You are on page 1of 22

See

discussions, stats, and author profiles for this publication at: http://www.researchgate.net/publication/272300622

Classification of Companies
ARTICLE in SSRN ELECTRONIC JOURNAL JANUARY 2012
DOI: 10.2139/ssrn.2191869

READS

64

1 AUTHOR:
Manjeet Kumar Sahu
University of Petroleum & Energy Studies
7 PUBLICATIONS 0 CITATIONS
SEE PROFILE

Available from: Manjeet Kumar Sahu


Retrieved on: 09 November 2015

CLASSIFICATION OF COMPANIES
Manjeet Kumar Sahu*

Abstract
The growth of economy and increase in the complexity of various business operation have
augmented the scope to classify the companies in various titles. This Article is reflecting upon
the existing and proposed companies under various legislation and tries to identify the various
kinds of companies which are in existence and it has also included those companies which have
been proposed under the companies Bill, 2011. It further discuss about the scope and regulatory
framework of such companies. This Article vividly describes all the possible mode of classifying
companies. The main purpose of classification of companies is to maintain the homogeneity and
apparently regulate those companies with similar legal framework.

Introduction
The word Company has no strictly technical or legal meaning1.The word 'Company' is an
amalgamation of the Latin word 'Com' meaning "with or together" and 'Pains' meaning "bread".
Originally, it referred to a group of persons who took their meals together. A company is nothing
but a group of persons who have come together or who have contributed money for some
common purpose and who have incorporated themselves into a distinct legal entity in the form of
a company for that purpose.
In generalized term, Company is an artificial person created by law and destroyed by law. It is
an association of person to start a business under a legal guidance. The Precise definition of
country varies from country to country. Companies, whether public or private, are an
indispensable part of an economy. They are the modes through which a country grows and
expands worldwide. Their performance is an important parameter of a countries economic
position.
*3rd Year, Int. B.A LL.B(Hons.) , University of Petroleum and Energy Studies
1
Buckley J in Stanley Re,(1906) 1 Ch 131,134

Page 1

Electroniccopy
copyavailable
available at:
at: http://ssrn.com/abstract=2191869
Electronic
http://ssrn.com/abstract=2191869

Lord Justice Lindley2 defined company as an association of many persons who contribute
money or moneys worth to a common stock and employ it for a common purpose. The common
stock so contributed is denoted in money and is the capital of the company. The persons who
contribute it or to whom it belongs are members. The proportion of capital to which each
member is entitled is his share.
In the terms of the Companies Act, 1956 Company means a company registered under this act3.
In common Law, a company is a legal person or legal entity, separate from and capable of
surviving beyond the lives of its members.4
In modern times the functioning of companies has assumed a new role in society5.It has become
the most dominant form of business organization6. It is now accepted on all hands, even in
predominantly capitalist countries that a company is not a property. The traditional view that a
company is the property of its shareholders is now an exploded myth. A company, according to
the new socio-economic thinking, is a social institution having duties and responsibilities
towards the community in which it functions7.
Classification of Companies
The corporate form can take many shapes in order to respond efficiently to the environment.
Company Law should therefore recognize a multiple classification of companies. The criteria for
classification on the basis of the forms is discernible but recognizes that such classification can
never be exhaustive. It is necessary to recognize the potential for diversity in the forms of
companies and rather than seeking to regulate specific aspects of each form, seek to provide for
principles that enable economic inter-action for wealth creation on the basis of clear and widely
accepted principles.
I. On the Basis of Mode of Incorporation, Companies can be classified into three categories.

He was a prolific author widely known for his work on Partnership and company.
3(i) of Companies Act,1956
4
Salomon v. Salomon & Co.,[1895-99] All ER Rep 33. See also, Graf Evans: what is a Company (1910) 26 LQR
259
5
Dr. N.V. Paranjape,COMPANY LAW,(4th Edn.,2010),Central Law Agency, Allahabad at p.35
6
Lee Loevinger,The Law of Free Enterprise, (1949) at p.59
7
P.N. Bhagwati CJI in National Textile Workers Union v. P.R. Ramkrishnan AIR 1983 SC 759 commented upon
the new dimenstions of companies.
3

Page 2

Electroniccopy
copyavailable
available at:
at: http://ssrn.com/abstract=2191869
Electronic
http://ssrn.com/abstract=2191869

Chartered Company: A Company is incorporated by a charter granted by Monarch and is


regulated by that charter. The powers and nature of business of a chartered company are defined
by the charter which incorporates it. A chartered company has wide powers. It can deal with its
property and bind itself to any contracts that any ordinary person can. In case the company
deviates from its business as prescribed by the charted, the Sovereign can annul the latter and
close the company.
Ex.- East India Company came into being by the grant of a Royal Charter. Such Companies does
not exist in India now.
Statutory Company: A Company which is created by a Special Act of the Legislature and is
governed by the provisions of that Act. Such companies do not have any memorandum or
articles of association. They derive their powers from the Acts constituting them and enjoy
certain powers that companies incorporated under the Companies Act have. Alternations in the
powers of such companies can be brought about by legislative amendments.
The provisions of the Companies Act shall apply to these companies also, except in so far as
provisions of the Act are inconsistent with those of such Special Acts8.
These companies are generally formed to meet social needs and not for the purpose of earning
profits.
Ex.- State Bank of India , Industrial Finance Corporation of India are Statutory Companies.
Registered Company: A Company brought into existence by registration of certain documents
under the Companies Act,1956. Such companies come into existence only when they are
registered under the Act and a certificate of incorporation has been issued by the Registrar of
Companies. This is the most popular mode of incorporating a company.

Registered companies may further be divided into three categories on the basis of liability.

i) Companies limited by Shares : The main attribute of limited companies which attracts the
investors is limited liability of the share-holders. The Liability does not fluctuate but limited to
the extent of the unpaid value of such shares9. These types of companies have a share capital and

8
9

. 616 (d) of Companies Act,1956


Supra, note 5 at p.60

Page 3

the liability of each member or the company is limited by the Memorandum to the extent of face
value of share subscribed by him. The amount remaining unpaid on the share can be called up at
any time during the lifetime of the company or at the time of winding up 10. In other words,
during the existence of the company or in the event of winding up, a member can be called upon
to pay the amount remaining unpaid on the shares subscribed by him. Such a company is called
company limited by shares. A company limited by shares may be a public company or a private
company. These are the most popular types of companies.
The Supreme Court has emphasized that the right of a guarantee company to refuse to accept the
transfer by a member of his interest in the company is on a different footing than that of a
company limited by shares.
ii) Companies Limited by Guarantee: These types of companies may or may not have a share
capital. But if it has share capital , it is subject to the same restriction as to reductions as the
capital of a company limited by shares11.Each member promises to pay a fixed sum of money
specified in the Memorandum in the event of liquidation of the company for payment of the
debts and liabilities of the company12.This amount promised by him is called Guarantee. The
Articles of Association of the company state the number of member with which the company is
to be registered13.Such a company is called a company limited by guarantee14. Such companies
depend for their existence on entrance and subscription fees. The liability of the member is
limited to the extent of the guarantee and the face value of the shares subscribed by them, if the
company has a share capital. If it has a share capital, it may be a public company or a private
company.
The amount of guarantee of each member is in the nature of reserve capital. This amount cannot
be called upon except in the event of winding up of a company. Non-trading or non-profit
companies formed to promote culture, art, science, religion, commerce, charity, sports etc. are
generally formed as companies limited by guarantee.

10

S.S. Gulsan, COMPANY LAW,(2nd Edn,2009),Excel Books, New Delhi at p.34


100 of Companies Act,1956
12
13(3) of Companies Act,1956
13
27 (2) of Companies Act,1956; Rajeev Kwatra v. Sunil Khanna,(2006) 129 Comp Cas 373 CLB
14
Supra Note 5 at p.60
11

Page 4

iii) Unlimited Companies : Section 12 gives choice to the promoters to form a company with or
without limited liability15. A company not having any limit on the liability of its members is
called an unlimited company16.The right of limited liability is desirable, but not a necessary
adjunct to incorporation17. An unlimited company may or may not have a share capital. If it has a
share capital it may be a public company or a private company. If the company has a share
capital, the article shall state the amount of share capital with which the company is to be
registered18.The articles of an unlimited company shall state the number of member with which
the company is to be registered19. Section 77 does not apply to the case of an unlimited
company20.
The main disadvantage of an unlimited company is that its members are liable like the partners
of a firm for all its trade debts without any limit .But still, the creditors cannot directly sue the
members.

II. On the basis of number of members a company can be classified as :

1.One person company: With increasing use of information technology and computers,
emergence of the service sector, it is time that the entrepreneurial capabilities of the people are
given an outlet for participation in economic activity. Such economic activity may take place
through the creation of an economic person in the form of a company. Yet it would not be
reasonable to expect that every entrepreneur who is capable of developing his ideas and
participating in the market place should do it through an association of persons. We feel that it is
possible for individuals to operate in the economic domain and contribute effectively. To
facilitate this, the Committee recommends that the law should recognize the formation of a
single person economic entity in the form of One Person Company21.

15

12 of Companies Act,1956:Mode of forming incorporated company


12(c) of Companies Act,1956
17
Leonard W. Hein, British Business Corporation: Its Origin and Control,(1963-64) 15 Toronto Law Journal 134
18
27 (1) of Companies Act,1956
19
Id.
20
77 contains restriction on purchase by a limited company of its own or its holding companys share.
21
Report of the expert committee on company law available at http://www.mca.gov.in/Ministry/chapter3.html
Last updated on 16th Nov,2012
16

Page 5

One Person Company means a company which has only one person as a member22. Though new
in India, OPC's are in existence in quite a few countries across the world, notably China23. It is a
one shareholder corporate entity, where legal and financial liability is limited to the company
only. The One Person Company will be formed as a private limited company. The words One
Person Company shall be mentioned in brackets below the name of such company, wherever
its name is printed, affixed or engraved24.
Where an OPC enters into a contract with the sole member of the company who is also a
director, the company should, unless the contract is in writing, ensure that the terms of the
contract or offer are contained in the memorandum or are recorded in the minutes of the first
Board meeting held after entering into the contract and every such contract should be informed
to the Registrar25.
It was an effort of JJ Irani Expert Committee who recommended for the formation of one-person
company (OPC). It has suggested that such an entity may be provided with a simpler legal
regime through exemptions so that the single entrepreneur is not compelled to fritter away time,
energy and resources on procedural matters.
At present, an entrepreneur in India has to find another person to implement his skills through
incorporation of a company while in the UK, Australia, Singapore, Pakistan, etc, a single person
can form a company26.

2. Private company :A private company is that company which by its articles of association
limits the number of its members to fifty, excluding employees who are members or exemployees who were and continue to be members; restricts the right of transfer of shares, if any;
prohibits any invitation to the public to subscribe for any shares or debentures of the company27.
Where two or more persons hold share jointly, they are treated as a single member. According to,
the minimum number of members to form a private company is two28. A private company must
22

Clause 2(62) of the Companies Bill, 2011


Mohan R . Lavi ,The One-Person Company Concept available at http://www.thehindubusinessline.com
/industry-and-economy/taxation-and-accounts/article2686921.ece accessed on 17th Nov,2012
24
Proviso to Clause 12(3) of the Companies Bill,2011
25
Supra, note 23
26
Preeti Malhotra, One-person company is a great prospect for lone entrepreneur available at http://articles.
economictimes.indiatimes.com/2007-12-26/news/27683483_1_nominee-director-opc-entrepreneur accessed on 17th
Nov, 2012
27
3(1) (iii) of Companies Act, 1956
28
12 of Companies Act ,1956
23

Page 6

use the word Pvt after its name. Private companies represent a different set of relationships in
terms of ownership, risk and reward as compared to public companies29.
A Private Company has been described as an incorporated partnership, combining the
advantages of the privacy of partnership and the permanence and origin of the corporate
constitution. Private Companies can keep their affairs to themselves30.Private Companies exist
with the sanction and encouragement of the Legislature31. They enjoy the benediction of the
Legislature.
Characteristics or Features of a Private Company. The main features of a private of a private
company are as follows :
i)

A private company restricts the right of transfer of its shares. The shares of a private
company are not as freely transferable as those of public companies. The articles
generally state that whenever a shareholder of a Private Company wants to transfer
his shares, he must first offer them to the existing members of the existing members
of the company. The price of the shares is determined by the directors. It is done so as
to preserve the family nature of the companys shareholders.

ii)

It limits the number of its members to fifty excluding members who are employees or
ex-employees who were and continue to be the member. Where two or more persons
hold share jointly they are treated as a single member. The minimum number of
members to form a private company is two.

iii)

A private company cannot invite the public to subscribe for its capital or shares of
debentures. It has to make its own private arrangement.

Private Company can also be broadly classified as:


a) Purely Private Company32 ,and
b) Private Company which is a subsidiary of a company which is not a private
Company33.

29

Supra ,note 21
Edward Manson, The Evolution of the Private Company,(1910) 26 LQR 11
31
Younger LJ in Commr of Indian Revenue v. Sansom,[1921] 2 KB 492
32
3(1) (iii) of Companies Act, 1956
33
3(1)(iv)(c) of Companies Act,1956
30

Page 7

3. Public companies: A company which is not a private company and has minimum paid up
capital of 5 lakh rupees or more, or a private company which is a subsidiary of a company which
is not a private company34.Public company may be said to be an association consisting of not
less than seven members, which is registered under the Companies Act and which is not a private
company within the meaning of the Act. The shares and debentures of a public company may be
listed on a Stock Exchange and are offered to public for sale35.
There is no restriction on transfer of shares in case of public company. A Public Company
having a share capital shall file with the Registrar a statement in lieu of prospectus signed by all
the directors named therein, in case it has not issued a prospectus36. A Public company cannot
commence its business unless certificate to commence business is issued by the Registrar of
Companies in accordance with Section 149 of the Companies Act.

Deemed Public Company: Section 43-A of the Act deals with circumstances where a private
company is deemed to be a public company. A Private Company may continue to retain the
provisions as required under Section 3(1)(iii) of the Act and the number of its members may also
be reduced below seven37. It is for this reason the supreme Court stated that a deemed public
company is neither a private company nor a public company but company in third category38.
Even, The Company Law Board (CLB) in Hillcrest Realty Sdn. Bhd v. Hotel Queenroad (P)
Ltd.39held that the basic characteristics of a private company do not get altered by the mere fact
that such a company is a subsidiary of a public company.
Though, Section 43-A has been omitted but Section 43-A Sub-section (2-A) still subsist after the
Amendment made in the year 2000.This provision states that when a deemed public company
becomes a private company after this amendment, the company has to inform the Registrar and
latter would make necessary changes in his records. This process needs to be completed within 4
weeks from the date of the companys application.

34

3(1)(iv) of Companies Act,1956


Supra, note 5 at p.65
36
70 of Companies Act,1956
37
Supra, note 5 at p.65
38
Needle Industries(India) Ltd. v. Needle Industries Newey(India) Holding Ltd.,AIR 1981 SC 1298
39
Hillcrest Realty Sdn.Bhd vs Hotel Queenroad (P) Ltd [(2006) 72 CLA 245 CLB]
35

Page 8

III. On the basis of membership pattern and manner of access to capital , Public Companies
can further classified as:
Listed Company: Company whose shares are traded on an on an official stock exchange40.
It means a public company which has its securities listed on any recognized stock exchange 41.A
company is said to be listed ,quoted or have a listing if its shares can be traded on a stock
exchange. It is also known as Quoted Company42. It must adhere to the listing requirements of
that exchange, which may include how many shares are listed and a minimum earnings
level43.After the amendment made in the year 200044, every list company making initial public
offer of any security for a sum of rupees ten crores or more, shall issue the same only in
dematerialized form by complying with the requisite provisions of the Depositories Act, 1996. A
listed public company may, and in the case of resolutions relating to such business as the Central
Government may, by notification, declare to be conducted only by postal ballot, shall, get any
resolution passed by means of a postal ballot, instead of transacting the business in general
meeting of the company45.
Unlisted Company: A Public company whose shares are not on the official list of shares
traded on a particular stock market46. A publicly unlisted company is a company that can have
an unlimited number of shareholders to raise capital for any commercial venture. Companies
which are not listed publicly are more likely to engage in profit maximizing behavior as their
share capital structure makes it very easy to give its members financial returns. Unlisted
companies are usually too small to qualify for a stock exchange listing, and do not usually
advertise for investors47. However they tend to be larger than companies limited by guarantee.
Unlisted companies are very small and do not trade on an exchange because they do not meet

40

Financial Times Lexicon available at http://lexicon.ft.com/Term?term=listed-company accessed on 15th


Nov,2012
41
Supra, note 10 at p.36; also, 2(23A) of companies Act,1956 available at http://www.mca.gov.in /Ministry/
pdf/Companies_Act_1956_13jun2011.pdf accessed on 18th Nov,2012
42
Graeme Pieters, Listed Company, available at http://moneyterms.co.uk/ accessed on 15th ,Nov,2012
43
Supra, note 5 at p.40.
44
Insertion of 68 B in Companies Act,1956
45
192 A of Companies Act,1956:inserted by Companies (Amendment) Act,2000 w.e.f 13-12-2000
46
Longman Business English Dictionary,available at http://lexicon.ft.com/Term?term=unlisted-company accessed
on 15th Nov,2012
47
What is an Unlisted Public Company? available at http://www.companyplanners.com.au/faqs/unlisted.shtml
accessed on 15th Nov,2012.

Page 9

market capitalization requirements. The Government of India have passed the Unlisted Public
Companies Amendment Rules, 2011 for the preferential allotment in the unlisted public
companies48.
IV. On the basis of Control over the management, Companies may be classified into:
1. Holding companies, and
2. Subsidiary Company
1. Holding Company:A company is known as the holding company of another company if it has
control over the other company. A company qualifies as a holding company when it has the
power to control the composition of the board of directors of another company or holds a
majority of its shares. According to Sec 4(4) a company is deemed to be the holding company of
another if, but only if that other is its subsidiary.
A company may become a holding company of another company in either of the following three
ways:a) By holding more than fifty per cent of the normal value of issued equity capital of the
company; or
b) By holding more than fifty per cent of its voting rights; or
c) By securing to itself the right to appoint, the majority of the directors of the other company,
directly or indirectly.
The other company in such a case is known as a Subsidiary company. Though the two
companies remain separate legal entities, yet the affairs of both the companies are managed and
controlled by the holding company. A holding company may have any number of subsidiaries.
The annual accounts of the holding company are required to disclose full information about the
subsidiaries.
A Holding Company is not allowed to interfere in the disinvestment decision of a sub-subsidiary
company even if one of the effect of disinvestment could have been the loss of position as a
Holding company49.

48

Unlisted Public Companies Amendment Rules, 2011 published in the Gazette of India, Extraordinary -PARTI I ,
SECTION-3, SUB SECTI ON (i) of dated the 14.12.2011)
49
BDA Breweries v. Cruickshonk & Co. Ltd,(1996) 85 Comp Cas 325 Bom.

Page 10

2. Subsidiary Company: A company is known as a subsidiary of another company when its


control is exercised by the latter (called holding company) over the former called a subsidiary
company50. Where a company (company S) is subsidiary of another company (say Company H),
the former (Company S) becomes the subsidiary of the controlling company (company H).It is a
company whose parent is a majority shareholder51. For the purposes of liability, taxation and
regulation, subsidiaries are distinct legal entities.
A Subsidiary company may lose its separate identity to a certain extent in two cases. Firstly, the
Legislature may brush aside the legal forms and require the companies in a group to present a
joint picture. Thus, Section 212-14 contain provisions designed primarily to give better
information of the accounts and financial position of the group as a whole to the creditors,
shareholders and public.52
Secondly, the Court may on the facts of case refuse to grant a subsidiary company an
independent status. It may not be possible to put in a straitjacket of judicial definition as to
when the subsidiary company can really be treated as a branch, or an agent , or a trustee of the
holding company. Circumstances such as the profits of the subsidiary company being treated as
those of the parent company, the control and conduct of business of the subsidiary company
resting completely in the nominees of the holding company53.

3. Associate Company: Associate is used synonymously to describe a company whose parent


only possesses a minority stake in the ownership of the company54.

V. On the basis of Ownership of companies

a) Government Companies. A Company of which not less than 51% of the paid up capital is
held by the Central Government of by State Government or Government singly or jointly is
known as a Government Company55. It includes a company subsidiary to a government
50

4 (I) of Companies Act,1956


Albert Phung is a writer and analyst for Investopedia.com.He discussed it in FAQ.available at http://www
.investopedia.com/ask/ answers /06/subsidiaries.asp#ixzz2CG5KN54W accessed on 15th Nov,2012
52
Avtar Singh, COMPANY LAW,(15th Edn,2009).Eastern Book Company , Lucknow at P.29 . See also, Liability
of a Corporation for Acts of a Subsidiary or Affiliate,(1958) 71 Harv L R 1122
53
Kapur .J in Freewheels(India) Ltd. v. Dr. Veda Mitra, AIR 1969 Del 258
54
Id.
55
617 of the Companies Act,1956
51

Page 11

company. The share capital of a government company may be wholly or partly owned by the
government, but it would not make it the agent of the government 56.The staff members of the
company are not the Government employees and hence, the Government is not liable to pay the
salary of the staff of a Government Company57.The auditors of the government company are
appointed by the government on the advice of the Comptroller and Auditor General of India58.
The Annual Report along with the auditors report is placed before both the House of the
parliament.59
Hitting the reality of the situation, Krishna Iyer .J remarked The true owner is the state and the
effective collectorate is the state and the accountability for actions to the community and to
Parliament is of the state. Nevertheless a distinct juristic person with a corporate structure
conducts the business.60

Some of the examples of Government companies are - Mahanagar Telephone Corporation Ltd.,
National Thermal Power Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power
Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.

b) Non-Government Companies. All other companies, except the Government Companies, are
called non-government companies. They do not satisfy the characteristics of a government
company as given above.
Some of the example of Non-Government Companies are- Reliance Industries Limited, WIPRO
Limited etc.

VI. On the basis of Nationality of the Company

56

Heavy Engineering Mazdoor Union v. State of Bihar, AIR 1970 SC 82; Central Inland Water Transport
Corporation Ltd. v. Brojo Nath Ganguly , AIR 1986 SC 1571:It was stated if there is an instrumentality of agency of
the state which has assumed the garb of a Government Company, it does not follow that it thereby ceases to be an
instrumentality of agency of the state.
57
A.K Bindal V. Union of India , (2003) 5 SCC 163
58
619(2) of the Companies Act,1956
59
619 A of the Companies Act,1956 (Inserted by Act 65 of 1960, 200 (w.e.f 28-12-1960)
60
Supra, note 52 at p.22

Page 12

a) Indian Companies: These companies are registered in India under the Companies Act. 1956
and have their registered office in India. Nationality of the members in their case is immaterial.

b) Foreign Companies: It means any company incorporated outside India which has an
established place of business in India61. The Court has considered the extent of business which
has to be carried on to make a place of business for the purpose to establish a sufficient
presence within the jurisdiction for service of process62. A company has an established place of
business in India if it has a specified place at which it carries on business such as an office, store
house or other premises with some visible indication premises. Section 592 to 602 of Companies
Act, 1956 contain provisions applicable to foreign companies functioning in India.
The Companies (Amendment) Act,1974 reduced section 591 into Section 591(1) and inserted
sub-section (2).The effect of the amendment is that in the case of a foreign company having a
place of business in india, if 51 % of the paid-up share capital , whether preference or equity is in
Indian hands, it shall have to comply with such of the provisions of the Act as may be prescribed
as if it were a company incorporated in India63.
VII. On the basis of size:
Small companies : A small company is a company other than public company that has a paid-up
capital not exceeding fifty lakh rupees or such higher amount as may be prescribed which shall
not be more than five crore rupees64. Such companies should also be subjected to reduced
financial reporting and audit requirements and simplified capital maintenance regimes.
Essentially the regime for small companies should enable them to achieve transparency at a low
cost through simplified requirements. Such a framework may be applied to small companies
through exemptions, consolidated in the form of a Schedule to the Act65. It has been stated by the
expert committee that a small company should however neither be a holding nor a subsidiary of
any other company. However, the Committee does not feel the need for providing a special
internal governance and constitutional regime to small companies. This is likely to come in the

61

591 (I) of Companies Act,1956


A.S. Dampskib Hercules v. Grand Trunk Pacific Rly o. [1912] 1 KB 222.
63
Supra, note 52 at p.596
64
Clause 2(85) of Companies Bill,2011
65
Supra, note 21 at Chapter 3, 4.1
62

Page 13

way of their future growth. Instead the Committee recommends enabling of new vehicles for
business,

such

as

Limited

Liability

Partnerships,

through

separate

legislation,

if

necessary66. Associations, Charitable Companies etc. licensed u/s 25 of the existing Companies
Act, should not be treated as small companies irrespective of their gross assets67. The law should
provide a framework compatible to growth of small corporate entities. Exemptions should
however facilitate compliance by small companies in an easy and cost effective manner. These
should not incentivize concealment of true size by any entity or be a barrier to growth of small
companies68. However, public limited companies cannot qualify to be small companies.
Other companies: All companies other than small companies are included under other
companies. It is irrespective that the particular companies are Private or Public, listed or unlisted,
limited or unlimited, Government or Foreign Companies.
VIII. On the basis of business activities undertaken:
Company is a form of business organizations in which the individuals contribute some amount of
capital69. The Companies Act, 1956 broadly classifies the companies into private and public
companies and provides for regulatory environment on the basis of such classification. However,
with the growth of the economy and increase in the complexity of business operation, the forms
of corporate organizations keep on changing. Classification of Companies can therefore take
many shapes and a multiple classification of companies can be made.
1. Section 25 Companies70: Section 25 Companies are companies formed for solely promoting
art, commerce, science, literature, charity, religion and other useful objects71. It is to be granted a
license by the Central government recognized for such purpose. It is required to apply its profits
only for promoting its objects and for other purposes. It is not required to pay dividend out of its

66

Id. at 4.3
Id. at 4.4
68
Id.
69
Alok Patnia, Section 25 Companies under Companies Act,1956 available at http://taxmantra.com/2012/05/
section-25-companies-in-the-companies-act-1956/ accessed on 17th Nov,2012
70
List of Section 25 Companies are available at http://www.mca.gov.in/MCA21/dca/RegulatoryRep/pdf/ Section25
Companies.pdf Last updated on 16th Nov,2012
71
25 (1) (a)of Companies Act,1956
67

Page 14

profits to its members72. Due to better laws, Section 25 companies have the most reliable
strongest organizational structure.
The advantages of these companies are that a partnership firm is allowed to be its members73.
There is a minimum requirement of share capital in comparison to other Companies. Publication
of name is not necessary. It can increase the no. of directors without obtaining prior permission
from Central Government. If articles of Sec 25 Companies provide for election of directors by
ballot then provisions of Sec 257 does not apply to them. It can appoint any person as Secretary
as they thinks fit. Members of a charitable company under section 25 have been granted the right
of inspection by clause 9 of Annexure 1 to the Companies Regulations, 195674.
2. Producer Companies: With the coming into force on February 6 of the Companies
(Amendment) Act 2002, (1 of 2003), another category, `producer companies,' finds a place in the
Companies Act,195675.Part IX A of the Companies Act,1956 explicitly deals with the Producer
Company. It is based on the recommendations of an expert committee led by noted economist,
Y. K. Alagh. Producer company is to indicate that only certain categories of persons can
participate in the ownership of such companies. The members have necessarily to be `primary
producers,' that is, persons engaged in an activity connected with, or related to, primary produce.
Primary Produce is a produce of farmers arising from agriculture including animal husbandry,
horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee
raising and farming plantation products: produce of persons engaged in handloom, handicraft
and other cottage industries: by - products of such products; and products arising out of ancillary
industries76. Producer Company means a body corporate having objects or activities specified in
section 581B and registered as Producer Company under the Companies Act, 1956 77. The
disadvantages of Producer Company is that The administration and management of Producer
Companies is not in tune with general framework for companies with liabilities limited by
shares/guarantees. The shareholding of a Producer Company imposed restrictions on its
transferability, thereby preventing the shareholders from exercising their exit options through a
72

25 (1) (b) and 3 of Companies Act,1956;also see ADRBM Mandal v. Joint Charity Commr,(1973) 43 Comp
Cas 361 Bom.Western UPchamber of Commerce & Industry has been granted licence under this section.
73
25(4) of Companies Act,1956
74
Supra, note 52 at p.443
75
GSR No 135(E) : The Companies (Amendment) Act ,2002 (w.e.f 6-2-2003)
76
581A (j) of Companies Act,1956
77
Id.

Page 15

market determined structure. It was also not feasible to make this structure amenable to a
competitive market for corporate control and the Corporate Governance regime applicable to
companies could not be properly imposed on this form78.
3. Investment Companies: It is a company whose principal business is the acquisition of shares
,stock, debentures or other securities79.The Department of Company Affairs has clarified the
position of an investment company further and observed that whether a company is an
investment company or not, is a question of fact which has to be decided in relation to the actual
business transacted by the company80.The word whose principal business is the acquisition of
shares implies that the company concerned is expected to hold shares etc. acquired by it for a
reasonable time .In substance, if the whole or substantially whole of the companys business
relates to shares, securities, stock and debentures etc. it should be treated as an investment
company.
4. FERA Companies: The Companies operating in India under the Foreign Exchange
Regulation Act, 1973 are technically called the FERA Companies. They broadly fall under
following categories: Indian Companies having no foreign interests or having less than 40
percent foreign interest, Indian Companies having more than 40 percent non-resident interest81
and Foreign incorporated companies which are registered in India merely for business
operations. The Central Government may impose certain restrictions on FERA Companies under
Section 26 of the Foreign Exchange Regulation Act ,1973.
5. Chit Fund Companies82:Chit fund company means a company managing, conducting or
supervising, as foremen, agent or in any other capacity, chits as defined in Section 2 of the Chit
Funds Act, 198283. The main objective of Chit Fund company is to carry on the business of
conducting chits (auction and other chits) daily, weekly, by-weekly, monthly, quarterly and are
such intervals as the company may decide from time to time and to lend money either with or
78

Supra, note 21 , at Chapter 3, 9.1 and 9.2


Proviso to 372(10) of Companies Act,1956
80
Supra, note 5 at p.73
81
Such companies were earlier known as Foreign Controlled Companies.
82
List of Chit Fund Companies are available at http://www.mca.gov.in/MCA21/dca/RegulatoryRep/pdf/Chit_
FundCompanies.pdf Last updated on 16th Nov,2012
83
2(1)(h) of Prevention of Money Laundering Act,2002 available at http://fiuindia.gov.in/pmla-section2.htm
accessed on 17th Nov,2012
79

Page 16

without security upon such terms and conditions as the company may think fit to the subscribers
of the chits and to guarantee the performance of the contract by any such person84.
6. Non-Banking Finance Companies85: A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act, 1956 and is engaged in the business of loans and
advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local
authority or other securities of like marketable nature, leasing, hire-purchase, insurance business,
chit business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, sale/purchase/construction of immovable property. A non-banking
institution which is a company and which has its principal business of receiving deposits under
any scheme or arrangement or any other manner, or lending in any manner is also a non-banking
financial company86. Non-banking financial companies (NBFCs) are fast emerging as an
important segment of Indian financial system. It is an heterogeneous group of institutions (other
than commercial and co-operative banks performing financial intermediation in a variety of
ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise
funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance
loans to the various wholesale and retail traders, small-scale industries and self-employed
persons. Thus, they have broadened and diversified the range of products and services offered by
a financial sector. Gradually, they are being recognised as complementary to the banking sector
due to their customer-oriented services; simplified procedures; attractive rates of return on
deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc87.
Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit
taking company. This registration authorises it to conduct its business as an NBFC. For the
registration with the RBI, a company incorporated under the Companies Act, 1956 and desirous
of commencing business of non-banking financial institution, should have a minimum net owned
fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999).
84

Prize Chits and Money Circulation Schemes (Banning) Act, 1978.


List of NBF Companies are available at http://www.mca.gov.in/MCA21/dca/RegulatoryRep/pdf/NbfcCompanies.
pdf Last updated on 16th Nov,2012
86
Frequently Asked Questions on NBFCs available at http://www.rbi.org.in/scripts/FAQView.aspx?Id=71
accessed on 17th Nov,2012
87
Business Financing, Non-Banking Finance Companies(NBFCs) available at http://business.gov.in/business
financing/non_banking.php accessed on 17th Nov,2012
85

Page 17

As per the RBI Act88, a 'non-banking financial company' is defined as:- (i) a financial institution
which is a company; (ii) a non banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or arrangement or in any other
manner, or lending in any manner; (iii) such other non-banking institution or class of such
institutions, as the bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
7. Plantation Companies89: Plantation Companies issue agro bonds and other deposit schemes
at high rates of interest and promise to produce and market plantation products. Plantation
companies have for long operated in a regulatory vacuum. They raise money and invest in
agriculture and related activities. Since, They are not non-banking finance companies, they are
not under the ambit of the Reserve Bank of India (RBI). They raise money that is not defined as
deposits, hence they are not regulated by the Department of Company Affairs (DCA) and since
the money raised is not invested in securities, they do not come under SEBI's purview. So, there
was no government regulatory agency aggrieved investors could turn to in case the companies
defaulted90.But later on, the Government decided to regulate these schemes as Collective
investment schemes coming under the provisions of section 11(2)(c) of the SEBI Act91. There is
a great potential for plantation companies in Green Business in India.
8. Dormant Company: Through the insertion of Dormant Company under the Companies Bill,
2011, the Ministry of corporate Affairs have taken step to designate a company as dormant
company. A Dormant company will enjoy a number of relaxations and they can revert to a full
fledged company once they apply for it. Dormant companies can be used for holding patents,
trademarks, copyrights, designs, other rights and intellectual properties. Many prospective
entrepreneurs such as scientists with their research products, artists with their registered artwork,
singers with their music compilations, authors with their books can think of starting their own
companies to hold these intellectual properties and they can get their company designated as a
88

45-I(f) of the RBI Act, 1934


List of Plantation Companies are available at http://www.mca.gov.in/MCA21/dca/RegulatoryRep/pdf/
Plantation_Companies.pdf Last updated on 16th Nov,2012
90
V Shankar Aiyar, A slow-moving administration and a toothless SEBI have failed to check fraudulent plantation
companies, India Today,Nov 2nd ,1998 available at http://archives.digitaltoday.in/indiatoday/02111998/biz.html
accessed on 17th Nov,2012
91
SEBI Act.1992- 11(1) (c) registering and regulating the working of collective investment schemes, including
mutual funds.
89

Page 18

dormant company. When a dormant company comes to a position to do business as a normal


company they can apply to get re-designated as a fully fledged company92.
A company is considered dormant during a period in which no accounting transaction occurs93.
Where a company is formed and registered under the Act for a future project or to hold an asset
or intellectual property and has no significant accounting transaction, such a company or an
inactive company may make an application to the Registrar in such manner as may be prescribed
for obtaining the status of a dormant company.94
9. Nidhi Companies : The First committee which studies the functioning of the Nidhi Company
was Viswanatha Shastri Committee in 1965, it was followed by various other committees95.
Nidhi company is a company registered under Companies Act and notified as a Nidhi
company or Mutual Benefit Society by the Central Government96. It is a non-banking finance
company doing the business of lending and borrowing with its members or shareholders.
Chapter XXVI of the Companies Bill 2011 defines Nidhi as a company which has been
incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its
members, receiving deposits from, and lending to, its members only, for their mutual benefit, and
which complies with such rules as are prescribed by the Central Government for regulation of
such class of companies.97 Though Sabanayagam Committee Report on Nidhis98 had suggested
following definition as Nidhi is a company formed with the exclusive object of cultivating the
habit of thrift, savings and functioning for the mutual benefit of members by receiving deposits
only from individuals enrolled as members and by lending only to individuals, also enrolled as
members, and which functions as per Notification and Guidelines prescribed by the DCA. The
92

Anjan Kumar Roy, Corporate Law Advisor,ANJAN KUMAR ROY & CO. Company Secretaries,Company Bill ,
2009 The Impact, available at http://indiabusinesslawadvice.blogspot.in/2010/05/companies-bill-2009-wasintroduced-to.html accessed on 17th Nov,2012
93
Dormant Companies available at http://www.acra.gov.sg/Company/Making_Changes/AnnualReturnofLocal
Company/Dormant+Companies.htm Last updated on 15th Sept,2009
94
Clause 455 of the Companies Bill 2011
95
Sabanayagam Comt. Report on Nidhis available at http://www.mca.gov.in/Ministry/nidhi.html Last accessed on
17th Nov,2012
96
620-A of Companies Act,1956
97
Bill No. 121 of 2011, http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2011.pdf accessed on 14th
Nov,2012
98
REPORT OF SABANAYAGAM COMMITTEE ON NIDHIS Central Government vide
Notification
No.5/7/2000-CL.V dated 23rd March,2000 available at http://www.mca.gov.in/Ministry/nidhi/reportsaba.pdf

Page 19

word Nidhi shall not form part of the name of any company, firm or individual engaged in
borrowing and lending money without incorporation by DCA and such contravention will attract
penal action.
The primary object of Nidhis has been to carry on the business of accepting deposits and lending
money to member-borrowers only against jewels, etc., and mortgage of property. Nidhis were
not expected to engage themselves in the business of Chit Fund, hire purchase, insurance or in
any other business including investments in shares or debentures. As stated these Nidhis do their
business only with Members. Such Members are only individuals .Bodies Corporate or Trusts
are never to be admitted as Members99.
10. Companies Regulated by Special Acts: The Companies which are regulated by Special
Acts such as the Banking Companies Act,1949; the Insurance Companies governed by the
Insurance Act,1938;Electricity (Supply) Act,1948;Food Corporation Act,1964 etc. shall have to
be incorporated and registered under the Companies Act and therefore the provisions of the
Companies Act,1956 shall also apply to them like any other company except insofar as they are
inconsistent with the Special Act which constitutes them100.
Need for Classification of Companies

Classification refers to recognizing, naming, and describing units or elements to be mapped. The
objective of all classifications is the orderly arrangement of a large array of objects so that their
differences and similarities can be better understood. We classify land and water resources for
any number of reasons, including: Separating like things from unlike things by increasing
homogeneity. This in turn increases accuracy in classification and decreases sampling effort.
Setting the boundaries of a study area or an area we hope to influence. Looking for identifiable
patterns or identifying spatial context and allowing extrapolation. It aids in the development of
restoration endpoints by developing identifiable and compatible classes within the classification.
Displaying or communicating complex relationships more effectively for planning, restoration,
and management.
99

Sabanayagam Comt. Report on Nidhis available at http://www.mca.gov.in/Ministry/nidhi.html accessed on


17th Nov,2012
100
Supra, note 5 at p.75

Page 20

The Companies Act, 1956 broadly classifies the companies into private and public companies
and provides for regulatory environment on the basis of such classification. However, with the
growth of the economy and increase in the complexity of business operation, the forms of
corporate organizations keep on changing. There is a need for the law to take into account the
requirements of different kinds of companies that may exist and seek to provide common
principles to which all kinds of companies may refer while devising their corporate governance
structure. Rigid structures, unnecessary controls and regulations inhibit the risk taking initiatives
of the entrepreneurs. Private companies and small companies, who do not generally go for public
issues or deposits for their financial requirements but utilize their personal or in-house resources,
need to be given flexibility and freedom of operation and compliance at a low cost. Equally,
public companies that access capital from public need to be subjected to a more stringent regime
of corporate governance. To enable a comprehensive framework for different forms of corporate
organizations, the Company Law should ensure multiple classifications of companies. It should
also enable smooth change-over of companies from one type to another101.
The law should recognize the potential for diversity in the forms of companies and rather than
seeking to regulate specific aspects of each form, seek to provide for principles that enable
economic inter-action for wealth creation on the basis of clear and widely accepted principles 102.

101

Classification and Registration of Companies at 1available at http://www.mca.gov.in/Ministry/chapter3. html


Last updated on 16th Nov,2012
102
Id.

Page 21