity, with a perpetual succession and common seal."

Characteristic Features of a Company

Incorporated Association: A company must be registered under the Companies Act. The minimum memberships required are: * Public Company: Minimum of $7\,\text{members}$ . * Private Company: Minimum of $2\,\text{members}$ . * Section 3 also allows for a One Person Company (OPC).
Legal Entity Distinct from Members: The company is a separate legal entity. It can own property and sue or be sued (even by its own members for libel). Members cannot claim ownership rights in the company's assets during its life or winding up.
Artificial Person: It is a juristic person without a physical body, existing only in the contemplation of law. It acts through natural persons (directors, officers, shareholders), who bind the company when acting within their authority.
Perpetual Succession: The company's life is not linked to the life of its members. It continues to exist even if all members die, become insolvent, or leave. "Members may come and go but the company can go on forever."
Common Seal: As an artificial person, the company uses a common seal as its symbolic signature on agreements to make them valid.
Limited Liability: * Limited by Shares: Liability is limited to the nominal value of shares held plus any agreed premium. * Limited by Guarantee: Liability is limited to the amount guaranteed by the member. * Unlimited Liability: In rare cases, members may be liable until all debts are paid.
Transferability of Shares: Shares of public companies listed on a stock exchange can be transferred freely. Private companies have restrictions on transferability in their Articles of Association.
Distinct Pattern of Management: Ownership is separate from management. Shareholders elect representatives known as Directors or the Board of Directors to manage day-to-day affairs.

Classification of Companies

Private Company (Section 2 (68)): A company with a minimum paid-up capital of $Rs.\,1\,lakh$ (removed by the 2015 amendment) which: * Restricts share transfer. * Limits members to $200$ (excluding current and former employee-members). * Prohibits public invitation to subscribe to securities. * Requires "Private Limited" at the end of its name.
One Person Company (OPC) (Section 3(1)(c)): A private company with only one member. * Eligibility: Only an adult, natural person who is an Indian citizen and resident in India. * Relaxations: No need for a cash flow statement; no annual general meeting; annual returns can be signed by a director alone; only one board meeting per half-year (gap of at least $90\,\text{days}$ ).
Small Company (Section 2(85)): A private company with: * Paid-up share capital not exceeding $Rs.\,50\,lakh$ . * Turnover not exceeding $Rs.\,2\,crore$ . * OPCs and Small Companies cannot be non-profit associations.
Public Company (Section 2 (71)): A company that is not private. * Minimum members: $7$ ; Maximum: No limit. * Minimum paid-up capital: $Rs.\,5\,lakh$ (removed by 2015 amendment). * Can invite public subscription; no restriction on share transfer. * Requires the word "Limited" at the end of its name.
Key Differences (Companies Amendment Act 2015 Updates): * Minimum Capital Requirement: Removed for both types; companies can start business immediately upon receiving a Certificate of Incorporation. * Board Composition: Private (Min $2\,\text{directors}$ ); Public (Min $3\,\text{directors}$ ). Listed Public companies must have at least $1/3$ independent directors.

Merits and Limitations of Joint Stock Companies

Merits

Large Resources: Ability to raise massive funds via shares, debentures, loans, and public deposits.
Limited Liability: Attracts small investors and allows for larger risk-taking in investment decisions.
Continuity of Existence: Perpetual life ensures long-term business stability.
Large-scale Operations: Enables efficiency and cost reduction through economies of scale.
Liquidity: Shares in public companies (NSE, BSE) can be converted to cash easily via a DMAT Account.
Professional Management: Can afford to hire expert managers for complex activities.
Research and Development (R&D): Funds available for innovation, improved quality, and staff training.
Tax Benefits: While the nominal rate is high, various exemptions under the Income Tax Act lower the effective burden.

Limitations

Difficult to Form: Extensive legal formalities and government compliance.
Control by a Group: Democratic management is often theoretical; in practice, a small group (often a family or majority shareholders) makes all decisions, and minority shareholders may be indifferent.
Excessive Government Control: Compliance with multiple Acts and heavy penalties for non-compliance.
Delay in Decision Making: Time-consuming procedural formalities requiring Board or General Body approval.
Lack of Secrecy: Required to file documents and publish reports; proceedings are often public.
Social Abuses: Risk of monopolies, exploitation of consumers/workers, and unhealthy influence on government policy.

Formation of a Company

Stage 1: Promotion Stage: Initiated by Promoters who conceive the idea, investigate data, and assemble resources. Section 2(69) defines a promoter as one named in a prospectus/annual return or having control over the company.
Stage 2: Registration/Incorporation Stage: Requires filing documents with the Registrar of Companies: * Memorandum of Association (MOA): Signed by $7$ for public, $2$ for private. * Articles of Association (AOA). * List of Directors and their written consent to act and take qualification shares. * Notice of Registered Office address (within $30\,\text{days}$ ). * Statutory Declaration of compliance: Signed by an advocate, CA, or company officer.
Stage 3: Certificate of Incorporation: The company's "birth certificate." Issued by the Registrar (digitally allowed). It includes a Corporate Identity Number (CIN).
Stage 4: Commencement of Business: Per the 2015 Amendment, all companies can now commence business immediately after incorporation (Section 11 was omitted).

Global and Collaborative Business Forms

Multinational Corporation (MNC)

Definition: Registered in one country (home country) but operates production/service facilities in multiple others (host countries).
Features: Centralized management at HQ; huge assets (e.g., IBM has $8\,\text{billion dollars}$ ); intensive advertising; access to international markets; emphasis on quality.
Advantages: Foreign capital inflow; employment generation; introduction of advanced technology; growth of ancillary industries; increased exports.
Limitations: May ignore host country priorities (focusing only on high-profit areas); monopoly power can kill domestic enterprises; change in local culture/habits.

Joint Venture

Definition: Two or more independent firms (private or government) contribute capital and expertise for a specific purpose (e.g., Maruti Ltd. of India and Suzuki Ltd. of Japan forming Maruti Suzuki India Ltd.).
Benefits: Tech access, resource pooling, innovation, risk and reward sharing.

Public Private Partnership (PPP)

Definition: Collaboration between public and private sectors for infrastructure (transport, health, waste management).
Features: Benefit for the public; shared risk and responsibility; government remains actively involved throughout the project life.
Merits: Faster implementation; higher quality via expertise; reduced costs; government relieved of borrowing burdens.
Demerits: Private profit motive may conflict with public welfare; risk of secret leaks; potential conflicts causing delays.

Public and Private Sector Enterprises

Private Sector: Businesses owned by individuals or groups. Goals: Profit-making ( $2\%$ profit must go to Corporate Social Responsibility per Companies Act 2013). Accountability is private.
Public Sector (PSUs): Owned by the Union Government, State Government, or both (minimum $51\%$ shares held by government). Currently, three sectors remain reserved for government: Railways, Atomic Energy, and Explosives.
Directive Principles of State Policy: The genesis of PSUs is to prevent the concentration of wealth, provide equality of opportunity, and establish a welfare state per the Industrial Policy Resolution of 1956.

Forms of Public Sector Undertakings

Departmental Undertaking: * Run as a government department under a Minister (e.g., Railways, Post & Telegraph). * Financed by the general budget; surplus goes to the treasury. * Controlled by bureaucracy; lacks professional expertise and flexibility.
Statutory Corporation: * Established via a special Act of Parliament/State Legislature (e.g., SBI, LIC). * Separate legal entity with autonomous internal management but accountable to the legislature. * Capital provided by the state; can raise capital via bonds.
Government Company: * Registered under the Companies Act with at least $51\%$ government stake. * Managed by a Board of Directors. Employees are not civil servants. * Easy to establish via executive decision; offers healthy competition to the private sector.

Questions & Discussion

Question on Continuity: If all members of a joint stock company die in an accident, does the company close? * Answer: No, the company has perpetual existence and continues with new members.
Shareholder Liability Case: Mr. Mohit invested $Rs.\,2\,lakh$ in shares. The company is failing. Will his house be sold to pay company debts? * Answer: No. Liability is limited to his investment ( $Rs.\,2\,lakh$ ).
Government Company Objectives: To ensure managerial autonomy, operational efficiency, and provide competition to the private sector.
Comparison of Suitability: * Large volume, widespread area, high risk: Joint Stock Company. * Maximum secrecy, limited government control: Sole Proprietorship.
Expansion of Acronyms: * BHEL: Bharat Heavy Electricals Limited * BPCL: Bharat Petroleum Corporation Limited * GAIL: Gas Authority of India Limited * HPCL: Hindustan Petroleum Corporation Limited * IOCL: Indian Oil Corporation Limited * MTNL: Mahanagar Telephone Nigam Limited * NTPC: National Thermal Power Corporation * ONGC: Oil and Natural Gas Corporation Ltd. * SAIL: Steel Authority of India Limited