B.com(H/P)| CH-4 Types of Companies : On the Basis of Control | Company law | Sem-2/4th Sol Du NEP

Introduction to Company Law

Overview of the Series

• The speaker introduces a series on Company Law, aimed at B.Com students across various semesters.

• Emphasizes that this will be a comprehensive series covering all aspects of Company Law relevant to exams.

Types of Companies

• Discussion on different types of companies, including private and public companies, as well as limited companies based on incorporation.

• Previous lessons covered types such as chartered and statutory companies; the focus is now shifting back to these concepts.

Government Companies

Definition and Characteristics

• A government company is defined as one where 51% or more shares are held by the government (central or state).

• If a subsidiary exists under a government company, it also qualifies as a government company. This highlights the interconnectedness in ownership structures.

Legal Framework

• According to Section 2(45), any company with 51% or more paid-up share capital owned by the government is classified as a government company.

Appointment of Auditors

Auditor's Role

• The appointment of auditors is conducted by the Controller and Auditor General of India, who oversees how accounts are audited within government companies.

Audit Report Creation and Submission Process

Overview of Audit Reports

• The auditor is responsible for creating the audit report, which must be submitted to the Controller and Auditor General of India.

• After submission, the Controller and Auditor General will review the report, providing comments or supplementary information if necessary.

Annual General Meeting (AGM) Presentation

• The audit report is presented at the Annual General Meeting (AGM), which is organized by the auditor.

• During the AGM, comments from the Controller and Auditor General are included in the presentation of the annual report.

Mandatory Nature of Annual Reports

• It is mandatory for government companies to prepare an annual report, which must be presented at their AGM.

• Following approval at the AGM, there is a 30-day window to submit this report to Parliament.

Reporting Requirements to Parliament

• The annual report includes details on revenue, assets, liabilities, and profits to inform government oversight.

• Companies have three months post-AGM to submit their reports to Parliament.

Understanding Foreign Companies

Definition of Foreign Companies

• A foreign company is defined as one incorporated outside India regardless of its shareholders' nationality.

Indian vs. Foreign Incorporation

• If a company’s incorporation occurs in India but has foreign shareholders, it remains classified as an Indian company.

Characteristics of Foreign Companies

• Any company incorporated outside India that conducts business within India qualifies as a foreign company.

Modes of Operation for Foreign Companies

• These companies can operate either physically or through agents in India using electronic modes.

Electronic Operations Explained

Understanding Foreign Companies and Their Structure

Definition of Foreign Companies

• A foreign company is defined as one that is incorporated outside India but conducts business activities within the country. This includes companies generating revenue from Indian operations.

• Financial statements and web-based marketing are essential functions for these companies, indicating their operational scope in India.

Characteristics of Indian vs. Foreign Companies

• If a company like "Physics Wala" operates in India but has branches abroad (e.g., Pakistan or the USA), it remains an Indian company domestically but may be considered foreign if it operates overseas.

• The distinction between domestic and foreign status hinges on where the company's branches are located and where they conduct business activities.

Holding and Subsidiary Companies

• A holding company controls one or more subsidiary companies, which are smaller entities under its management. The holding company possesses a majority stake (51% or more) in these subsidiaries.

• Subsidiary companies operate under the control of a holding company, meaning they do not have independent decision-making authority; their board decisions must align with those of the holding company’s board.

Understanding Control in Corporate Structures

• Control refers to how a holding company manages its subsidiaries through its board of directors, who make key decisions affecting both entities. Subsidiaries lack their own independent boards, relying instead on directives from the parent organization.

• For a subsidiary to maintain its status, it must have less than 51% ownership by other entities; otherwise, it could be classified differently based on shareholding patterns.

Associate Companies Explained

• An associate company is characterized by having at least 20% shareholding from another entity but does not fall under direct control like a subsidiary does; rather, it is influenced by the larger shareholder's decisions.

What is a Dormant Company?

Definition and Characteristics

• A dormant company is defined as one that is completely inactive, meaning it has not engaged in any business activities for a significant period. This includes not preparing financial or annual statements for the last two years.

• Such companies do not conduct transactions, which are necessary for generating financial statements. They may be established with future intentions but remain inactive initially.

Future Intentions of Dormant Companies

• Some companies are created with the intention to operate in the future; they may not be active now but are set up for potential use later on. For example, a company might be registered without immediate plans to start business operations.

• The concept emphasizes that even if a company is dormant, it must still file annual and financial statements indicating its inactivity to regulatory bodies like the Registrar of Companies (ROC).

Understanding Nidhi Companies

Concept of Nidhi Companies

• Nidhi companies are essentially mutual benefit societies formed by members who come together to save money and provide loans among themselves. This structure promotes savings habits within the group.

• Members contribute fixed amounts regularly, pooling resources to assist one member at a time with larger sums, such as ₹1 lakh, which can then be used for personal projects or needs like weddings or home purchases.

Functionality and Purpose

• The primary goal of Nidhi companies is to encourage saving among members while providing them access to loans when needed. They serve as an informal banking system within communities where traditional banking services may be limited or less accessible.

• These companies collect deposits from their members and offer loans back to them, fostering a cycle of savings and lending that benefits all participants involved in the scheme.

Government Companies: Structure and Regulations

Definition and Ownership

• Government companies are defined under Section 245 as those where shares are owned by either central or state governments; this ownership qualifies them as government entities regardless of their operational status.

Auditor Appointment Process

• The appointment of auditors for government companies is solely conducted by the Controller and Auditor General (CAG) of India, who holds comprehensive authority over auditing processes including reviewing financial statements submitted by these firms.

Financial Accountability

Annual Reports and Company Types

Presentation of Audit and Annual Reports

• The auditor prepares a report that is first submitted to the controller auditor before being presented at the Annual General Meeting (AGM).

• After presenting the report at the AGM, there is a three-month period allowed for submission to Parliament.

• The annual report must be presented in Parliament within three months following the AGM.

Understanding Foreign Companies

• A foreign company is defined as one established outside India but operating within India, either physically or electronically.

• Electronic mode refers to businesses conducted online, including B2B (business-to-business) and B2C (business-to-consumer).

Types of Companies Based on Control

Holding and Subsidiary Companies

• A holding company owns 51% or more shares of another company, while a subsidiary has less than 51% ownership by another entity.

Associate Companies

• An associate company is influenced by another company's decisions through ownership of 20% or more shares.

Dormant Companies

• A dormant company is inactive, having not produced any financial statements for two consecutive years.

Nidhi Companies

• Nidhi companies focus on promoting savings among their members.

Conclusion and Encouragement

• The chapter on types of companies based on control concludes here. The speaker encourages viewers to stay motivated as they prepare for exams.