Company law concerns the companies and the business organizations. Corporate law is the broader spectrum which encompasses the laws governing the association and the functions of the Shareholders, Directors, Employees, Creditors, Consumers, the business community as a whole. Different countries have various recognized forms of business entities, like: Company limited by guarantee: Most of the companies which are run for non-commercial purposes; where the members guarantee the payment of certain amounts in case the company goes into liquidation. Company limited by shares: This type of company has shareholders with limited liability. Unlimited company: It can be company with or without share capital; and does not enjoy limiting their liability where the company goes into liquidation. The premise on which company law bases itself is the fact that a corporation is described to be a person in a political capacity created by the law, and endures in perpetual succession.
Indian Overview
India now has a liberalized economy. We have strong financial growth and a well-proven judicial system. We are a signatory of the WTO. The nation is now encouraging foreign investment in almost every sector Presently the Indian economy is marching through an encouraging business scenario. Specific industries having foreign investment of 50% and above are entitled for automatic approval by the R.B.I. This also applies to trading companies that conduct export business. Automatic approval is also available to fully export oriented units (OEUs) and Export Processing Zones (EPZs) that meet certain regulatory requirements. Corporate law is the analysis of legal and external affairs, such as mergers and acquisitions (M&A), and how shareholders, stakeholders, consumers, and other parties involved in a transaction interact with one another both internally and externally through corporate governance and commercial transactions. A company or a partnership organisation could hire a corporate lawyer to represent them and advise them on their legal rights and responsibilities. Corporate lawyers may work for a small, medium, or big law firm, or for a regulatory agency such as SEBI, IRDAI, or RBI.
National Company Law Tribunal (NCLT)
National Company Law Board is a quasi-judicial body. It deals with corporate matters that are civil in nature and arise from the Companies Act. NCLT governs matters which are generally concerned with registered companies in India. Earlier the Company Law Board was responsible for cases related to companies and factories. This responsibility has now shifted to NCLT, making it the supreme body. Thus, the tribunal now handles all cases related to listed companies in India. They function on the rules set out in the Civil Procedure Code (CPC). They also follow the guidelines laid down by the Central government. The tribunal has jurisdiction over some of these matters:
NCLT has the power to cancel the registration of any company. They do so if the registration has been obtained by unlawful means under section 7(7) of the Companies Act. It also has the powers to freeze the assets of a company and restrict its functioning.
An investigation can be carried out against a company if 100 members order the same with the help of an application. The Companies Act 2013 lays down this provision. A person who is not a part of a company can also persuade the NCLT to investigate in certain situations. A person can file complain against any abuse or mismanagement in the company under section 397 of the Companies Act.
A Class Action suit falls under section 245 of the Indian Companies Act and penalizes fraud. If a company cheats or steals money from their investors or shareholders, the NCLT may demand the company to compensate the victims. A class action suit be filed against both a private and a public company. But financial institutions like banks are exempted.
NCLT is also responsible for converting a public limited company into a private limited company. As per section 459 of the act, NCLT has power to impose restrictions and conditions for such conversion. The NCLT holds primary jurisdiction in insolvency and bankruptcy cases. There it accepts and analyses evidence from both the creditors and debtors. The tribunal has benches in many cities. This reduces multiplicity of litigation in different courts and forums.
The National Company Law Appellate Tribunal (NCLAT) may appeal an order passed by NCLT. Any person may file an appeal within 45 days from the date of order of the Tribunal. The appellate tribunal after hearing the party may either accept or reject the appeal. The NCLAT must dispose of the appeal within 6 months from the date of receiving the appeal receipt.
Management Of Company In India
To meet the goals of a business, it is important to establish a management structure. They develop a management structure. Now, investors can assign and divide the tasks amongst the members and employees of the company. This helps to achieve the goals of a company. In a company there are various stakeholders. These include shareholders, directors, managers, and officers who constitute the organizational hierarchy of a company. Here we shall look at their functions in managing a company
Shareholders in a company hold shares and have the right to share profits of the company. They are represented by a board of directors at board meetings. They are who are considered the elected representatives of shareholders. The shareholders invest their capital. Hence, they are responsible for overseeing whether the company is well run and managed. They overview the decisions of the board. They express their objection or approval in the actions of the management of the company
Shareholders choose the board of directors to represent the interest of the company. While selecting a director some requirements must be kept in mind, they are as follows:
At least 3 directors in case of a Limited company.
2 directors in case of a Private Limited company.
1 director if it is a one-person company.
Within the directors, a Managing Director is selected who is responsible for the affairs of the company. They, with the help from other directors, hires senior managers and other officers. This leads to a better functioning of the company.
The directors appoint the officers to hold various positions of responsibility in a company. Some of the popular positions of officers are:
1. Chief Executive Officer: Popularly abbreviated as CEO, is the highest-ranking position in a company. A CEO handles all managerial decisions and overlooks the daily operations of the company.
2. Chief Operating Officer: Second in command to the CEO, who reviews the business operations in the company.
3. Chief Financial Officer: A senior financial executive responsible for overseeing all financial activities of a company. Their responsibilities include financial planning, raising funds, accounting, and other related matters.
4. Chief Marketing Officer: A senior marketing executive responsible for activities such as improving the brand of the company, advertising and managing marketing campaigns. The Chief Marketing Officer overlooks the sales, marketing, and development teams to market the product and company more efficiently.
5. Managers: Every manager in a company is given an area of work to handle. They must meet deadlines and make sure teams under them function effectively. They report to the officers or other senior managers in their division. Accounts manager, Store manager, regional manager are some of the positions that managers hold in a company. Many managers in a company are also responsible for the management of resources such as people, financials, and equipment.
Corporate Governanace
Corporate governance is a set of practices, policy and procedures. It controls the way a company is controlled and directed. It deals with various stakeholders. It includes customers, management and governmental bodies and institutions. In India, the organizational framework for corporate governance consists of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). SEBI handles the monitoring and regulating corporate governance. They do so for the listed companies in India through Clause 49. A company, while participating in any business activity, must adhere to the rules of corporate governance
Compliance and risk mitigation
A company governed on sound principles must work efficiently. It must ensure compliance with all laws and guidelines. A company discipline in its functioning is ready for any uncertain events. It has all the risk mitigation mechanisms in place.
Increases Shareholder Value
Good corporate governance systems in place can help improve shareholder satisfaction. It can improve the valuation of a company. through sustained efforts to keep the interest of all the stakeholders intact. Even a single unlawful act, can reduce the value of a company in the minds of the shareholder. Thus, strong corporate governance policy must be the backbone of any company.
Better Organizational efficiency
Sound corporate governance policies are important. They determine where the company stands compared to its competitors. Due to recent frauds and economic malpractices, many questions are raised on the way a company is governed. Corporate governance lays the steppingstone for the character of the company. They do so by utilizing resources and corporate strategies efficiently.
Important determinant in M&A deals
During the merger and acquisition of a company, corporate governance determines a good deal from a bad one. Stakeholders value a company with good corporate governance set in place.
Corporate governance plays a vital role in the growth of any company. Bad governance in a company can lower the investor’s trust. It decreases reputation among consumers. These may lead to severe economic downturns in a company. Designing a solid corporate governance framework is no easy task. It differs from industry to industry
Foreign Collaboration in India
Foreign collaboration with Indian industrialists is now common. It is a typical way for MNCs to take part in Indian industry. For collaborations, Indian and foreign enterprises come into international collaboration agreements. They do so through the sale of technology, spare parts, and the usage of foreign brand names for final goods.
In India there are two forms of foreign collaboration.
1. Financial - The authority who approves the collaboration is the Reserve Bank of India.
2. Technical - The Department of Industrial Development approves or disapproves of any collaboration.
Since 1949, the government's approach has remained mostly unchanged. They allow foreign direct investment on a preferential basis. They do so in sectors that will be beneficial for the country. The foreign undertakings will have to conform to the Industrial policy of the country. The same goes for Indian undertakings as well. Foreign investors are always treated on an equal footing with their Indian counterparts.
The Foreign Exchange Management Act (FEMA) of 1999 has been implemented by the government . It took the place of the 1973 Foreign Exchange Regulation Act (FERA). The previous statute was intended to regulate foreign exchange. Foreign exchange regulation is the goal of the new Act.
A violation of the former Act's requirements resulted in a criminal offence. The burden of proof lay with the guilty. Yet, the new Act provides for only a civil remedy. For an offence, it is not usual for the police to arrest the accused. He faces arrest only if he defaults in payment of penalty for contravention. The government must give approval to set up foreign collaboration. Approval is requested under the relevant foreign exchange laws in force. The requisite Government policy is required.
A foreign corporation may form a foreign collaboration. It is not necessary to form a joint venture with an Indian partner. It may happen that the minimum limited set out in the automatic route is exceeded. That is when a government approval is needed for a foreign collaboration.
A foreign investment promotion board has been established by the government. This is to encourage foreign investment in India. The Board's responsibilities include:
-expediting the approval of proposals;
-reviewing the collaborations that have been approved;
identifying and establishing contacts to invest in India.
Earlier, India's industries focused only on consumer items. Indian industry has benefited from foreign collaborations by diversifying its output range. This category includes steel, light and heavy engineering, petroleum refineries, and other industries.
Foreign Direct Investments (FDI)
Foreign Direct Investment (FDI) has long been a significant source of non-debt financing. It contributed to India's economic development and financial growth. Companies from other countries invest in India to take advantage of lower wages. They take advantage of one-of-a-kind investment incentives like tax breaks, among other things. It also entails acquiring technological expertise. In a country where foreign investment is made, it creates jobs.
Foreign capital continues to come into India. This is all thanks to the Indian government's favorable regulatory framework. They have created a thriving economic environment. In recent times, the administration has made many steps. This including loosening FDI restrictions in areas like as defense, and so on.
1. Government Route
The government route is a path for foreign investments that involves the government. Foreign investors must take government approval for such routes.
2. Automatic Route
The areas that fall under the automatic route to FDI do not demand government approval. Foreign investors can use the automatic route to make investments without obtaining government clearance. Someone must review the amended regulations right before making investments. This eliminates any misunderstanding
1. Horizontal
In another nation, the parent company is implementing the same business plan. The goods and services produced outside of the company's home nation are often identical to those produced in the company's home country.
2. Vertical
This foreign direct investment is a type of FDI in which exports are returned back to the home market. The expansion of trade blocs with low internal trade barriers but greater external trade barriers is the key contributor to this form of FDI.
3. Platform
Here, a company expanded to another country. They have a goal of exporting the foreign country's output to a third country
1. Mergers and Acquisitions
2. Joint Ventures (only with foreign company)
3. Establishing a branch of a domestic corporation in a foreign country
4. Purchasing voting interest in a foreign corporation
Joint Venture
A joint venture is when two or more people pool their resources together to complete a particular task. The task can be anything business-related, even a project. Each person is liable for the profits, losses and so on. The joint venture is a separate identity. It is not related to the other business interests of the people associated.
Joint ventures, by nature, are partnerships. Any legal entity can come together to form them. These include corporations, partnerships, limited liability companies, and so on. Even large companies may join hands with smaller companies to collaborate.
Before the talks of a Venture are concluded, the partners undertake:
• Search for eligible partners
• Short listing and prioritizing partners
• Due diligence (inclusive of the due diligence of intellectual property, if any)
• Foreign Investors
1. Take advantage of resources available
One firm may have well-established manufacturing operations. The other may have better distribution channels. Together, a joint venture will take advantage of both their plus points. They will use the combined resources and fulfil the purpose of the venture.
2. Saving Costs
Both companies will benefit from the joint venture since they will be able to leverage their production at a lower per-unit cost. They would have had to pay more if they hadn't. This is especially true when it comes to high-cost technological developments. In a joint venture, advertising and labour expenses might also be cost-effective.
3. Combined Expertise
A joint venture between two companies or parties will have diverse origins, knowledge, and expertise. Each company stands to enjoy the other's expertise and skill in a joint venture.
The joint venture agreement is an extremely essential document. It lays down the rights and obligations of the partners. It includes the objectives of the venture. It mentions in detail the initial contributions of the partners. It also includes the daily operations, responsibility for losses and right to profits. If drafted with care, it avoids litigation in future.
4. Foreign Markets
A corporation may wish to expand its market into other nations. They can profit from a joint venture agreement. They will supply items to a local business and take advantage of their business market. Some countries refuse international companies from doing business there. This makes a joint venture the only way to enter a foreign market for those companies.
The Internal Revenue Service(IRS) does not recognize the joint venture. The partnership formed between the two parties aids in the payment of taxes. It will pay taxes like any other business or corporation if it is a separate entity. If it operates as an LLC, it will work in the same way as any other LLC would. The profits and losses are passed through to the owner's personal tax returns.
The joint venture agreement spells out the taxation of profits and losses. The arrangement might be a contractual relationship between the two parties. In that case, it is the joint venture agreement that divides up the tax between the parties.
Limited Liability Partnerships (LLP)
LLP stands for Limited Liability Partnership. It combines the advantages of a corporation with the versatility of a partnership. It follows perpetual succession. It has the ability to form contracts and have property in its own name. It is a separate legal entity with full liability for its assets. in a partnership firm the maximum number of partners cannot be more than 20. The agreement restricts the partners' liability only to their contribution. No partner is liable for the activities of other partners who act without authorization. There may be joint liability resulting from another partner's bad business decisions. It may also arise from misdemeanor. LLP protects individual partners from such liabilities. The LLP, remains liable for its other duties as a separate business.
1. It is convenient in nature. The agreement is tailor-made to fit every partner related to the LLP.
2. There is no restriction on the required amount of capital. An LLP can be established with a minimum amount.
3. An LLP only requires a minimum number of 2 partners. There is no maximum limit. It ranges from 2 to many.
4. The registration cost required to register an LLP is lower than other forms of business.
5. There is no compulsion to audit the accounts of an LLP. Only the following situations is auditing required -
a. The annual turnover crosses 40 lakhs.
b. The contributions by the partners exceed 25 lakhs.
6. Limited Liability Partnerships have a lower compliance burden. It is because they only have to file two statements. They are - the Annual Return and Statement of Accounts and the Solvency Statement. In the case of a private corporation, they must accomplish at least eight to ten regulatory formalities and compliances.
7. The LLP is exempt from paying taxes on the income and share of its partners. The profits of an LLP can be taken by the partners. They are exempt from having to pay an additional tax in the form of DDT.
The internal governance structure of an LLP versus a joint stock corporation is a key distinction. It is a law that regulates the company (i.e. Companies Act, 1956). An LLP, on the other hand, would be bound by a contract involving partners. An LLP does not have the management-ownership distinction that a company maintains. The workings of a company is not as flexible as that of an LLP. It has fewer requirements for compliance than a company.
Mergers And Acquisition
Occasionally, the phrases "mergers" and "acquisitions" are used identically. Their interpretations, however, are separate. When one firm completely buys another, it is known as acquisition. A merger is the coming together of two businesses to form a new legal entity under a single corporate name. It helps in the valuation of a company. By examining similar companies in the industry and employing measures, a company can be reasonably evaluated.
1. Mergers
A merger occurs when the boards of directors of two firms agree to merge and seek shareholder approval. Two businesses join hands and become a completely new legal entity.
2. Acquisitions
In an acquisition, the purchasing corporation acquires a majority stake in the acquired company. It retains its identity and organizational structure.
3. Consolidation
By integrating core operations and eliminating previous organisational structures, consolidation creates a new corporation. Both companies' shareholders must approve the merger, after which they will get common equity shares in the new company.
4. Tender Offer
In a tender offer, one company offers to buy the other company's outstanding stock for a fixed price rather than the market price. The offer is made directly to the shareholders of the other firm by the purchasing company. It goes around the board of directors and management.
5. Asset Acquisition
In an asset acquisition, one business buys the assets of another company outright. The shareholders must approve such a purchase. Asset purchases are common during bankruptcy proceedings. Other corporations competed for the bankrupt company's varied assets. It is liquidated once the assets have been transferred to the purchasing businesses.
6. Management Acquisitions
A management buyout is often referred to as a management-led buyout (MBO). The executives of one company buy a controlling stake in another. It makes it personal. Former executives frequently collaborate with a financier or former company leaders in order to assist fund a deal. The majority of shareholders must approve such M&A transactions. They are often financed disproportionately with debt.
Their structures rely on the relation between the companies who get into an agreement.
1. Horizontal Mergers
The two companies are fellow competitors. They share a common market.
2. Vertical Merger
A supplier merges with a company.
3. Congeneric Mergers
Two different companies that are not competitors. However, they serve the same consumer base.
4. Market-extension Mergers
When two different companies who sell the exact same product. However, they sell it in different markets. They may merge to expand their market reach.
5. Product-extension Merger
In the same market, two companies sell different but related products.
6. Conglomeration
Two companies with similarities between them may merge.
According to the Companies Act of 1956, the Memorandum of Association must allow the company to not only acquire but also continue on with the activities of the acquired firm.If the above is not included in the Memorandum of Association, authorisation from the shareholders, the Board of Directors, and the Company Law Board must be requested.
• The merger must be announced on the stock exchanges where the two firms are listed.
• The High Court must accept the proposed merger (which was approved by the board of directors).
• The merger must be approved by a majority of shareholders and creditors.
• After taking into account all of the grounds, the High Court should issue an order approving the merger. The order's certified copy must subsequently be lodged with the Registrar of Companies.
Arbitration And Conciliation
Alternative Dispute Resolution (ADR) is inclusive of the mechanisms which include dispute resolution techniques which act as a means for the contesting parties to come to an agreement, just short of litigation.
Arbitration is a form of alternative dispute resolution. The parties settle their disputes with the help of an outside party. It is accomplished without resorting to the legal system. After hearing both sides, the dispute is sent to a nominated person who makes a quasi-judicial decision on the issues. Because this is never a subject of public record, the procedure is kept private. When it comes to private conflict resolution, arbitration is one of the most successful and dependable methods.
Arbitration can be done in two manners - voluntary or compulsory.
1. Voluntary - There is a dispute between the two sides. They are unable to resolve the problem amongst themselves. They agree to take their disagreement to a neutral arbitrator, whose verdict will be binding on both parties.
2. Compulsory - It is a process in which the parties are compelled to accept arbitration regardless of their willingness to do so. When one party in an industrial dispute feels affected by the other party's actions, the aggrieved party may request that the case be sent to any adjudication agency for resolution. The arbitrator, sometimes known as an arbitral tribunal, is a neutral person or persons charged with settling the issue that the parties have brought before them.
Why it is recommended-
a. This procedure is flexible and more economical than pricey court procedures.
b. Arbitration proceedings take up less of the client’s time, compared to litigation.
c. The parties of the matter have the freedom to choose the arbitrator who will handle their dispute.
d. It is easier to enforce arbitration awards, in comparison to court verdicts.
e. The matters dealt with in arbitration are kept private. Unlike court proceedings, these matters are not available for the general public to pick on.
Cons of the procedure-
a. The parties lose the right to approach the court in case arbitration is mandated by the contract between them.
b. There barely exists any chance for an appeal.
c. Interlocutory applications are not permitted in arbitral proceedings.
d. Arbitration awards are not directly enforceable; they can be carried out with judicial approval.
There are certain matters which cannot be referred to for Arbitration:
• Matrimonial Matters
• Insolvency Proceedings
• Criminal Proceedings
• Antitrust Matters
Conciliation is a process of dispute resolution in which the disputants reach an agreement with the assistance of a conciliator. To reach an agreeable arrangement, the conciliator talks with the parties both together and separately. Reduced tensions, improved communications, and other measures may be used to reach a final conclusion. It is a flexible process, allowing the parties to define the proceeding's content and purpose. It is risk-free, and the parties are not bound by it unless they sign it.
Why it is recommended -
a. It’s an informal procedure - hence it is flexible.
b. Conciliation, like any other type of alternative dispute resolution, is less expensive than litigation.
c. If the parties to the dispute are dissatisfied with the proceedings, they have the option of going to court.
Cons of Conciliation-
a. It is not binding upon the parties, unlike arbitration or court verdicts.
b. There are no chances to file for an appeal.
c. There is a chance that the parties don't find common ground. They may not settle.
Brand Valuation
The practise of evaluating a brand's total financial value is known as brand valuation. If those who value a brand were also involved in its creation, there is a conflict of interest.
• When a firm wants to evaluate its assets and brand, brand valuation becomes critical.
• The presence of the brand on the company's balance sheet demonstrates the actual return on assets.
• Brand management becomes more effective if the brand is valued.
• By treating the brand like any other asset, the company becomes less attractive to aggressive takeover bidders.
• Brand value is particularly well suited to service sectors with few assets but a big number of clients.
Premium Profits
This strategy is founded on the assumption that a branded product will sell more than one that is not. Premium refers to the difference in price between a branded and an unbranded goods. When this premium is multiplied by the expected annual sales of the product, the outcome is an annual price premium, the sum of which equals the brand's worth.
Earning Basis
This method involves deduction of the profitability of the branded product that is accredited to tangible assets and other factors leaving behind the value of the brand. In practice however it is difficult to attribute profitability to tangible assets and other factors.
The relief from royalty method
This method determines the brand's value by calculating how much a third party would invest for the brand's use or how much the owner saves by not paying for the brand's use
Step 1 - You must prepare a trademark application in order to register your brand (Please refer to our Trademark Service section to know more about a trademark application). You have to prepare specific documents for the same. These include
- Documents stating proof of registration of business.
- The trademark in a soft copy format.
- The applicant must also sign a power of attorney.
- The brand logo image.
Step 2 - You must pay an application fee of Rs. 2500.
Step 3 - You must fill out the brand name registration application. You can file it manually or online. The receipt for e-filing will be available immediately via the website.
Step 4 - The Registrar will evaluate the documents applied.
Step 5 - Indian Trade Mark Journals will publish the brand name. If there are no oppositions for 3-4 months after publication, the registrar considers it for acceptance.
(Note - If the registrar does not accept the registration, you may apply again, free of charges. However, if your application is rejected for a second time, you will have to start over.)
