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DECODING INDIA’S NEW LABOUR CODES: A UNIFIED COMPLIANCE GUIDE FOR CORPORATE PROFESSIONALS

Introduction

It lays the foundation for a future ready workforce and stronger, resilient industries driving labour reforms for Aatmanirbhar Bharat. The enforcement of India’s four comprehensive Labour Codes marks the most historical legislative shift in employment law since Independence. Each code addresses distinct domain of employment regulation. Effective from 21^st November 2025, with final central rules notified on 8^th May 2026, the Ministry of Labour and Employment has consolidated 29 existing labour laws into 4 streamlined codes. All prior enactments stand repealed.

For Practising Company Secretaries and corporate advisors, transitioning clients to this new regulatory architecture is a matter of critical operational urgency. Non-compliance no longer carries minor penalties; it exposes corporate entities to severe systemic risk.

1. The Code on Wages, 2019: The 50% Remuneration Rule

The Code on Wages, 2019 standardizes the definition of “wages” u/s 2(y) across all industries to eliminate arbitrary allowance structures and mandates a National Floor level minimum wage below which no state can fix the minimum wages. Key compliance obligations include:

• The 50% Wages Threshold: The code introduces a unified definition of ‘wages’ that includes basic pay, dearness allowance (DA), and retaining allowance must constitute at least 50% of the total Cost to Company (CTC).
• The Allowance Cap: Excluded components (such as HRA, conveyance, bonus and special allowance etc.) cannot cumulatively exceed 50% of the total remuneration. Any access is deemed wages. This directly impacts PF contribution calculation, gratuity computation and bonus eligibility.
• Minimum Wages: Every employer must pay at least the applicable minimum wages as notified by the appropriate government (Central or State). The Code mandates revision of minimum wages every five years. Employers operating in multiple states must track state-specific minimum wage notifications and update payroll accordingly.
• Overtime Treatment: Employers shall pay for every hour or for part of an hour so worked in excess, at an overtime rate which shall not be less than twice the normal rate of wages for all consent-based overtime work.
• Strict Salary Release Deadlines: The employer shall pay or cause to be paid wages to the employees, engaged on –

• daily basis, at the end of the shift;
• weekly basis, on the last working day of the week, that is to say, before the weekly holiday;
• fortnightly basis, before the end of the second day after the end of the fortnight;
• monthly basis, before the expiry of the seventh day of the succeeding month.

 

2. The Code on Social Security, 2020: Expanded Welfare and Gratuity Re-fits

The Social Security Code (SSC) modernizes benefit delivery while placing stringent time blocks on statutory investigations. It is arguably the most impactful of the four codes for employment, as it expands the ambit of social security to gig workers, platform workers and the unorganized sector, while also amending the provision governing EPF, ESI, gratuity & maternity benefits.

• Fixed-Term Gratuity Pro-Rata: Fixed-term (contract) employees are now eligible for pro-rata gratuity after completing just 1 year of continuous service, even if they have not completed five years of continuous service. This eliminates the previous irregularity where short-tenure fixed-term employees were excluded from gratuity.
• Employees Provident Fund (EPF): The SSC retains the EPF framework but aligns with the definition of wages under the Code on Wages, 2019, meaning the PF contributions must be calculated on the expanded wage base.
• Reduced Litigation Deposits: To appeal an order before the EPFO Tribunal, employers are required to deposit only 25% of the disputed amount, a significant reduction from the prior 75% in The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
• Maternity Benefits: The SSC preserve the 26-week paid maternity leave and additionally, it mandates the provision of creche facilities for establishments with 50 or more employees and enable the government to extend maternity benefits to home-based workers.

 

3. The Industrial Relations Code, 2020: Operational Redefinitions

The Industrial Relations Code, 2020 completely adjusts the parameters of workplace handling and dispute systems.

• Standing Orders Threshold: The mandatory requirement to formulate and certify Model Standing Orders now applies only to establishments with 300 or more workers, offering major administrative relief to MSMEs. Establishment below this threshold may adopt a model standing order notified by government. The Certified standing orders must cover terms of employment, working hours, disciplinary proceedings, and governance redressal.
• Trade Unions: The code introduces a new concept of – Sole Negotiating Union – Where only one Trade Union of workers registered under the code is functioning in an industrial establishment, then employer may recognise such Trade Union as sole negotiating union of the workers.

If more than one Trade Union of workers registered under the code then, the Trade Union having fifty-one per cent or more workers on the muster roll of that industrial establishment, then employer may recognise such Trade Union as sole negotiating union of the workers.

• Direct Tribunal Access: Workers can now approach Industrial Tribunals directly after a failed conciliation, completely bypassing long-drawn government referral methods.

4. The Occupational Safety, Health and Working Conditions Code, 2020

The OSH Code, 2020 consolidates compliance by replacing a mountain of scattered state and central permits with a unified filing platform and it expands the definition of establishment and introduces uniform norms for working hours, safety & contractor regulation.

• The Single-Window Paradigm: Multiple overlapping licenses and registrations are replaced by a single electronic registration, single operating license, and single annual return.
• Working hours: No worker shall be required to work for more than 8 hours a day and 48 hours a week. Overtime is permissible up to 144 hours per quarter with double rate overtime wages.
• Gender-Neutral Workplace Access: Women are legally permitted to work night shifts across all sectors, including underground mining and hazardous operations, subject to explicit written consent and prescribed safety protocols (CCTV, secure transport).
• Mandatory Safety Committees: Factories employing 500 or more workers must appoint a qualified safety officer. The Safety Committee shall consist of an equal number of members representing the employer and the workers, which shall not exceed twenty. The committee reviews safety measures and reports on accidental trends.
• Free Annual Health Check-ups: Every employer of dock work, building or other construction work shall arrange to conduct free of cost medical examinations for employee, who has completed forty years of age.
• Mandatory Appointment Letters: Every employer is legally obligated to issue formal, standardized appointment letters to all workers upon hiring to establish a clear employment history.

Conclusion: The Transition Role of PCS

The four new labour codes mark the biggest shift in India’s employment laws in decades. By replacing a strict, punitive system with a guidance-based model, the government is putting the responsibility for compliance directly on businesses. Companies can no longer afford to sit back and wait while individual states finalize their local guidelines.

To prevent operational disruptions, management and Company Secretaries must take immediate action. This means restructuring salary setups to meet new wage definitions, upgrading digital tracking tools, and implementing stronger safety protocols for women. Ultimately, true compliance is no longer just about passing inspections, it is about building a modern, self-regulated workplace.

 

For any further query or consultations, please connect with us:

J. K. Gupta & Associates

(Company Secretaries & Insolvency Professionals)

Email: cs@jkgupta.com; Mobile: 9953887741

Delhi || Noida

www.jkgupta.com

Special Exemptions and Privileges Available to Small Companies under the Companies Act, 2013

 

Introduction

Every successful business begins with a vision but sustaining that vision requires a regulatory framework that supports growth rather than hinders it. Recognizing this reality, the Companies Act, 2013 offers a simplified compliance framework for small companies, allowing entrepreneurs to focus more on growing their businesses and less on navigating regulatory hurdles. These special exemptions and privileges strike a balance between ensuring corporate accountability and promoting ease of doing business, making the corporate journey more manageable for smaller enterprises.

Meaning of Small Company

Under Section 2(85) of the Companies Act, 2013, a “small company” is defined as any company, other than a public company, that satisfies both of the following criteria

 Paid-up Share Capital: Does not exceed ₹10 crore.

 Turnover: For the immediately preceding financial year does not exceed ₹100 crore

Mandatory Exclusions

Even if a company meets the capital and turnover thresholds above, it cannot be classified as a small company if it is:

• A Public Company
• A Holding Company or a Subsidiary Company
• A Company registered under Section 8 (Non-profit organizations)
• A company or body corporate governed by any Special Act

 

 Major Privileges and Exemptions Available to Small Companies

1. Only Two Board Meetings in a Year

As per Section 173(5) of the Companies Act, 2013, A Small Company is required to hold only one Board Meeting in each half of the calendar year, with a minimum gap of 90 days between the meetings.

2. Cash Flow Statement Not Mandatory

As per Section 2(40) of the Companies Act, 2013, Financial Statements of a Small Company are not required to include a Cash Flow Statement.

3. Abridged Board’s Report

As per Section 134 of the Companies Act, 2013 read with Rule 8A of the Companies (Accounts) Rules, 2014, Small Companies are permitted to prepare an abridged Board’s Report instead of a detailed report.

4. Lesser Penalty for Non-Compliance

As per Section 446B of the Companies Act, 2013, Notwithstanding anything contained in this Act,  if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a  and one lakh rupees in case of an  or any other person, as the case may be.

5. Annual Return in Simplified Form

As per Section 92 of the Companies Act, 2013, Small Companies are required to file their Annual Return in Form MGT-7A instead of Form MGT-7.

6. No Mandatory Rotation of Auditors

As per Section 139(2) of the Companies Act, 2013, The provisions relating to mandatory rotation of auditors are not applicable to Small Companies.

     7. Exemption From Dematerialization of Securities

Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, mandates that every private company, other than a small company, shall issue and hold its securities only in dematerialized form and facilitate dematerialization.

Accordingly, small companies are expressly exempt from the mandatory dematerialization requirements under Rule 9B.

8. Fast Track Merger

As per Section 233 of the Companies Act, 2013, A merger between two or more small companies or a holding company and its wholly owned subsidiary or such other class or classes of Companies as may be prescribed may be carried out under the fast-track merger process without following the more elaborate merger procedure applicable to other companies.

9. No Mandatory Independent Directors Requirement

Small companies are not required to appoint independent directors as the only the listed company and the public companies which are covered under the prescribed limits are required to appoint independent director.

10. Exemption from Appointment of Key Managerial Personnel (KMP)

As per Section 203 of the Companies Act, 2013, Small companies are not required to appoint Whole-Time Key Managerial Personnel such as:

• Managing Director, or CEO or Manager and in their absence, a Whole-Time Director
• Company Secretary; and
• Chief Financial Officer

11. No Mandatory Compliance with Managerial Remuneration Limits

As per Section 197 of the Companies Act, 2013, Small companies are generally outside the strict framework of managerial remuneration restrictions applicable to public companies.

12. No Mandatory Requirement of Women Director

Unlike certain classes of companies, small companies are not required to appoint a woman director under Section 149(1).

13. Exemption from Corporate Governance Committees

Small companies are not required to constitute:

• Audit Committee
• Nomination and Remuneration Committee
• Risk Management Committee

Conclusion

The Companies Act, 2013 recognizes the unique challenges faced by small companies and provides them with several exemptions and procedural relaxations to promote ease of doing business. These benefits reduce compliance costs, simplify governance, and enable businesses to focus on growth while ensuring essential legal compliance. However, companies must regularly assess their eligibility for small company status, as these privileges are available only so long as they continue to satisfy the prescribed criteria.

 

For any further query or consultations, please connect with us:

J. K. Gupta & Associates

(Company Secretaries & Insolvency Professionals)

Email: cs@jkgupta.com; Mobile: 9953887741

Delhi || Noida

www.jkgupta.com

 

 

 

 

 

 

EMPLOYEE STOCK OPTION PLANS (ESOPs)

APPLICABLE LAWS AND PROVISIONS

The Companies Act, 2013, governs ESOPs by laying down the basic rules for how companies can grant stock options to their employees. Section 62(1)(b) read with Rule 8 of Companies (Share Capital and Debentures) Rules, 2014 authorizes companies to issue ESOP’S to employees, directors or officers ensuring shareholders’ approval. SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 also need to be followed (Listed Companies)

 

INTRODUCTION

ESOP (Employee stock option plans) is a corporate benefit plan designed to reward and retain employees in the company. ESOP provides employees with an opportunity to acquire a share in the wealth of the company at concessional rate. Unlike traditional salary or cash bonuses, ESOPs provide employees with equity-linked rewards, which creates a sense of belonging and alignment with the company’s long-term objectives. ESOP’s also acts as a golden handcuff to employees because they are intentionally structured to tie an employee’s financial future to the company.

 

PROCEDURE OF ISSUANCE OF ESOP’S

Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 governs the issuance of ESOP.

• Verify whether the company’s Article of Association (AOA) authorizes the issuance of Employee Stock Option Plans (ESOPs). If explicit authorization is lacking, the company must amend the AOA by obtaining shareholder approval in a general meeting.
• Formulate the comprehensive ESOP Scheme document, ensuring it clearly defines core terms such as eligibility criteria, vesting schedules, and the exercise period.
• Convene a meeting of the Board of Directors to pass a board resolution approving the draft ESOP Scheme and authorizing the issuance of notice to call an Extraordinary General Meeting (EGM).
• Hold the general meeting and pass the special resolution to approve the ESOP scheme.

 

ELIGIBILITY FOR ESOP’S

The extant regulations pertaining to ESOPs lays down some criteria for who eligible employees could be. For instance, Explanation to Rule 12 (1) of Companies (Share Capital and Debentures) Rules, 2014 states that –

For the purposes of clause (b) of sub-section (1) of section 62 and this rule Employee means-

(a) a permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole-time director or not but excluding an independent director; or (c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside company but does not include–

(i) an employee who is a promoter or a person belonging to the promoter group; or

(ii) a director who either himself or through his relative or through anybody, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.”

 

EXECUTION OF ESOP’S

• Grant the options: Issue formal grant letters to eligible employees offering them a specific number of options at a predetermined exercise price.

 

• Vesting Period: Upon completion of the vesting period, employees fulfill the tenure requirement and acquire the right to purchase the shares.

 

• Exercise and Allotment: Employees submit their exercise application and pay the required exercise price, after which the Board of Directors convene Board meeting to formally allot the shares.

 

• Filing of Form PAS-3 allotment of shares: The company must file the Return of Allotment with the Registrar of Companies (ROC) within 30 days from the date of allotment.

 

TYPES OF ESOP’S

1. Employee Stock Option Scheme (ESOS) – This is the most common type of ESOP. An employee stock option scheme (ESOS) grants an employee the contractual right to acquire corporate shares at a fixed, predetermined exercise price, which is frequently set below current fair market value. Distributed as a strategic component of executive or staff remuneration, these options typically mature over a designated vesting period tied to time-based or performance-driven metrics. Upon exercise, participants enjoy full shareholder privileges, including voting entitlements and dividend distributions

 

2. Employee Stock Purchase Plan (ESPP)- An employee stock purchase plan (ESPP) allows employees to purchase company stock at a discounted price and gradually increase their ownership stake in the business through periodic investments. ESPP allows participation in company profits as well, in the form of dividends.

 

3. Restricted Stock Units (RSU’s)- These are a type of ESOP that allow employes to convert RSU’s into company’s share in exchange for a certain number of years working for the company or when specific performance milestone is achieved.

 

4. Stock Appreciation Rights (SARs)– These are a type of ESOP that allows employees to receive payment based on the appreciation of company stock over a certain period. Companies can use SARs to provide employees with stock benefits without diluting their equity.

 

5. Phantom equity plan – A Phantom Equity Plan (PEP) is a type of ESOP that allows employees to receive payment based on the value of the company’s stock without actually owning any shares. Companies provide mock stocks to them that tracks the value and performance of company’s real shares.

 

ROUTES FOR ISSUING ESOP’S

Under Indian law, a Company can issue ESOPs broadly through two routes – the Direct Route and the Trust Route – The choice depending on whether the Company is listed or unlisted and its own preference for administrative simplicity versus flexibility.

Direct Route

 Under the direct route, the company issues stock options directly to eligible employees. Upon the employee’s decision to exercise these options, the company executes a fresh issuance of equity capital. This process increases the total outstanding share capital of the Company, and the employee also becomes the registered shareholder of the company.

Trust Route

 Here the company set up an Employee Welfare Trust (EWT) which acts as an intermediary – holding shares and transferring them to employees upon exercise of options, instead of the Company allotting fresh shares directly. This mechanism eliminates the need for issuance of fresh equity shares, thereby preventing the dilution of the company’s existing equity capital structure. Consequently, this route is widely utilized by listed entities leveraging secondary market liquidity.

 

Governing law (Listed Companies): SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the SEBI Regulations mandate the trust route in specified circumstances, such as secondary market acquisition-based schemes.

Two Sub-methods of funding the trust:

Primary acquisition: the company allots fresh shares to the trust, which then transfers them to employees on exercise.

Secondary acquisition: the trust purchases existing shares from the share’s market/promoters, capped at 2% of the paid-up capital per year and 5% cumulatively and subject to shareholder approval and specific SEBI disclosure norms.

 

It requires trust deed, trustee appointments separate demat account, annual disclosures (for listed entities), and adherence to related party transaction norms since the trust is typically treated as a related party.

As the Trust is structured exclusively as a non-business entity for ESOP administration, it does not possess independent liquidity to fund open-market share acquisitions. Consequently, pursuant to the enabling provisions of Section 67 of the Companies Act, 2013, the company may legally advance loans or provide financial assistance to the Trust, thereby enabling it to acquire and hold the requisite equity shares for subsequent allotment to employee beneficiaries.

 

BENEFITS OF ESOP’s

• Psychological ownership: An ESOP cultivates psychological ownership by tangibly linking an employee’s daily efforts to the company’s financial success and building an emotional investment in the organization.
• Wealth accumulation: ESOP acts as a wealth building engine , especially when combined with compounding stock value. For employees confident in their company’s trajectory, stock option can grow into a significant financial asset over time.
• Enhance company culture: Ownership drives accountability. Teams become more transparent, collaborative , and focus on value creation when everyone has skin in the game.
• Better productivity: Since employees themselves want to gain profits earned by the company , ESOP can boost employee productivity.

 

ESOP IN STARTUP

An ESOP is a benefit that gives employees the right to buy a small part of company’s shares at fixed price in the future which means that if the startup grows and becomes valuable over time, this gives employees a chance to earn extra money on top of their salary.

Startup may offer ESOPs to their promoters, directors and employees without the restrictions on promoter participation that applies to other private companies. Additionally recognized startups can enjoy deferred tax payments of ESOPs.

 

CONCLUSION

ESOP serves as a bridge connecting an employee’s daily contributions to the overarching success of the organization. It is one of the best ways to reward employees, enhance profitability, generate the spirit of ownership and make employees more loyal towards the company. ESOP can act as an emotional investment in the company by the employee. It is a vital internal corporate action which helps to retain talented and skillful employees in the company.

For any further query or consultations, please connect with us:

J. K. Gupta & Associates

(Company Secretaries & Insolvency Professionals)

Email: cs@jkgupta.com; Mobile: 9953887741

Delhi || Noida

www.jkgupta.com

 

NAVIGATING SOCIETY COMPLIANCES IN INDIA: A CORPORATE AND INSTITUTIONAL FRAMEWORK

Introduction

Registered Societies occupy a unique space in India’s legal landscape – they are neither corporations nor partnerships, yet they carry significant legal personality & accountability. Thousands of educational institutions, charitable organizations or trusts, and other welfare associations are operating as registered society.

As establishing a Society under the Societies Registration Act, 1860 (or corresponding state-specific legislation) is a popular framework for promoting charity, education, science, literature, and the arts. However, securing registration is only the first step to safeguard its legal identity, protect its tax-exempt status, and maintain public trust. Society must adhere to an array of annual and periodic compliances.

Despite their non-commercial character, societies remain bound by a dense web of statutory obligations that the governing boards of such organizations often underestimate. A comprehensive understanding of these statutory responsibilities is indispensable for ensuring legal compliance, maintaining sound governance, and avoiding severe regulatory penalties. Recognizing and diligently fulfilling these obligations not only safeguards society from legal repercussions but also reinforces its credibility, accountability, and institutional integrity.

This article provides a structured overview of society compliance in India, covering registration, governance, financial discipline & consequential obligations.

1. Registration – The Foundation of Legal Existence

A society acquire legal existence only upon registration with the competent authority – typically the Registrar of Societies or sub-divisional magistrate under the applicable state laws. The process involves:

• Drafting and signing of Memorandum of Association (MOA) by at least 7 members (in most states).
• Framing of bye-laws or Rules & Regulations of society.
• Submission of the registration application along with the prescribed fees, affidavit and identity proofs of the founding members.
• Obtain the Certificate of Registration which contains the unique registration number.
• Post registration, obtaining the Permanent Account number (PAN) in the name of society.

2. Governance and Mandated Meetings

Transparent governance forms the backbone of a legally compliant Society. Regulatory bodies look closely at how a Society conducts its internal democracy.

• The Annual General Meeting (AGM): Societies must convene an AGM at least once every calendar year. The primary agenda includes approving the annual budget, passing audited financial statements, and appointing statutory auditors.
• Governing Body Meetings: The executive committee or managing board must meet regularly—typically quarterly—as prescribed by the Society’s own specific Rules and Regulations to oversee operational decisions.
• Notice and Quorum Protocol: Meeting notices, along with the precise agenda, must be served to all registered members within the timeline stipulated in the Byelaws or state amendments usually clear 14 days. Decisions are legally binding only if the mandatory quorum is met.

3. Annual Post-AGM Filings with the Registrar

The execution of institutional meetings must be supplemented by systematic, time-bound reporting to the jurisdictional Registrar of Societies.

• Filing the List of Governing Body: Within 14 days of the AGM (or the timeline specified by state amendments), a complete list containing the names, occupations, and addresses of all elected managing committee members must be submitted to the Registrar.
• Annual Activity Report: A comprehensive narrative report outlining the projects executed, objectives achieved, and utilization of public or private funds during the financial year must accompany the annual filing.

4. Financial Accountability and Audits

Given that Societies frequently manage public funds, philanthropic donations, and government grants, their financial architecture is subject to stringent regulatory oversight or scrutiny.

• Statutory Audit Engagements: Every registered Society must maintain clean, double-entry books of accounts. The annual financial statements comprising the Balance Sheet, Income and Expenditure Statement, and Receipts and Payments Account must be audited by a practicing Chartered Accountant.
• Data Retention and Preservation: Financial vouchers, invoices, bank statements, and general ledgers must be securely preserved at the registered office for the legally mandated period, which is typically eight financial years.

5. Maintenance of Statutory Registers

Societies are legally obligated to maintain updated physical or digital records, which must remain accessible for inspection by regulatory authorities or members.

• Register of Members: A chronological ledger detailing the full name, address, occupation, admission date, and date of cessation for every member of the general body.
• Minutes Books: Formally bound or secure, unalterable digital logs dedicated strictly to record the official resolutions, voting metrics, and minutes of both General Body and Governing Body proceedings.
• Asset Register: A comprehensive, itemized inventory tracking all movable and immovable properties owned, acquired, or disposed of by the institution.

6. Direct and Indirect Tax Compliances

Sustaining the status of a Registered Non-Profit Organization (RNPO) requires continuous, precise interaction with the Central Board of Direct Taxes (CBDT) and indirect tax authorities under the unified framework of the Income Tax Act, 2025.

• Annual Income Tax Returns (Form ITR-7): Irrespective of total income or transaction volume, every RNPO must file its annual return in Form ITR-7 on or before October 31^st of the relevant tax year.
• Maintenance of Section 332 and 354 Registrations: Tax exemptions on institutional income formerly under Section 12A/12AB are now governed by Section 332. Tax deductions accelerated to donors formerly under Section 80G are now governed by Section 354. For smaller entities whose total annual income does not exceed ₹5 Crore, the institutional registration validity under Section 332 is extended to 10 years. For larger entities, the institutional timeline remains 5 years. Donor deduction certificates under Section 354 strictly retain a 5-year renewal window regardless of organization size. Missing these critical timelines triggers a cessation of charitable status, exposing accumulated institutional assets to a severe Exit Tax.
• Goods and Services Tax (GST) Compliance: If an RNPO executes commercial activities, organizes ticketed exhibitions, or renders taxable services exceeding the prescribed state or national thresholds, it must secure GST registration and file regular monthly or quarterly returns. Under Sections 345 and 346 of the new Act, any commercial activity must remain strictly incidental to the core charitable objectives, separate books of accounts must be maintained, and for General Public Utility (GPU) entities, receipts from such activities must not exceed 20% of total receipts to safeguard tax exemptions.

7. Foreign Funding and Global Compliances

Organizations looking beyond domestic borders for financial aid, grants, or endowments fall under the strict preview of international and national security regulations.

• FCRA Registration or Prior Permission: A Society is legally prohibited from accepting foreign hospitality or financial contributions without obtaining valid registration or explicit prior permission under the Foreign Contribution (Regulation) Act.
• Annual Form FC-4 Filings: Entities holding active FCRA designations must electronically submit an annual return via Form FC-4. This must be accompanied by an exclusive audited financial statement of foreign funds within nine months of the closing of the financial year on or before December 31^st.

Conclusion: The Legal Risks of Non-Compliance

Neglecting these statutory obligations exposes an institution to severe regulatory and operational risks. The Registrar of Societies and allied tax authorities hold the power to impose financial penalties, suspend digital filing access, revoke tax-exempt status, and, in cases of chronic non-compliance, strike the entity off the register.

Given the complex intersections of state-specific society laws, central direct tax provisions, and time-sensitive renewal structures, professional legal and financial oversight is highly recommended to ensure the long-term compliance of your institution.

For any further query or consultations, please connect with us:

J. K. Gupta & Associates

(Company Secretaries & Insolvency Professionals)

Email: cs@jkgupta.com; Mobile: 9953887741

Delhi || Noida

www.jkgupta.com

Conversion of Society into Company

Society is a non-profit organization; often registered and governed under the Societies Registration Act, 1860, which may be formed for literary, scientific, charitable, or similar purposes. Minimum 7 persons are required for formation of a society.

While societies registered under the Societies Registration Act, 1860, are distinct from corporate bodies governed by the Company Act, 2013, they still are a separate legal entity and possess a distinct legal framework.

Societies are similar to Section 8 companies in terms of the purpose of formation but have limited scope in operations and fundraising.

For a local, domestic, low administration and less compliant purpose, societies are the best option but for high credibility, more fundraising and national or international scope, a Section 8 company must be preferred.

How a Society Registered Under a Different Act Convert into a Section 8 Company?

At first glance, the idea that a society formed under an entirely different statute can be converted into a Section 8 company may seem unusual or even unnatural. A society is typically registered under a separate legislative framework with its own governing structure, compliance requirements, and regulatory philosophy. On the other hand, a Section 8 company is incorporated under the Companies Act, 2013, and is subject to a more structured corporate governance regime. The apparent difference in their legal origins often raises the question: how can an entity created under one law seamlessly transition into another?

However, what may appear unconventional is, in fact, a legally recognized and well-regulated process. The legislature, acknowledging the evolving needs of non-profit and charitable organizations, has deliberately provided a mechanism for such conversion. Regulators have laid down a structured procedure within the Companies Act, 2013, enabling societies and other eligible entities to register themselves as Section 8 companies, provided they comply with the prescribed conditions and procedural requirements Provided under the Companies Act 2013. This ensures continuity of objectives while bringing the organization within the corporate regulatory framework.

The rationale behind permitting such conversion is practical and policy driven. Many societies, over time, expand their scale of operations, funding sources, and stakeholder engagement. Transitioning into a Section 8 company often enhances credibility, improves governance standards, and facilitates better regulatory oversight. Thus, rather than being an unnatural shift, the conversion reflects a structured legal evolution from one recognized form of organization to another.

Further, under the provisions of conversion of Companies Act, 2013, the term “Company” includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force.  The word company is broad enough to accommodate such transitions.

Therefore, the conversion of a society into a Section 8 company is not an anomaly but a legally sanctioned transformation supported by the statutory framework itself.

A registered society can be converted into a Section 8 Company limited by Guarantee by following the prescribed legal process governed under provisions of Companies Act 2013. However, this involves several steps, approvals, and documentation.

A smooth conversion process requires multiple steps and compliances with both societies and company laws.

 

Conclusion:

The conversion of a registered society into a Section 8 company is a big step for organizations to formalize their structure, be more recognized and access more extensive funding opportunities. Under the Companies Act, 2013, this process brings numerous advantages. By following the outlined steps and staying compliant with MCA requirements, societies can convert into a Section 8 company smoothly and benefit from a stable and recognized legal structure to achieve their charitable mission.

 

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INTRODUCTION

Section 8 of the Companies Act, 2013 provides for a mechanism through which an Association can be registered as a Company, if such association is formed for promoting commerce, art, science, sports, education, research, social welfare, Charity, religion, protection of environment or any other useful object and intends to apply its profits/income in promoting its objects. The objective of this provision is to provide corporate personality to such Associations but at the same time exempting them from some of the cumbersome legal requirements. Section 8 companies also plays very important role in compliance of the provisions of corporate social responsibility. Under the provisions of Section 8 of the Companies Act, 2013, a company can also be formed for non-profit objectives. These may not be charitable. These companies are also allowed to drop the words ‘limited’ or ‘private limited’ from their names. The promoters while deciding whether to register themselves as a society or as section 8 company may keep the following distinctive feature in mind:

 WHO CAN FORM A SECTION 8 COMPANY

• Any two or more persons or association of persons (including a partnership firm)
• Any existing company

Here it is important to mention that One Person Company cannot be a Section 8 Company. (Rule 3(5)) of Company Incorporation Rules.

PROCEDURE FOR INCORPORATION OF SECTION 8 COMPANY

1. Obtain Digital Signatures

Nowadays various document prescribed under the Companies Act, 2013, are required to be filed with the digital signature (DSC) of the Managing Director or Director or Manager or Secretary of the Company, therefore, it is compulsorily required to Obtain a Class II Digital Signature Certificate from authorized DSC issuing Company for at least one director to sign the E-forms related to incorporate like form INC.1 and other documents.

2. Obtain Director Identification Number

 As per 153 of the Companies Act, 2013, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number in form DIR.3 to the Central Government in such form and manner and along with such fees as may be prescribed.

Therefore, before submission of e-Form INC.1 for availability of name, all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtained.

3. Name availability for proposed company

 As per section 4(4) read with Rule-9 of Companies (Incorporation) Rules, 2014, application for the reservation/availability of name shall be in Form no. INC.1 along with prescribed fee of Rs. 1,000/-. In selection of Company name should be in accordance with name guidelines given in Rule-8 of Companies (Incorporation) Rules, 2014. The name will be valid for a period of 20 Days from the date on which the application for Reservation was made. However, Registrar can extend the same on application for extension by the applicant. After approval of name ROC will issue a Name availability letter w.r.t. approval for availability of name for a proposed company.

4. Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA)

 Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match the objects shown in e-Form INC.1. These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the experts and the other object clause should be drafted in a very broader sense. The memorandum of association of the proposed company shall be in Form No.INC.13 and Articles of Association in  Form INC 31.

5. License under section 8 for new companies with charitable objects

A person or an association of persons (hereinafter referred to in this rule as “the proposed company”), desirous of incorporating a company with limited liability under sub-section (1) of section 8without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”, shall make an application in SPICe+ Simplified Proforma for Incorporating company Electronically Plus: INC-32) along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 to the Registrar for a license under sub-section (1) of section 8.

• The memorandum of association of the proposed company shall be in Form No.INC.13.
• The application filed under sub-rule (1) shall be accompanied by the following documents, namely.
• The memorandum and articles of association of the proposed company.
• The declaration by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice, that  [the memorandum] and articles of association have been drawn up in conformity with the provisions of section 8and rules made thereunder and that all the requirements of the Act and the rules made thereunder relating to registration of the company under section 8 and matters incidental or supplemental thereto have been complied with;
• An estimate of the future annual income and expenditure of the company for the next three years, specifying the sources of the income and the objects of the expenditure.
• The declaration by each of the persons making the application.
• A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government.
• The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies.

 

REVOCATION OF LICENSE

License issued under section 8 can be revoked on account of non-compliance of any of the provisions relating to the grant of the License and conditions of the said license. Central Government has power to revoke the license granted to a company under section 8 of the Act. Sub-section (6) of the section 8 of the act states that the Central Government may, by order, revoke the license granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a license is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest.

The central Government, without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word “Limited” or the words “Private Limited”, as the case may be, to its name and thereupon the Registrar shall, without prejudice to any action that may be taken, on application, in Form No. INC.20 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 to convert its status and change of name accordingly.

Where a license is revoked under sub-section (6), the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section:

Where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

• If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to [“Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016“]

 

• A company registered under this section shall amalgamate only with another company registered under this section and having similar objects.

CONVERSION OF SECTION 8 COMPANY INTO ANY OTHER COMPANY

A company registered under section 8 of the act can convert itself into a company of any other class or kind. To convert, the company needs to comply with the below mentioned procedure.

A company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion.

The explanatory statement annexed to the notice convening the general meeting shall set out in detail the reasons for opting for such conversion including the following:

• Date of incorporation of the company.
• The principal objects of the company as set out in the memorandum of association.
• Reasons as to why the activities for achieving the objects of the company cannot be carried on in the current structure i.e. as a section 8 company.
• If the principal/main objects of the company are proposed to be altered, what would be the altered objects and the reasons for the alteration.
• What are the privileges/concessions currently enjoyed by the company, such as tax exemptions, approvals for receiving donations/contributions including foreign contributions, land and other immovable properties, if any, that were acquired by the company at concessional rates/prices or gratuitously and, if so, the market prices prevalent at the time of acquisition and the price that was paid by the company, details of any donations or bequests received by the company with conditions attached to their utilization etc.
• What would be the impact of the proposed conversion on the members of the company including details of any benefits that may accrue to the members as a result of the conversion.

A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT.14 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 and then the company shall file an application in Form No. INC.18 with the Regional Director with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a company of any other kind and a copy of the same application shall also be filed with the Registrar.

The company shall, within a week from the date of submitting the application to the Regional Director, publish a notice at its own expense, and a copy of the notice, as published, shall be sent forthwith to the Regional Director. The said notice shall be in Form No. INC.19 and shall be published.

• At least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district.
• on the website of the company, if any, and as may further be notified/directed by the Central Government.

– The company shall send a copy of the notice, simultaneously with its publication, together with a copy of the application and all attachments by registered post or hand delivery, to the Chief Commissioner of Income Tax having jurisdiction over the company, Income Tax Officer who has jurisdiction over the company, the Charity Commissioner, the Chief Secretary of the State in which the registered office of the company is situated, any organization or Department of the Central Government or State Government or other authority under whose jurisdiction the company has been operating. If any of these authorities wish to make any representation to the Regional Director, it shall do so within sixty days of the receipt of the notice.

– Copy of proof of serving such notice shall be attached to the application.

– The Board of directors shall give a declaration to the effect that no portion of the income or property of the company has been or shall be paid or transferred directly or indirectly by way of dividend or bonus or otherwise to persons who are or have been members of the company or to any one or more of them or to any persons claiming through any one or more of them.

Where the company has obtained any special status, privilege, exemption, benefit or grant(s) from any authority such as Income Tax Department, Charity Commissioner or any organization or Department of Central Government, State Government, Municipal Body or any recognized authority, a “No Objection Certificate” must be obtained, if required under the terms of the said special status, privilege, exemption, benefit or grant(s) from the concerned authority and filed with the Regional Director, along with the application.

The company should have filed all its financial statements and Annual Returns up to the financial year preceding the submission of the application to the Regional Director and all other returns required to be filed under the Act up to the date of submitting the application to the Regional Director and in the event the application is made after the expiry of three months from the date of preceding financial year to which the financial statement has been filed, a statement of the financial position duly certified by chartered accountant made up to a date not preceding thirty days of filing the application shall be attached.

The company shall attach with the application a certificate from practicing Chartered Accountant/ Company Secretary in practice/ Cost Accountant certifying that the conditions laid down in the Act and these rules relating to conversion of a company registered under section 8 into any other kind of company, have been complied with.

The Regional Director may require the applicant to furnish the approval or concurrence of any particular authority for grant of his approval for the conversion.

On receipt of the application, and on being satisfied, the Regional Director shall issue an order approving the conversion of the company into a company of any other kind subject to such terms and conditions as may be imposed in the facts and circumstances of each case including the following conditions:

• The company shall give up and shall not claim, with effect from the date its conversion takes effect, any special status, exemptions or privileges that it enjoyed by virtue of having been registered under the provisions of section 8;
• If the company had acquired any immovable property free of cost or at a concessional cost from any government or authority, it may be required to pay the difference between the cost at which it acquired such property and the market price of such property at the time of conversion either to the government or to the authority that provided the immovable property;
• Any accumulated profit or unutilized income of the company brought forward from previous years shall be first utilized to settle all outstanding statutory dues, amounts due to lenders claims of creditors, suppliers, service providers and others including employees and lastly any loans advanced by the promoters or members or any other amounts due to them and the balance, if any, shall be transferred to the Investor Education and Protection Fund within thirty days of receiving the approval for conversion; Before imposing the conditions or rejecting the application, the company shall be given a reasonable opportunity of being heard by the Regional Director.

 

On receipt of the approval of the Regional Director

The company shall convene a general meeting of its members to pass a special resolution for amending its memorandum of association and articles of association as required under the Act consequent to the conversion of the section 8 Company into a company of any other kind and thereafter shall file with the registrar a certified copy of the approval of the Regional Director within thirty days from the date of receipt of the order in Form No. Inc.20 along with the following documents:-

 

• Amended e-memorandum of association and e-articles of association of the company.
• A declaration by the directors that the conditions, if any imposed by the Regional Director have been fully complied with.

On receipt of the required documents, the Registrar shall register the documents and issue the fresh Certificate of Incorporation.

 

CONVERSION OF ANY OTHER CLASS OF COMPANY INTO SECTION 8 COMPANY

 

A Limited Company, Subject to some conditions is allowed to convert itself into Section 8 Company in terms of provisions contained under Section 8(5) of the Companies Act, 2013. To convert, the company needs to comply with the below mentioned procedure  

The new set of Memorandum of Association (in e-form INC-13) and Articles of Association should be adopted by passing Special Resolution in the Extraordinary General Meeting (EGM) after proposing it in the Board Meeting by passing Board Resolution.

A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT.14 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 and then the company shall file an application in Form No. INC.12 with the ROC with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a Section 8 Company and a copy of the same application shall also be filed with the Registrar.

• the e-Memorandum of Association and e-Articles of Association of the company;
• the declaration by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in Practice, that the memorandum and articles of association have been drawn up in conformity with the provisions of section 8 of the Act and rules made thereunder and that all the requirements of the Act and the rules made thereunder;
• a statement showing in detail the assets (with the values thereof), and the liabilities of the company, as on the date of the application or within thirty days preceding that date;
• the certified copy of the resolution passed in general or board meetings approving registration of the company under section 8 of the Act; and
• a declaration by each of the persons making the application

 

Further as per form INC -12, the following would also be required

• Estimation of future income and expenditure for the next three years

 

The company shall, within a week from the date of submitting the application to the Registrar, publish a notice at its own expense, and a copy of the notice, as published, shall be sent forthwith to the Registrar. The said notice shall be in Form No. INC.26 and shall be published.

• At least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district.
• on the website of the company, if any, and as may further be notified/directed by the Central Government.

The license for Section 8 Company shall be issued by ROC in INC-16 or INC-17, as the case may be.

• The Registrar may direct the company to insert in its MOA/AOA, such conditions of the license, as may be specified in this behalf.

EXEMPTIONS TO SECTION 8 COMPANIES UNDER COMPANIES ACT 2013
(vide Notification dated 05.06.2015)

 

•  Provision of Section 2(24) relating to Company Secretary shall not apply to   Section 8 Company
• The provision given under Section 2(68) and 2(71) relating to requirement of minimum paid up share capital of Private Company and Public Company respectively shall not apply to Section 8 Company.
• A general Meeting of Section 8 Company may be called by giving not less than clear fourteen days’ notice.
• In sub section 2 of section 96, the following clause has been added before the explanation and after the proviso:

“Provided further that the time, date and place of each annual general meeting are decided upon beforehand by the board of directors having regard to the directions, if any, given in this regard by the company in its general meeting.

• The provision contained under Section 118 relating to Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot shall not be applicable to Section 8 Company.

Except that minute, may be recorded within thirty days the conclusion of every meeting in case of Companies where the articles of association provide for confirmation of minute by circulation.

• A copy of the financial statements, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than fourteen days before the date of the meeting
• Provision Contained under Section 149(1) and first proviso to Subsection (1) which is relating to minimum and maximum number of Directors in a Company shall not applicable to Section 8 Company.
• Provision Contained under following:
• Section 149(4) relating to number of Independent Directors
• Section 149(5) relating to time period provided for compliance of Section 149(4)
• Section 149(6) relating to definition of Independent director
• Section 149(7) relating to declaration by Independent director
• Section 149(8) relating to Compliance of provision specified under Schedule IV
• Section 149(9) relating to remuneration of Independent director
• Section 149(10) and 149(11) relating to term of Independent director
• Section 149(12)(i) relating to liability of Independent director
• Section 149(13) relating to non-applicability of section 152(6) and 152(7) to appointment of Independent director

Shall not be applicable to Section 8 Company

 

• The provision contained under Section 150 relating to Manner of Selection of Independent director shall not be applicable to Section 8 Company.
• Provision contained under Section 152(5) relating to Consent of director to hold the office as director shall not be applicable to Section 8 Company.
• Provision contained under Section 160 relating to the right of persons other than retiring director to stand for directorship shall not be applicable to Section 8 Company whose articles provide for election of directors by ballot.
• Provision contained under Section 165(1) relating to the number of directorships.
• Provision contained under Section 173(1) relating to Meetings of Board shall apply to the extent that the Board of Directors of Section 8 Company shall hold at least one meeting within every six calendar months.
• The quorum for meetings of the Board shall be either eight members or twenty five percent of its total strength whichever is less.

Provided that the quorum shall not be less than two members

• The provision contained under Section 177(2) relating to” independent directors forming a majority in Audit Committee” shall not be applicable to Section 8 Company.
• The provisions contained under Section 178 relating to the Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not be applicable to Section 8 Company.
• The Board may decide the following matters by circulation instead of at meeting:

(i) to borrow monies

(ii) to invest the funds of the Company

(iii) to grant loans or give guarantee or provide security in respect of loans

• The provision contained under Section 184(2) relating to disclosure of interest by director shall apply only if the transaction with reference to section 188 on basis of terms and conditions of the contract or arrangement exceeds one lakh rupees
• The provision contained under Section 189 relating to register of contracts or arrangements in which directors are interested shall apply only if the transactions with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

PENAL PROVISIONS

 

Applicable Provisions: Section 8 and 447 of the Act

Sub-section (11) of the section 8 of the act states that if a company makes any default in complying with any of the requirements laid down in this section, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine which shall not be less than ten lakh rupees but which may extend to one crore rupees and the directors and every officer of the company who is in default shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to twenty-five lakh rupees, or with both:

Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447 of the Act.

******

 

INTRODUCTION

The company must have a Board of Directors for the smooth functioning of its affairs. It is the directors under whose supervision, the management team, run the business affairs of the company. A Director may act as Executive or non-executive director of the company.

As per Companies Act, 2013 (Act), a company shall have minimum number of three directors in the case of a public company, two Directors in the case of a private company, and one director in the case of a One Person Company. There shall be a maximum of fifteen directors and that number can be increased beyond fifteen, by passing members special resolution.

Every company shall have at least one resident director who has stayed in India for a total period of not less than one hundred and eighty-two days during the financial year. For the newly incorporated companies for the first financial year the duration will be counted proportionally at the end of the financial year.

In respect of some specified class of companies’ independent director and women director are required to be appointed on the board. In case of the appointment of independent director in General Meeting, an explanatory statement for such appointment should also be annexed with Notice for calling of General Meeting shall include a statement that in the opinion of the board for the fulfillment of the conditions specified in the Act.

An independent director will be appointed for the term for the five years and shall be reappointed after passing the special resolution in General Meeting. The retirement and rotation of the directors does not apply to the Independent Director.

 

1. Appointment of Directors

(Applicable Provisions: Section 149,152,153,154,155,156,157, 158,161 of the Companies Act read with Rule 8, 9, 10, 11 and 12 of Companies (Appointment and Qualification of directors) Rules, 2014)

Every company needs to have Directors to run the affairs of the company in the prescribed manner.

At the time of incorporation of a company, if no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed and in case of a One Person Company an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section 152.

If the paid-up share capital of the company is 100 crore rupees or more or turnover of 300 crore rupees or more, it is required to appoint at least one-woman director on its Board. And if provisions of CSR is applicable to the company it is also required to have at least one independent director to be part of the CSR committee.

As per section 149(4) of the Companie Act, 2013 and rule 4 of Companies (Appointment and qualifications of directors) Rules 2014, in case of listed public company there shall be at least one third of the total directors to be independent director (while calculation any fraction to be rounded of to one). And in case of unlisted public company, it shall have at least two independent directors if any of the following conditions attracted: 1) Paid-up Share Capital of minimum ten crore or 2) Turnover of minimum 100 crore or 3) aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

It should be noted that every director shall be appointed by the company in general meeting except the cases where power has been given to the Board expressly under section 161 of the Companies Act 2013 i.e. Appointment of Additional director, Alternate director and Nominee director, Casual vacancy director.

Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under this Act.

In the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfills the conditions specified in this Act for such an appointment.

A person appointed as a director shall not act as a director unless he gives his consent in writing to hold the office as director to the company in Form No. DIR.2 and such consent has been filed with the Registrar within thirty days of his appointment in Form No. DIR.12 along with the fee as provided in Companies (Registration of Offices and Fees) Rules, 2014.

As per section 152(6) Unless otherwise the Articles provide the two third of the total numbers of the directors of the public company will be liable to be retire by rotation (any fraction while calculation shall be rounded off to 1). One third of rotational director shall retire by rotation at every annual general meeting (while calculation any fraction rounded off to the nearest integer). The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but if directors appointed on the same day, then the retirement will take place by mutual agreement between them and in its absence by lottery method.

For calculation of the number of the directors liable to be retire by rotation, the ‘Total number of the directors’ shall not include the independent director.

2. Appointment of additional director, alternate director and nominee director

(Applicable Provisions: Section 161 of the Act)

The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. Board of Directors of a company may appoint any person as an additional director, who shall hold office up to the date of next annual general meeting.

The Board of Directors of a company may, if so authorized by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for a period of not less than three months from India. It is also important to note that no person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.

Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force. The articles of company should allow the appointment of nominee director. Subject to the articles of a company, the Board may appoint any person as a Director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.

In the case of a public company, if the office of any director appointed by the Company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board: Provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

A person appointed shall not act as a director unless he gives his consent in writing to hold the office as director to the company in Form No. DIR.2 and such consent have been filed with the Registrar within thirty days of his appointment in Form No. DIR.12 along with the fee as provided in Companies (Registration of Offices and Fees) Rules, 2014.     

3. Disclosure of Director’s Interest

(Applicable Provisions: Section 184(1) of the act read with Rule 9(1) of Companies (Meeting of Board & its Powers) Rules, 2014)

         Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in FORM MBP-1.

4. Intimation by Director

(Applicable Provisions: Section 164(2) of the act read with Rule 14 (1) of Companies (Appointment and Qualification of directors) Rules, 2014)

Every director before his appointment and re-appointment shall inform the company concerned     about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8.

Whenever a company receives the information in Form DIR-8, company shall, within thirty days of such receipt, file Form DIR-9 with the Registrar.

5. Resignation of Director

(Applicable Provisions: Section 167 and 168 of the act read with Rule 15 and 16 of Companies (Appointment and Qualification of directors) Rules, 2014)

 

A director may resign from its office by giving a notice with the reasons of resignation in writing to the company. The company shall intimate the same to the Registrar of companies in Form No. DIR.12 within thirty days from the date of receipt of notice of resignation from the director and post the information on its website, if any. The resigning Director may also inform the reason of resignation to registrar in Form DIR-11 within thirty days from the date of his resignation.

 

Where all the directors of a company resign from their offices or vacate their offices under section 167 of the Act, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.

The company shall also place the fact of such resignation in the report of the board of directors to be laid down at the immediately following general meeting of the company.

In case a company has already filed Form DIR-12 with the Registrar, a foreign director of such company resigning from his office may authorize in writing a practicing chartered accountant or cost accountant in practice or company secretary in practice or any other resident director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the resignation.

6. Vacation of office of director

(Applicable Provisions: Section 164 and 167 of the Act.)

The office of a director shall become vacant in case:-

(a)    He incurs any of the disqualifications specified in section 164, which are as below:

• he is of unsound mind and stands so declared by a competent court.
• he is an undischarged insolvent.
• he has applied to be adjudicated as an insolvent and his application is pending.
• he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:

And if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.

• an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force.
• he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
• he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
• he has not complied with sub-section (3) of section 152 relating to holding of Directors Identification number.
• A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified above.

(b)    He is absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board.

(c)    He acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested.

(d)    He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184.

(e)    He becomes disqualified by an order of a court or the Tribunal.

(f)     He is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months.

Provided that the office shall not be vacated by the director in case of orders referred to in clauses (e) and (f)-

(i) for thirty days from the date of conviction or order of disqualification.

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of: or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.]

(g)    He is removed in pursuance of the provisions of this Act.

(h)    He, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to these.

The company has to take the note of the same and hold the board meeting and consider the occurrence of the case/es mentioned in sub-section (1) of the Section 167 and file the form for change in board of director in the Form No. DIR.12 with the Registrar of the companies along with the fee as provided in Companies (Registration of Offices and Fees) Rules, 2014

Where all the directors of a company vacate their offices under any of the disqualifications specified above, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

7. Removal of Director

(Applicable Provisions: Section 169 of the Act.)

A company may by passing ordinary resolution in general meeting remove a director other than the director appointed by National Company Law Tribunal under section 242 and the director appointed by way of proportional representation under section 163 of the Companies Act, 2013.

Further to be noted that an independent director appointed for the second term can be by passing special resolution in the general meeting. The company shall give the opportunity of being heard to a director being removed.

(Concept of special notice to remove the director)

Special notice is required to remove the director or to appoint somebody in his place. On receipt of notice of a resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting. The company shall issue notice for holding general meeting of shareholders and the representation if any received from the director, to be removed, may also be sent with notice if time allowed to do so and if a copy of the representation is not sent as aforesaid due to insufficient time or for the company’s default, the director may without prejudice to his right to be heard orally require that the representation shall be read out at the meeting.

 

copy of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the tribunal is satisfied that the rights conferred to director are being abused to secure needless publicity for defamatory matter; and the tribunal may order the company’s costs on the application to be paid in whole or in part by the director notwithstanding that he is not a party to it.

The Company shall, within 30 days of passing of resolution, intimate the Registrar in Form No. DIR.12 along with such fee as may be provided in Companies (Registration of Offices and Fees) Rules, 2014 and post the information on its website, if any.

A vacancy created by the removal of a director, if he had been appointed by the company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given.

Here in this article, provisions relating to Appointment, Resignation and Removal of company directors has been discussed and summed up. Hope the article will be helpful to the readers and will help them in compliance of the related provisions.

 

The management of the affairs of a company is vested with the Board of Directors. Subject to the restriction of the Companies Act, the Board can delegate any of its authority to its subordinate committee or any other individual. Here, in this article, we will discuss the Roles, Responsibilities and Powers of the Board of Directors as enumerated in the Companies Act.

 

MEETINGS OF BOARD OF DIRECTORS

 

       {APPLICABLE PROVISIONS: Section 173 and 175 of the Act read with rule 3, 4 and 5 of Companies (Meetings of Board and its Powers) Rules, 2014 and Secretarial Standard-1}

 

Meeting: Important Deadlines

 

Every Company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation except in case of One Person Company and shall hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board.

 

One Person Company, Small Companies and Dormant Companies are required to conduct one meeting in each half of the Calendar year and the gap between the two meetings should not be less than Ninety days.

 

Quorum and Adjournment provisions

 

The quorum for a meeting of the Board of Directors of a company as prescribed by Section 174 of the Companies Act 2013 shall be one third of its total strength or two directors, whichever is higher, but if the Articles of Association of a Company prescribe a higher strength of Quorum, then the requirements of the Quorum shall be subject to the Articles of Association. The participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum and if  a meeting of the board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.

The quorum should be ascertained before starting the meeting for valid transaction of the business to be discussed at the meeting. And any fraction of a number shall be rounded off & deemed as one and Quorum shall be present not only at the time of commencement of the Meeting but also while transacting business.

Director shall not be counted for Quorum in respect of an item in which he is interested, and he shall not be present, whether physically or through Electronic Mode, during discussions and voting on such item.

 

Calling of the Meeting: Notice & Agenda

 

A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means

In case the company sends the Notice by speed post or by registered post or by courier, an additional two days shall be added for the service of Notice.

The Agenda, setting out the business to be transacted at the Meeting, and Notes on Agenda shall be given to the Directors at least seven days before the date of the Meeting, unless the Articles prescribe a longer period. (SS-1)

To transact urgent business, the Notice, Agenda and Notes on Agenda may be given at a shorter period of time than stated above, if at least one Independent Director, if any, shall be present at such Meeting.

 

If no Independent Director is present, decisions taken at such a Meeting shall be circulated to all the Directors and shall be final only on ratification thereof by at least one Independent Director, if any and In case the company does not have an Independent Director, the decisions shall be final only on ratification thereof by a majority of the Directors of the company, unless such decisions were approved at the Meeting itself by a majority of Directors of the company. (SS-1)

 

Participation through Video Conferencing: Keeping up on the Technological Front.

 

The Board of Directors can Participate in the Meeting of board of Directors either himself or through video conferencing or other audio-visual means, as prescribed under the act, which are capable of recording and recognizing the participation of the directors and of recording and storing the proceedings of such meetings along with date and time.

 

And the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio-visual means.

 

Every director of the company shall attend at least one Board meeting in the financial year           of the company.

The office of a Director shall become vacant in case the Director absents himself from all the Meetings of the Board held during a period of twelve months with or without seeking leave of absence of the Board. (SS-1)

Disclosure of Interest (Section 184)

Every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a notice in writing in Form No. MBP-1

 

Secretarial Standards: Applicability

 

Every company shall observe Secretarial Standards with respect to General and Board Meetings specified by ICSI and approved by the Central Government. Duty is cast on the Company Secretary to ensure that the company complies with the applicable Secretarial Standards.

 

POWERS OF THE BOARD

 

{APPLICABLE PROVISIONS: Section 179 of the Act read with rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014}

 

Discretion of the Board

The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do but in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in the Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting but the Board shall not exercise any power or do any act or thing which is directed or required, whether under the Companies Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting only. And no regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.

 

Powers to be exercised by Board only at meeting

The Act mandates that the Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board: –

1. The power to make calls on shares holders in respect of money unpaid on their shares
2. To authorize buy-back of securities under section 68
3. The power to issue securities, including debentures
4. The power to borrow monies
5. The power to invest the funds of the company
6. The power to grant loans or give guarantee or provide security in respect of loans
7. To approve financial statement and the Board’s Report
8. To diversify the business of the company
9. To approve amalgamation, merger or reconstruction
10. To take over a company or acquire a controlling or substantial stake in another company
11. To make political Contribution
12. To Appoint or Remove KMP
13. To Appoint or remove Internal and Secretarial Auditor

 

       Delegation of Authority

However, the Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses d, e and f to the extent specified in the resolution and subject to such conditions as may be imposed

 

RESTRICTIONS ON POWERS OF BOARD

 

{APPLICABLE PROVISIONS: Section 180 of the Act read with Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014}

 

The board of directors is empowered to run the affairs and business of the company in a free manner, but the Companies Act puts certain restrictions on the powers of the Board.

As per the provisions of the Act, the Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely: –

1. To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
2. To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation.
3. To borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business but the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.
4. To remit, or give time for the repayment of, any debt due from a director.

 

Every special resolution passed by the Company in general Meeting in relation to the exercise of the powers referred to in Clause 9(c) of sub section (1) of section 180 shall specify the total amount up to which monies may be borrowed by the Board of directors.

 

Resolution by Circulation

 

The Act requires certain business to be approved only at Meetings of the Board. However, other businesses that require urgent decisions can be approved by means of Resolutions passed by circulation. Resolutions passed by circulation are deemed to be passed at a duly convened Meeting of the Board and have equal authority.

No resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or to all the members of the committee, then in India (not being less in number than the quorum fixed for a meeting of the Board of committee, as the case may be), and to all other directors or members at their usual address in India, and has been approved by such of the directors as are then in India, or by a majority of such of them, as are entitled to vote on the resolution.

The Resolution is considered as passed when it is approved by a majority of the Directors entitled to vote on the Resolution, unless not less than one-third of the total number of Directors for the time being require the Resolution under circulation to be decided at a Meeting.

The Resolution, if passed, shall be deemed to have been passed on the last date specified for signifying assent or dissent by the Directors or the date on which assent from more than two-third of the Directors has been received, whichever is earlier, and shall be effective from that date, if no other effective date is specified in such Resolution.

 

As per SS-1, following is the Illustrative list of items of business which shall not be         passed by circulation and shall be placed before the Board at its Meeting

 

General Business Items

 

• Noting Minutes of Meetings of Audit Committee and other Committees.
• Approving financial statements and the Board’s Report.
• Considering the Compliance Certificate to ensure compliance with the provisions of all the laws applicable to the company.
• Specifying list of laws applicable specifically to the company.
• Appointment of Secretarial Auditors and Internal Auditors.

 

Specific Items

• Borrowing money otherwise than by issue of debentures.
• Investing the funds of the company.
• Granting loans or giving guarantee or providing security in respect of loans.
• Making political contributions.
• Making calls to shareholders in respect of money unpaid on their shares.
• Approving Remuneration of Managing Director, Whole-time Director and Manager.
• Appointment or Removal of Key Managerial Personnel.
• Appointment of a person as a Managing Director / Manager in more than one company.
• Appointment of Director(s) in casual vacancy subject to the provisions in the Articles of the company. To be subsequently approved in the immediate next general meeting.
• According sanction for related party transactions which are not in the ordinary course of business, or which are not on an arm’s length basis.
• Purchase and Sale of subsidiaries/assets which are not in the normal course of business.
• Approve Payment to Director for loss of office.
• Items arising out of separate meeting of the Independent Directors if so, decided by the Independent Directors.

 

Corporate Actions

• Authorize Buy Back of securities
• Issue of securities, including debentures, whether in or outside India.
• Approving amalgamation, merger or reconstruction.
• Diversify the business.
• Takeover another company or acquire controlling or substantial stake in another company.

 

For any queries and legal opinions please contact: 

J. K. Gupta & Associates

257, Vardhaman City Center,

Gulabi Bagh, Near Shakti

Nagar Railway Under Bridge

New Delhi-110052

Phone No- 9953887741/ 9310557569

Email Id: – cs@jkgupta.com