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History of Company Law in India

Introduction

The history of India has been discussed widely on different platforms by historians, scholars, analysts and researchers. Colonialism lasted for almost 200 years, and it left a wide impact on the country as well as its people. The economic and social conditions that we live in presently have been shaped by the historic changes that took place during the British Raj, and the laws and policies we abide by today are an outcome of the colonial period India witnessed. Even though there are arguments on how the British ruined the economic and socio-political conditions of that time, there is no denying the fact that a large number of major advances in India are a result of the British rule, and only under the British rule was it that India came to be unified as one.

Be it the railways, or the postal system, or the various laws and policies that we still cling to, the British regime provided a ground, when it left, no matter how uneven, on which the leaders of our nation made our economy stand. Primarily, India was an agrarian economy, and it still is, to a large extent, but the surge of corporate governance it has witnessed in the past few decades is worth noticing.

Corporate governance, at present, is in the form of the Companies Act, 2013, in India, which is an extensive statute that governs almost every aspect of company law in India. However, this Act, as much as it is new, has its roots back in the time of the British Raj, and we shall take a look at how the various Acts passed by the British before independence, and the Indian Parliament after independence, shaped the company laws of India to become what it is today.

Early History of Company Law in India

The concept of good governance is not new to India. As early as third century B.C.E., Chanakya, the wazir for the kingdom of Pataliputra, promulgated the four-fold duties of a king – raksha, palana, vridhhi and yogakshema, which largely correspond to the protection of the wealth of shareholders in a company (raksha), maintaining the wealth of a company through profitable ventures (palana), proper utilisation of the assets to boost wealth (vridhhi), and safeguarding interests of the shareholders (yogakshema). Thus, the system existed, much in an orthodox manner, which led to various kingdoms amassing wealth and prosperity due to measures taken by their kings to ensure good governance. Kautilya’s Arthashastra and Neetishastra, two golden books on economic administration and political ethics, provide an insight into the early management practices, including CSR (Corporate Social Responsibility).

The early agrarian economy consisted of units of familial ties, which usually consisted of two patrilineal generations living together and co-operating for their economic benefit. Wealth was collected and divided according to the share of each family member, and this system came to be known as the Hindu Undivided Family (HUF) system. It still exists in certain families, and has come to be regulated by Hindu personal laws.

Company Law in India During British Rule

East India Company’s rule was established in the country after the Battles of Plassey and Buxar (1757 and 1764, respectively), but these companies were not what present-day companies are composed of. East India Company, like its rivals of France and Portugal, were trading companies that received an official declaration by the ruler of a territory, known as the Royal Charter, which allowed trade to take place between the United Kingdom and India. The East India Company received its first charter in 1600, and since then it firmly based its ground in the Indian soil. But it was much later, in 1844, that the first Act by the British was passed, regarding companies. It was known as the Joint Stock Companies Act, and it allowed an organisation to be incorporated without a charter or sanction by the British Parliament. It also established the Joint Stock Companies office. But the Act did not allow the facility of limited liability to the members of a company.

Keeping this in mind, the British Parliament introduced the Limited Liability Act in 1855. Further, the Act of 1844 was replaced with a more comprehensive Act of 1856, which marked the beginning of company law in England. It introduced elements such as Memorandum of Association and Articles of Association.

The Companies Act of 1862 incorporated all the elements of the previous Acts, and laid down a single framework for the governance of the companies. Limited liability with guarantee, as well as provisions of winding up were also incorporated. Alteration within the object clause of the Memorandum of Association was prohibited. This Act provided the basis for further enactments to come up.

The principal Act in England regarding the governance of companies came to be the Companies Act of 1948, which included several other detailed elements related to Board of Trade, accounts, public accountability etc.

In India, once the British Parliament assumed direct power after the Revolt of 1857, the Acts of England were formulated in India keeping in mind the then prevailing socio-economic and political environment. After the Joint Stock Companies Act was passed in India in 1857, company laws in India underwent several amendments and enactments, because it was somewhat difficult to apply the laws of England to India, clearly when the economic structure and lifestyle of both the countries were different.

The Companies Act of 1866 brought with it provisions of incorporation, regulation and winding-up, and included trading companies as well as other associations. It was replaced by the Companies Act of 1913, which came to be the forerunner of the various legislations passed in England.

Company Law in India Post-Independence Period

The Companies Act, 1913, continued well after independence, until our leaders realised that it was high time the Act be revised. A committee was appointed by the government in 1950, under the chairmanship of Shri H. C. Bhaba, which submitted its report in 1952. This report, along with the Companies Act of England, 1948, led to the enactment of the Companies Act of 1956, which came into force on April 1st, 1956, and repealed the previous existing laws.

The Companies Act of 1956 initially separated itself into 13 parts, consisting of 658 sections, and 15 schedules. It remained in force for a long time and was amended in several instances because growth in the corporate sector after independence saw a sudden boom. The Act went on to comprise the provisions of shelf prospectus, audit committee, postal ballot etc., along with establishing the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). In 2006, provisions of DIN and online filing of documents came into practice.

Existing Company Law in India

The Companies Act of 1956 was undoubtedly a voluminous legislation. It demanded a repeal, hence putting a new and more compact piece of legislation in its place, for which purpose the J. J. Irani Committee was appointed. The then director of Tata Sons was appointed as the head of the committee. The approach, in the beginning, was to liberalise the law and make it more user-friendly, removing all the unnecessary clauses the previous Act contained. But the Satyam Scam of 2009 shifted the focus to make the laws more stringent in order to prevent misuse.

The recommendations made by the J. J. Irani Committee led to the enactment of the Companies Act of 2013, which is the existing law on corporate governance in India. This Act is rule based, which means that the Ministry of Corporate Affairs has retained certain powers in itself, and may make rules regarding those provisions where the Act states so. These powers are administered by the Regional Director and the Registrar of Companies.

This Act is divided into 19 Chapters and consists of 470 Sections and 7 Schedules. If compared to the Companies Act of 1956, provisions have been reduced to a large extent, which makes the Act reader-friendly. The major highlights of this Act are the provisions of a woman director, CSR, class action suits, entrenchment clauses in AoA (Articles of Association) and Key Managerial Personnel. It also introduced new terms such as OPC (One Person Company), Dormant Company, Small Company, Associate Company etc.

Amendments to the Companies Act brought significant provisions, whilst removing or detailing some of the existing ones. Overall, the Companies Act of 2013 is a culmination of well-thought out processes and much debate, which has resulted in its effective implementation.

Conclusion

The new regime brought about by the Companies Act of 2013 pushes Indian companies to meet global standards. It aims to provide an increased level of transparency and better protection to investors. Recent forms in the laws of Foreign Direct Investment and Finance laws, as well as the pro-arbitration stance taken by the Indian judiciary in matters related to corporate disputes, are the steps that can take the Indian corporate world to new heights. However, the government still has to do a lot in terms of formulating effective and easy rules and regulations where discretion is with the Ministry of Corporate Affairs. Detailed out provisions need to be simplified further for ease of understanding.

FAQs on History of Company Law in India

Which was the first Act to govern company laws in India?

The foremost Act to be brought under the heading of company laws was the Joint Stock Companies Act of 1857, in India, which was initially passed by the British Parliament in England, and was altered to suit the corporate environment in India, before its enactment.

What was the reason for the absence of a comprehensive law on companies in India before independence?

One of the major reasons for the lack of a unified company law regime in India was that India was an agrarian economy from the very starting, and colonialism only added to it. Major developments in the corporate sector were not visible until after independence, and during the British Raj, the laws enacted by the British Parliament for England did not suit the conditions of India, hence they were rendered inapplicable.

What factors contributed to the post-independence period’s upsurge in the corporate field in India?

After independence, the political scenario of India came to be dominated by Jawaharlal Nehru, who was inclined towards economic and social development, social welfare and foreign affairs. This was reflected in the planning system that India adopted, the setting up of large public sector systems, nationalised banking, controlling and licensing private enterprises etc. Foreign Direct Investment came to be controlled by the state, and top-notch Indian businesses of that time joined hands with the government to face international competition. Import duties and tariffs were put in place, creation of a domestic market, and key social reforms such as those in the personal laws of Hindus and Muslims played a vital role in highlighting the progress of corporate sector in India. As the economy grew more self-reliant, companies and businesses started coming up, giving people enough confidence to follow in the same footsteps. Frequent amendments in the law to make it easier furthered the ends.

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Zara Suhail Ahmed

Zahra is a student at Aligarh Muslim University, pursuing a 5-year B.A. LLB course. Currently in her 4th year, Zahra opted for Law after completing most part of her schooling from Cambridge School, New Delhi. Zahra has interned under a few lawyers and firms, participated in various moot courts and similar events, and is proficient in research and written content. A strong believer that education is the greatest virtue, Zahra seeks to learn from every platform and individual, whether working alone or as a team. Although Zahra is keenly interested to pursue ADR (Alternate Dispute Resolution) as a career, she has kept her options open and is interested in examining the different career prospects that her profession has to offer. Zahra has diversified interests apart from her professional life as well. Not only a successful lawyer, but she also aspires to become a productive human being.