Law 05 Company Law 02 Classification of Companies Notes 20170314 Parab PDF

Lecture Notes on Corporate Laws
Types of
Companies
Balkrishna Parab
balkrishnaparab@jbims.edu
1 Introduction
Companies are by far the most common vehicles used to carry on business
activity both in India and around the world. They have become so because
governments have legislated to provide companies with various incentives,
rights and privileges. Governments have successfully used the law to create
a legal framework favourable to form various types of companies.
The word 'company' is derived from two Latin words pains meaning bread
and 'com' meaning "with or together". Originally, it referred to a group of
persons who took their meals together. In the context of business, a company
is understood as a group of persons who have voluntarily come together for
sharing profits derived from carrying on some business.
The law defines company as:
A company means a company incorporated under the
Companies Act, 2013 (CA 2013) or under any previous
company law1.
Not a very helpful definition. There is the commonly accepted view of what
can be called a company. Haney has defined a company as:
1
Section 2 (20) of the Companies Act, 2013.
Types of Companies
An artificial person created by law, having separate entity with

a perpetual succession and common seal.
A body corporate or corporation includes a company incorporated outside
India, but does not include: (i) a co-operative society; (ii) any other body
corporate (not being a company as defined in CA 2013), which the Central
Government may, by notification, specify in this behalf2. As on March 31,
2014, there were 952,433 active companies in India3.
Companies may be classified, broadly, on four bases: liability of members,
pattern of membership, control, and nationality.
Classification Based on Liability of Members

Based on liability of members, companies may be classified into three sub-
categories: company limited by guarantee, company limited by shares, and an
unlimited liability company.
Company Limited by Guarantee

Not all companies issue shares: some companies are formed on the strength of
guarantees given by the members. Such companies are called as companies
limited by guarantee. In such companies the members agree to contribute a
specified amount to the companys assets in the event of the company being
wound up. The total amount payable by all members is called the "guarantee
fund". The members do not have to pay anything as long as company is a
going concern.
Company Limited
by Guarantee
Companies Based
Company Limited
on Liability of
by Shares
Members
Unlimited
Liability Company
2
3
58th Annual Report, Ministry of Corporate Affairs, Government of India.
2
Types of Companies
CA 2013 defines a company limited by guarantee as:

A company limited by guarantee is one having the liability of
its members limited by the memorandum to such amount as the
members may respectively undertake to contribute to the assets
of the company in the event of its being wound up4.
In a company limited by guarantee the members agree to contribute a specified
amount to the companys assets in the event of the company being wound up.
The total amount payable by all members is called the "guarantee fund". The
members do not have to pay anything as long as company is a going concern.
The guarantee is not an asset of the company but a mere contingent liability of
its members until winding-up. Consequently, it cannot be charged by the
company as a security nor can it be increased or reduced by an alteration of
the memorandum or by agreement with the members or by any procedure
equivalent to the increase or reduction of share capital5.
A company limited by guarantee may, or may not, have share capital. The
memorandum of association of company limited by guarantee and not having
a share capital cannot contain a provision purporting to give a non-member a
right to participate in the divisible profits of the company6.
If a company limited by guarantee has a share capital, its members have two
liabilities. They must pay the issue price of their shares, and must honour their
guarantee in the event of the company being liquidated.
There were 5407 companies limited by guarantee in India as on March 31,
20147.
Company Limited by Shares

A company limited by shares is the most common kind of registered company.
Members of the company take shares issued by the company. Each share is
assigned a nominal value, the amount that must be paid to the company for the
share.
A company limited by share is defined by CA 2013 as:
A company limited by shares is one having the liability of its
members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them8.
4
5
Hennessy v National Agricultural and Industrial Development Association [1947] IR 159).
6
7
58th Annual Report of the Ministry of Corporate Affairs, Government of India
8
3
Types of Companies
When a company limited by shares is registered, its memorandum must state

the total nominal value of all the shares it is going to issue, called authorized
share capital. The memorandum also states the number of shares to be issued.
Liability of a member (shareholder), when the company is wound up is limited
to the amount of the nominal value of his shares that has not been paid.
As on March 31, 2014, there were 946,651 companies limited by shares in
India9.
Unlimited Company
A company having no limit on the liability of its members is called an
unlimited liability company. If company is being wound up, members can be
made to contribute to the companys assets without limit to enable it to pay its
debts.
An unlimited liability company is defined by CA 2013 as:
An unlimited company means a company not having any limit
on the liability of its members10.
It must be remembered that the liability of a member of an unlimited liability
company is to the company and not to the outside creditors. Such a company
may be set up with or without a share capital.
As on March 31, 2014 there were 375 active companies with unlimited
liability in India11. The personal liability of members of this type of company
is the reason why not many of them exist. They are sometimes formed by
those who wish to have separate corporate status and perpetual succession
even though these are not accompanied by limited liability.
Classification Based on Pattern of Membership

Based on pattern of membership we classify companies into three types:
private company, public company, and non-profit company. A private
company may be a one-member company or a small company.
Private Company
The distinction between public and private companies first appeared in the UK
Companies Act 1907. The distinction is made to exempt private companies
from several regulatory compliances.
CA 2013 defines a private company as follows:
9
58th Annual Report of the Ministry of Corporate Affairs, Government of India.
10
11
4
Types of Companies
A private company is a company which by its articles of

association (i) restricts the right to transfer its shares; (ii) limits
the number of its members to two hundred; and (iii) prohibits
any invitation to the public to subscribe for any securities of the
company12.
For counting the number of members, where two or more persons hold one or
more shares in a company jointly, they are treated as a single member. Further,
persons who are in the employment of the company; and persons who, having
been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after
the employment ceased, are not included in the number of members.
The one major drawback of the private company is the inability to go to the
market to raise capital. When a business run by a private company expands,
and needs further investment capital, one obvious course for it to take is to re-
register as a public company, so that further shares can be offered and sold to
the public.
The law allows a private company to be converted to a public company by
altering its articles of association13. As many as 669 private companies became
public during 2013-1414.
Private Company
As Such
Private One-Person
Company Company
Companies Based
Public Small
on Pattern of
Company Company
Membership
Not-for-Profit
Company
12
13
Section 31 of the Companies Act, 2013.
14
5
Types of Companies
One Person Company

The term one person company (OPC) is an oxymoron because in general
parlance, a company means an enterprise having at least two persons. This
type of company was introduced by CA 2013. The rationale for enabling
setting up of a one-person company was explained by the Expert Committee
on Company Law headed by Dr. J. J. Irani in 2005 as follows:
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 can develop 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 Company. Such an entity
may be provided with a simpler regime through exemptions so
that the single entrepreneur is not compelled to fritter away his
time, energy and resources on procedural matters.
The introduction of one-person company is a move designed to encourage
corporatization of micro businesses and entrepreneurship with a simpler legal
regime so that the small entrepreneur is not compelled to devote considerable
time, energy and resources on complex legal compliances.
CA 2013 defines a one-person company as follows:
A one person company means a company which has only one
person as a member15. The words one person company is
required to be mentioned in brackets below the name of a one
person company wherever its name is printed, affixed or
engraved.16
The memorandum of association of a one person company is required to
indicate the name of the one other person who shall, in the event of the
subscribers death or his incapacity to contract become the member of the
company17.
15
16
Proviso to Section 12 (3) of the Companies Act, 2013.
17
Section 4 (1) (f) of the Companies Act, 2013.
6
Types of Companies
The name of the other person referred above should be included in the
memorandum only with his written consent. This written consent is also
required to be filed with the Registrar at the time of incorporation. This other
person may withdraw his consent by following the prescribed procedure.
The member of a one person company may at any time change the name of
such other person by giving notice in the prescribed manner. It is duty of the
member of a one person company to intimate the company the change, if
any, in the name of the other person nominated by him by indicating in the
memorandum or otherwise and the company is required to intimate the
Registrar any such change18.
A one person company is required to have at least one director19. Where no
provision is made in the articles of a company for the appointment of the first
director of a one-person-company an individual being member is deemed to
18
19
Section 149 (1) (a) of the Companies Act, 2013.
7
Types of Companies
be its first director until the director or directors are duly appointed by the
member20. A one person company is required to hold at least one meeting of
the board of directors in each half of a calendar year and the gap between the
two meetings should not be less than ninety days21.
If a sole member-director of a private company dies, there is no board to
approve the transfer of her shares under the terms of the will or on intestacy.
The company is then in effect paralysed, being without a board or
shareholders. The articles should therefore be altered to allow, for example,
the company secretary, if one has been appointed, to authorise a transfer or
allow the personal representatives of the deceased member to appoint a
director if the company has none. The director could then approve the transfer
and the business of the company could proceed.
Some of the privileges and benefits identified with one-person company are:
Mandatory rotation of auditor after expiry of maximum term is not
applicable;
The annual return of a one-person company shall be signed by the
company secretary, or where there is no company secretary, by the director
of the company;
The provisions relating to holding of general meetings, shall not apply to a
one-person company;
A one-person company needs to have minimum of one director;
For the purposes of holding meeting of board of directors it shall be
sufficient compliance if all resolutions required to be passed at a board
meeting, are entered in the minutes-book, signed and dated by the member
and such date shall be deemed to be the date of the board meeting;
The financial statements of a one-person company can be signed by one
director alone.
Cash flow statement is not a mandatory part of financial statements for a
one-person company.
Small Company
The concept of small company has been introduced for the first time by CA
2013. The law identifies some companies as small companies based on their
capital and turnover position for providing certain relief and exemptions from
regulatory compliances.
CA 2013 defines a small company as follows:
A small company is a company, other than a public company,
(i) paid-up share capital of which does not exceed 50 lakh
20
21
8
Types of Companies
rupees; or (ii) turnover of which as per its last profit and loss
account does not exceed two crore rupees.
The small company clause is not applicable to (i) a holding
company or a subsidiary company; (ii) a non-profit company22;
or (iii) a company or body corporate governed by any special
Act23.
The exemptions available to a small company include:
The annual return of a small company can be signed by the company secretary
alone, or where there is no company secretary, by a single director of the
company;
A small company may hold only two board meetings in a year, that is, one
board meeting in each half of the calendar year with a minimum gap of ninety
days between the two meetings;
A small company need not include a cash flow statement as part of its
financial statement.
Provision regarding mandatory rotation of auditors and maximum term of
auditors is not applicable to a one-person company.
Public Company
A public company is defined negatively, as a company other than a private
company. A public company is one which states in its constitution that it is a
public company and which complies with all the requirements laid down in
CA 2013 for registration or re-registration of a company as a public company.
Further, a public company cannot begin business or exercise any of its
borrowing powers unless the Registrar of Companies issues a certificate for
commencement of business. The law requires that the name of a public
company should end with the words limited, to distinguish from a private
company.
CA 2013 defines a public company as follows:
A public company is a company which is not a private
company. Further, a subsidiary of a public company is deemed
to be public company even where such subsidiary company
continues to be a private company in its articles24.
There is a common misconception that the securities of all public companies
are listed on the stock exchange. A listed company may be defined as
22
Registered under Section 8 of the Companies Act, 2013.
23
24
9
Types of Companies
A company is one whose securities can be traded on a

recognised stock exchange.
Out of 62412 active public companies in India as on March 31, 201425 only
5000-odd companies are listed companies.
Non-Profit Company
A nonprofit company is a company that uses its surplus revenues to further
achieve its purpose or mission, rather than distributing its surplus to its
shareholders and members as dividends. This is known as the distribution
constraint. The designation as a nonprofit does not mean that the company
does not intend to make a profit, but rather that the company does not intend to
distribute profits as dividends.
CA 2013 defines a non-profit company as follows:
A company which has in its objects the promotion of
commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any
such other object can be registered as a non-profit company.
Such a company can apply its profits, if any, or other income in
promoting its objects and is prohibited from paying any
dividend to its members26.
As a non-profit company is registered under section 8 of the Companies Act,
2013, it is also known as Section 8 Company27.
A license from the Central Government is required for registration of a non-
profit company. This license may allow the company to be registered as a
limited company without the addition to its name of the word Limited, or
the words Private Limited. A non-profit company cannot alter the provisions
of its memorandum or articles except with the previous approval of the Central
Government28.
If on the winding up or dissolution of a non-profit company there remains
some money after the satisfaction of its debts and liabilities, the same may be
transferred to another non-profit company having similar objects.
Alternatively, the money may be transferred to the Rehabilitation and
Insolvency Fund formed set up by the Central Government for the purposes of
rehabilitation, revival and liquidation of the sick companies29.
25
26
27
Such companies were earlier known as Section 25 companies as they were registered under
28
Section 8 (4) (1) of the Companies Act, 2013.
29
10
Types of Companies
Instead of being defined by non words, some organizations are suggesting

new, positive-sounding terminology to describe the sector. A more broadly
applicable term, "Social Benefit Organization" (SBO) has been advocated for
by organizations such as MiniDonations30. Advocates argue that these terms
describe the sector in its own terms, without relying on terminology used for
the government or business sectors. However, use of terminology by a
nonprofit of self-descriptive language that is not legally compliant risks
confusing the public about nonprofit abilities, capabilities and limitations31.
Classification Based on Control

Based on control companies may be classified into four sub-categories:
associate company; subsidiary company, holding company and government
company.
Associate Company
An associate company (or associate) is a company in which another company
owns a significant portion of voting shares. In this case, an investor does not
consolidate the associate's financial statements.
CA 2013 defines an associate company as follows:
An associate company, in relation to another company, means a
company in which that other company has a significant
influence, but which is not a subsidiary company of the
company having such influence and includes a joint venture
company32.
In this context significant influence means control of at least twenty per cent
of total share capital, or of business decisions under an agreement. However,
the 20 per cent cut-off is only indicative. A company may be considered as
associate irrespective of the extent of shareholding if it can be shown that the
investor has significant influence over the financial and operating policies of
the investee company.
Factors that indicate significant may include one or more of the following:
Representation on the board of directors
Participation in policy-making decisions
30
Ramirez, Jr., L:"The Case for Social Benefit Organizations".MiniDonations.org Blog,
February 2010.
31
Alvarado, Elliott I.: "Nonprofit or Not-for-profit -- Which Are You?", page 6-7. Nonprofit
World, Volume 18, Number 6, November/December 2000.
32
11
Types of Companies
There are material intercompany transactions

There is an interchange of management personnel
There is technical dependency between the two entities
The extent of ownership in relation to other voting blocks of ownership
The investors interest in the
associate company is account for
by using the equity method under
Account Standard 23. AS 23
defines equity method as:
The equity method is a
method of accounting
whereby the investment is
initially recorded at cost,
identifying any goodwill or
capital reserve arising at
the time of acquisition. The
carrying amount of the
investment is adjusted
thereafter for the post-
acquisition change in the
investors share of net
assets of the investee. The
consolidated statement of
profit and loss reflects the
investors share of the
results of operations of the
investee.
Where a company has one or more
associate companies it is required:
(i) to prepare a consolidated
financial statement of the company
and of all the associate companies
in the same form and manner as
that of its own; place these
financial statements before the
annual general meeting of the
company; and (iii) attach along
with its financial statement, a
separate statement containing the
12
Types of Companies
salient features of the financial statement of its associate companies33.
Subsidiary Company
A subsidiary is an entity that is controlled by a separate entity. The controlled
entity is called a subsidiary company and the controlling entity is called its
holding company. The holding and the subsidiary do not necessarily have to
operate in the same locations, or operate the same businesses, but it is also
possible that they could conceivably be competitors in the marketplace. Also,
because a holding company and a subsidiary are separate entities, it is entirely
possible for one of them to be involved in legal proceedings, bankruptcy, tax
delinquency, indictment and/or under investigation, while the other is not.
The most common way that control of a subsidiary is achieved is through the
ownership of shares in the subsidiary by the holding company. These shares
give the holding company the necessary votes to determine the composition of
the board of the subsidiary and so exercise control. This gives rise to the
common presumption that 50 per cent plus one share is enough to create a
subsidiary. There are, however, other ways that control can come about and
the exact rules both as to what control is needed and how it is achieved can be
complex.
A subsidiary may itself have subsidiaries, and these, in turn, may have
subsidiaries of their own. A holding company and all its subsidiaries together
are called a group, although this term can also apply to cooperating companies
and their subsidiaries with varying degrees of shared ownership.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and
regulation. For this reason, they differ from divisions, which are businesses
fully integrated within the main company, and not legally or otherwise distinct
from it.
Subsidiaries are a common feature of business life and most if not all major
businesses organize their operations in this way. Large companies organize
their businesses into national or functional subsidiaries, sometimes with
multiple levels of subsidiaries.
CA 2013 defines a subsidiary company as follows:
A subsidiary company or subsidiary, in relation to any other
company means a company in which the other company (i)
controls the composition of the Board of Directors; or (ii)
exercises or controls more than one-half of the total share
33
13
Types of Companies
capital either at its own or together with one or more of its

subsidiary companies34.
Associate
Company
Subsidiary
Company
Companies Based
on Control
Holding Company
Government
Company
The word "control" used in the definition of "subsidiary" is generally taken to

include both practical and theoretical control. Thus, reference to a body which
controls the composition" of another body's board is a reference to control in
principle, while reference to being able to cast more than half of the votes at a
general meeting, whether legally enforceable or not, refers to theoretical
power. The fact that a company has a holding of less than 50 per cent plus one
share which, because the holdings of others are widely dispersed, gives
effective control is not enough to give that company 'control' for determining
whether it is a subsidiary.
A subsidiary company is not allowed to hold any shares, either by itself or
through its nominee, in the holding company35. However, a subsidiary
company can hold shares in its holding company, (i) in the capacity of a legal
representative of a deceased member of the holding company; or (ii) as a
trustee; or (iii) where the subsidiary company is a shareholder even before it
became a subsidiary company of the holding company36.
34
35
36
14
Types of Companies
Holding Company
A holding company provides a means of concentrating control of several
companies with a minimum amount of investment. The use of a holding
company is legally simpler and less expensive than other means of gaining
control of another company, such as merger or consolidation. A holding
company can reap the benefits of a subsidiarys goodwill and reputation, yet
its liability is limited to the proportion of the subsidiarys stock that it owns.
These and other factors make holding companies an effective form of
organization on both national and international levels. The parent company in
a conglomerate corporation is usually a holding company.
CA 2013 defines a holding company as follows:
A holding company, in relation to one or more other
companies, means a company of which such companies are
subsidiary companies37. A holding company is not allowed to
allot or transfer its shares to any of its subsidiary companies
and any such allotment or transfer of shares of a company to its
subsidiary company is void38.
Where a company has one or more subsidiary companies it is required: (i) to
prepare a consolidated financial statement of the company and of all the
subsidiary companies in the same form and manner as that of its own; place
these financial statements before the annual general meeting of the company;
and (iii) attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary
companies39.
Consolidated financial statements are financial statements that factor the
holding company's subsidiaries into its aggregated accounting figure. It is a
representation of how the holding company is doing as a group. The
consolidated accounts should provide a true and fair view of the financial and
operating conditions of the group. Doing so typically requires a complex set of
eliminating and consolidating entries to work back from individual financial
statements to a group financial statement that is an accurate representation of
operations. The consolidated accounts present the financial situation of a
group of companies as if they formed one single entity.
Government Company
A government company is a company in which fifty-one per cent or more of
the paid-up share capital is held by the Central Government, or by any State
37
38
39
15
Types of Companies
Government or Governments, or partly by the Central Government and partly

by one or more State Governments. A subsidiary company of a government
company is also considered to be a government company40.
The auditor of a government company is appointed by the Comptroller and
Auditor-General (CAG) of India. The CAG also gives direction to the auditor
of the government company about the way the accounts of the company are
required to be audited. The audit report is submitted by the auditor to the
CAG41.
Classification Based on Nationality

Based on nationality, companies may be classified into three-categories:
Indian company, foreign company; and an off-shore company.
Foreign Company
CA 2013 defines a foreign company as follows:
A foreign company means any company or body corporate
incorporated outside India which(i) has a place of business in
India either in its own name or through an agent, physically or
through electronic mode; and (ii) conducts any business activity
in India in any other manner42.
The key word in the above definition is place of business in India. It has
been held that merely holding of property cannot amount to having a place of
business. However, when representatives of a company incorporated outside
the country frequently stayed in a hotel in the country for looking after matter
of business, it was held that the company had a place of business in India43.
Additional compliance obligation is imposed on those foreign companies
where fifty per cent or more of the paid-up share capital is held by citizens of
India or by bodies corporate incorporated in India. Such a foreign company is
required to comply with the following provisions regarding the business
carried on by it in India as if it were a company incorporated in India44:
Delivery of certain documents to Registrar within 30 days of establishment
of business in India45;
40
41
42
43
Tovarishestvo Manufacture Liudvig Rabenek, Re [1944] 2 All ER 556.
44
45
16
Types of Companies
Preparation and delivery of annual financial statements to the Registrar46;

Display of the name of the company and the country in which it is
incorporated, on the outside of every office or place where it carries on
business in India and on all business letters, billheads and letter paper, and
in all notices, and other official publications of the company47.
Indian
Company
Companies
Foreign
Based
Company
Nationalitty
Offshore
Company
As on December 31, 2014, there were 3306 foreign companies active in India.
Of these foreign companies a majority (662) were incorporated in the USA,
followed by Singapore (454)48.
Offshore Company
The term offshore' means located or based outside of one's national
boundaries49. An offshore company is a company incorporated for operating
outside the country of its registration and/or the place of residence of its
directors, shareholders and beneficial owners. This is typically pursued to
realize various financial, legal or tax benefits.
Offshore companies are used for a variety of commercial and private purposes,
some legitimate and economically beneficial, whilst others may be harmful or
even criminal. Allegations are frequently made in the press about offshore
companies being used for money laundering, tax evasion, fraud, and other
forms of white collar crime.
46
47
48
http://profit.ndtv.com/news/economy/article-over-3-200-foreign-companies-operating-in-
india-government-601920
49
http://www.investopedia.com/terms/o/offshore.asp#ixzz3XCoUisY6
17
Types of Companies
Offshore companies are also used in a wide variety of commercial transactions

from generic holding companies, to joint ventures and listing vehicles.
Offshore companies are also used widely in connection with private wealth for
tax mitigation and privacy. The use of offshore companies, particularly in tax
planning, has become controversial in recent years, and several high-profile
companies have ceased using offshore entities in their group structure because
of public campaigns for such companies to pay their "fair share" of
government taxes50.
Mauritius is a favourite destination for setting up an offshore company. Some
of the benefits of setting up an offshore company in Mauritius are as follows:
legal tax exemption (GBC 2, which is a local kind of an offshore company,
is non-resident for tax purposes);
neither accounting nor reporting requirements;
business can be conducted internationally;
offshore company can be incorporated with one director and one
shareholder;
offshore company enjoys limited liability without any paid-up capital (no
minimum capital required);
offshore company formation takes 48 hours; and
high level of privacy protection (by structuring the shareholding through
nominee shareholders and appointing nominee directors)51.
Detailed information in relation to the use of offshore companies is
notoriously difficult to come by because of the opaque nature of much of the
business (and because, in many cases, the companies are used specifically to
preserve the confidentiality of a transaction or individual). It is a commonly
held view that most uses of offshore companies are driven by tax mitigation
50
"How we can make global companies pay their fair share of tax". Financial Times. 22 May
2013.
51
http://www.privacy-solutions.com/international-business-company-Mauritius.html
18
Types of Companies
and/or regulatory arbitrage, although there are some suggestions that the
amount of tax structuring may be less than commonly thought. Other
commonly cited legitimate uses of offshore companies include uses as joint
ventures, financing SPVs, stock market listing vehicles, holding companies
and asset holding structures, and trading vehicles. Intermediate uses of
offshore companies include uses as investment funds and private wealth
holding vehicles.
Shell Company
A shell corporation is a company which serves as a vehicle for business
transactions without itself having any significant assets or operations. Some
shell companies may have had operations, but those may have shrunk due to
unfavorable market conditions or company mismanagement. Shell
corporations are not in themselves illegal, and they do have legitimate
business purposes. However, they are a main component of the underground
economy, especially those based in tax havens.
Shell companies can also be used for tax avoidance. A classic tax avoidance
operation is based on the buying and selling through tax haven shell
companies to disguise true profits. The firm does its international operations
through this shell corporation, thus not having to report to its country the sums
involved, avoiding any taxes.
19
Types of Companies
Vanishing Company
In an era where capital market regulations were weak several fraudulent
companies were floated, which after raising capital, simply disappeared. Such
companies are termed as vanishing companies. Formally, vanishing companies
are companies which have defaulted on each of the following three criteria:
Not maintaining their registered offices;
Non-filing of statutory returns with the concerned Registrars of Companies
and stock exchanges as per listing agreements for a continuous period of
two years; and
Non-correspondence between the stock exchange and the company for a
long time.
A Central Coordination and Monitoring Committee (CMC), co-chaired by
Secretary, Ministry of Corporate Affairs and Chairman Securities and
Exchange Board of India (SEBI) was set up in 1999 to consider the issues
relating to companies that had come out with public issues and disappeared.
Out of the companies which came out with public issues during 1992-2005,
238 companies were identified as vanishing companies. Of these, 125
companies have since been traced out and another 32 such companies are
presently under liquidation and as such deleted from the list of vanishing
companies. As on March 31, 2014 there were 81 vanishing companies in
India52.
BALKRISHNA PARAB
Jamnalal Bajaj Institute of Management Studies,
University of Mumbai. Contact: E-Mail:
balkrishnaparab@jbims.edu; Cell: 9833528351;
Address: JBIMS, 164, DN House, HT Parekh
Marg, Backbay Reclamation, Mumbai 400 020.
52
20

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Lecture Notes on Corporate Laws

An artificial person created by law, having separate entity with

Classification Based on Liability of Members

Company Limited by Guarantee

CA 2013 defines a company limited by guarantee as:

Company Limited by Shares

When a company limited by shares is registered, its memorandum must state

Classification Based on Pattern of Membership

A private company is a company which by its articles of

One Person Company

A company is one whose securities can be traded on a

Instead of being defined by non words, some organizations are suggesting

Classification Based on Control

There are material intercompany transactions

salient features of the financial statement of its associate companies33.

capital either at its own or together with one or more of its

The word "control" used in the definition of "subsidiary" is generally taken to

Government or Governments, or partly by the Central Government and partly

Classification Based on Nationality

Preparation and delivery of annual financial statements to the Registrar46;

Offshore companies are also used in a wide variety of commercial transactions

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