Introduction to Companies Act 2013 and Key Definitions (CA Intermediate)

Understand Introduction to Companies Act 2013 and Key Definitions

Key rules to remember

Key managerial personnel (Sec 2(51))

KMP = CEO or MD or manager + company secretary + whole-time director + CFO + other officer (not more than one level below the directors, in whole-time employment, designated by the Board) + such other officer as may be prescribed

The Board-designated officer must be not more than one level below the directors and in whole-time employment.

Subsidiary company (Sec 2(87))

Subsidiary if holding company (i) controls the composition of the Board, or (ii) exercises or controls more than one-half of the total voting power

Test is control of Board or more than 50% of total voting power. Control through another subsidiary also counts. Holding company is the reverse: a company of which others are subsidiaries.

Associate company (Sec 2(6))

Associate = significant influence, but not a subsidiary; significant influence = control of at least 20% of total voting power, or control of or participation in business decisions under an agreement

Includes a joint venture company. Note 'at least 20%' versus 'more than 50%' for subsidiary.

Small company (Sec 2(85))

Not a public company; paid-up capital ≤ ₹50 lakh (or higher prescribed amount, not more than ₹10 crore) AND turnover ≤ ₹2 crore (or higher prescribed amount, not more than ₹100 crore)

Both conditions must be met. Turnover is taken from the profit and loss account for the immediately preceding financial year. Does not apply to a holding or subsidiary company, a Section 8 company, or a company governed by a special Act. The current prescribed limits are in the Rules; check your updated study material.

Private company (Sec 2(68))

Articles: restrict share transfer + limit members to 200 (except OPC) + prohibit invitation to the public to subscribe for securities

Joint holders count as one member. Employees, and ex-employees who stayed members, are not counted.

Government company (Sec 2(45))

Not less than 51% of paid-up share capital held by Central Government or State Government(s), or both; includes a subsidiary of such a company

The test is 51% or more of paid-up share capital.

Related party: public company limb (Sec 2(76)(v))

Public company in which a director or manager is a director and holds, along with relatives, more than 2% of its paid-up share capital

Both conditions apply: directorship and holding more than 2%.

Financial statement (Sec 2(40))

Balance sheet + profit and loss account (or income and expenditure account) + cash flow statement + statement of changes in equity, if applicable + explanatory notes

OPC, small company and dormant company may not include the cash flow statement.

Foreign company (Sec 2(42))

Incorporated outside India + place of business in India (by itself or through an agent, physically or electronically) + conducts business activity in India in any other manner

Both limbs (a) and (b) must be met.

How to solve Introduction to Companies Act 2013 and Key Definitions questions

1. 1Identify the defined term the facts are testing, for example KMP, subsidiary or small company.
2. 2Write the definition in your own words and cite the clause, such as Section 2(51). Cite only numbers you are sure of.
3. 3List the conditions one by one. Note thresholds like 20%, 51%, 2% or 'more than one-half'.
4. 4Match each fact in the question to a condition. Do the arithmetic where needed, such as voting power or turnover.
5. 5Check the exceptions and provisos, such as persons excluded or entities to which the definition does not apply.
6. 6State a clear conclusion in one line, for example 'Hence X Ltd. is a subsidiary of Y Ltd.'.
7. 7For distinction questions, compare on 3 to 4 points: meaning, test, percentage, and effect.

Quickest way: Threshold and checklist method

Common mistakes in Introduction to Companies Act 2013 and Key Definitions

• Treating a company with exactly 50% voting power as a subsidiary.

  Students remember 'half' but forget the wording.

  Fix: Section 2(87) says more than one-half of total voting power, or control of the Board composition. Exactly 50% alone does not meet the voting test.

• Confusing associate company (20%) with subsidiary (more than 50%).

  Both involve voting power and the figures get mixed up.

  Fix: Remember: associate means significant influence, at least 20%, and it is not a subsidiary. Subsidiary needs Board control or more than 50%.

• Applying the small company limits without checking exclusions.

  Students check only capital and turnover.

  Fix: A small company cannot be a public company, holding company, subsidiary company, Section 8 company, or one governed by a special Act. Also check both capital and turnover.

• Listing the Company Secretary only, or the CFO only, as KMP.

  Memory shortcut.

  Fix: Write the full list: CEO or MD or manager, CS, whole-time director, CFO, Board-designated officer and prescribed officer.

• Saying every director is an officer in default.

  Students read 'officer' loosely.

  Fix: Section 2(60) names specific persons, such as the whole-time director and KMP. Other directors are covered only in listed cases, for example where there is no KMP and the Board has specified them, or where they were aware of the contravention through Board proceedings without objecting, or it happened with their consent or connivance.

• Treating a foreign company as one that merely has Indian shareholders.

  The word 'foreign' misleads.

  Fix: It must be incorporated outside India, have a place of business in India, and conduct business activity in India in any other manner.

Worked examples