The company is an instrument that unites the efforts of great number of people -shareholders, directors, members of the top management team and the functional or departmental managers and their subordinates.
The shareholders who provide the funds for the company are commonly regarded as the ‘owner’ of the company and its business and property.
Legally, they are not the owners; they have been given some rights and privileges of exercising control over the affairs of the company in the same manner as has an individual proprietor over his own business or partners over the partnership business.
1. Introduction to Company 2. Evolution of Company 3. Classification 4. Characteristics 5. Features 6. Nature 5. Mission or Purpose 6. Stages Involved in the Formation of a Company (With Steps) 7. Basic Documents Required in the Formation of a Company
8. Structure of Company Management 9. Difference between Company, Partnership and Limited Liability Partnership 10. Social Responsibility 11. Problems of Company Management 12. Advantages 13. Limitations.
Company: Introduction, Evolution, Features, Classification, Nature, Mission, Formation, Structure, Advantages and Limitations
Company – Introduction
The company is an instrument that unites the efforts of great number of people -shareholders, directors, members of the top management team and the functional or departmental managers and their subordinates. The shareholders who provide the funds for the company are commonly regarded as the ‘owner’ of the company and its business and property.
Legally, they are not the owners; they have been given some rights and privileges of exercising control over the affairs of the company in the same manner as has an individual proprietor over his own business or partners over the partnership business.
In practice, shareholders do not and, in most cases, cannot exercise control and carry out management of the business. They delegate their powers and authority to their elected representatives – the members of Board of Directors. The Board of Directors is thus entrusted with the task of direction and management. Usually, the Board appoints one of their members to be the Chairman, and one to the position of the Managing Director.
In theory, therefore, the control of a company’s affairs is in the hands of the shareholders; but, in practice, it is in varying degrees in the hands of the Board, Managing Director or any other chief executive, specially qualified for the task.
The power over enterprise having passed to capital, individual proprietorship or partnership could not supply sufficient capital nor could technology needed by large-scale business be handled by either of the forms of organisation. Therefore, it became necessary to have another form of organisation through which large sums of money could be amassed from large number of people who are either not capable of running business enterprises or have no time to do so.
They are however, willing to invest their savings in a business provided they are assured that their money is safe and they will not be called upon to pay anything more than what they undertake to invest.
The form suitable to serve these purposes was found to be a limited company. This form enables the entrepreneurs to get the necessary capital from the general public, retaining at the same time, the control and management in their own hands. As a matter of fact, most of the shortcomings of the partnership form of organisation can be overcome by organising a business as a joint stock company with limited liability.
Company – Evolution
The company form of ownership existed as early as the days of the Roman Empire. In England, it was formed prior to 1600. In our country, a form of joint-stock company had come into existence in the middle of the 17th century in South India; understandably, as it was here the Indians first came into contact with the European merchants.
During the 17th century, there was a considerable expansion of trade between India and Europe and European companies were competing with each other in South India to buy Indian merchandise of which cotton textiles constituted a very important part. So far, the European companies had followed the practice of procuring supplies through individual Indian merchants who were paid advances. The Indian merchants in turn advanced money to weavers to secure the output.
In a period of expanding trade, it was natural that the European companies had to deal more and more with a greater number of smaller merchants to procure supplies. This necessarily increased the cost of supplies as well as created uncertainty with regard to the quality and quantity of the goods supplied. Recovery of debts became a great problem.
It was primarily to overcome these difficulties that the European companies seem to have fostered among the Indian merchants the idea of organising joint- stock companies. The small merchants of the Coromandal coast who were often badly hit by their own competition, eagerly accepted the idea, but the wealthy Surat merchants did not really favour it and secretly competed with their own joint-stock companies in buying goods from the market.
Generally, a joint-stock company consisted of between five and ten merchants who together subscribed an amount varying from 10,000 to 1,50,000 pagodas (gold coins current in South India at that time). From the 1660s, many such companies are mentioned in the records of the English and the Dutch East India Companies. Their number began to decline after about 1720, until they disappeared almost completely by the end of the 18th century.
Then came the East India Company in the latter part of the 18th century. From then onwards, there was no going back and as times went by, numerous companies with huge capital investments came to be registered.
Company – Classification: Public Company, Private Company, Foreign Company, Company with Liability Limited by Guarantee and a Few Others
Companies are of different classes as explained below:
1. Public company;
2. Private company;
3. Foreign company;
4. Company with liability limited by guarantee;
5. Government company;
6. Unlimited company; and
7. Holding and subsidiary companies.
1. Public Company:
The meaning of a company as given earlier relates to a public company. In other words, in a public company members are at liberty to transfer their shares without affecting its continuity. Liability of members is limited. Company has relative permanence. This company is called public or open company because it invites the public to subscribe to its share capital.
2. Private Company:
A private company has some distinct features which make it different from a public company. It brings out the difference between the two. Incidentally, the meaning of private company can be made out from the table itself.
3. Foreign Company:
A foreign company is one which is registered outside India but has a place of business in India.
4. Companies Limited by Guarantee:
Here members agree to pay a sum, in addition to the amount of shares held by them, if the need arises, to pay off the creditors of the company. The additional amount to be paid is laid down in the memorandum or articles of association. A guaranteed company maybe with share capital or without share capital. Where the company is without share capital, it raises the needed funds through entrance fees and subscriptions. Where the company has a share capital, liability of the members extends to the additional sum guaranteed when the company is wound up. A company limited by guarantee is generally formed to promote art, science, religion or charity.
5. Government Company:
An enterprise becomes a government company when it has the following major characteristics:
i. It has most of the features of a private limited company;
ii. The whole of the capital or 51 per cent or over if it is owned by the government;
iii. All the directors or majority of them are appointed by the government;
iv. It is created under the provisions of the Companies Act, 1956; and
v. Its funds are obtained from government and in some cases, from private shareholders and through revenues derived from the sale of its goods and services.
6. Unlimited Companies:
A company not having any limit on the liability of its members is called an unlimited company. The members of an unlimited company are like a sole proprietor or partners of a firm, liable for its debts without any limit.
The concept of unlimited liability does not conform to the corporate concept which necessarily postulates limited liability. Hence, unlimited companies are rare but not extinct.
7. Holding and Subsidiary Companies:
Any company that buys a sufficient number of shares in another is called a holding company and the acquired one is called the subsidiary. The acquiring company is known as the parent company. Some holding companies own all the shares of their subsidiaries. But owning of not less than half of the shares is enough to call the owing company a parent company.
Company – Top 8 Characteristics: Artificial Person, Created by Law, Limited Liability, Perpetual Succession and a Few Others
The following characteristics of company are as follows:
1. Artificial Person – A company has a separate legal entity. It purchases and sells goods in its own name. It incurs expenses and receives income in its own name. It sues others and is sued by others in its name. As such company behaves like human being but it is actually not a natural person, so it is called artificial person.
2. Created by law – The company is formed, carried on and even wind up by observing legal formalities. The company has to apply to the Registrar of companies of the state with Memorandum of Association, Articles of Association and prospectus etc. for the certificate of incorporation.
3. Limited Liability – The liability of its shareholders is limited to the face value of shares allotted to him.
4. Perpetual Succession – The dictionary means permanent life. The company has got permanent life and goes on continuing in spite of the death, incapability, lunacy and insolvency of its shareholders. The company has distinct legal entity and existence separate from its shareholders.
5. Democratic Management – Company is managed in a democratic form. As democracy is defined by the govt. of the people, for the people and by the people, in the same way, company is established by shareholders and works for the shareholders. It is managed by board of directors who are the elected representatives of shareholders.
6. Common Seal – Every company has a common seal. The name of the company is engraved on the common seal. Every document of the company bears this seal. The company is an artificial person, so common seal as the symbol of company’s signature holds importance.
7. Separate Legal Entity – A company is a legal person, and its entity is quite distinct and separate from its members. It can purchase and sell the properties in its own name, can open bank account in its own name and enter into contracts. Since, a company has a legal personality distinct from that of its members, a creditor of a company can sue only the company for his debts and not any of its members.
8. Transferability of Shares – In a company, the shareholders are free to transfer his shares to any other person at any time. There is no restriction on transferring the shares.
Company – Top 6 Features
Feature # 1. Formation:
Since a company is a corporate body enjoying a separate entity of its own distinct from that of individual members, it can be set up only by following the procedure laid down for the purpose under law. The whole process of company formation may be divided into two stages- (i) Promotion, and (ii) Incorporation.
Promotion is the process of exploration, investigation, and the organisation of necessary resources with the object of initiating business under corporate ownership. In other words, it is the exercise of business entrepreneurship for establishing and starting a company.
The promoters are entrepreneurs who foresee prospects of gain through a particular line of business and take active steps to get the business started under company form of organisation. They take the necessary initiative and place before the general public a business proposition that needs public funds.
It is through their dynamism and active efforts that capital is collected from a large number of people often widely scattered and equally often pursuing different vocations of their own.
Incorporation is the legal process through which the separate corporate entity of a company is given recognition by law. Most of the companies are brought into existence through this process.
To secure incorporation, the promoters prepare and file with the Registrar of Joint Stock Companies the following documents:
(i) The Memorandum of Association, i.e. the charter of the company laying down the objects and the capital etc. of the company;
(ii) The Articles of Association, i.e., the rules and bye-laws governing the internal working of the company (if a company does not prepare its own Articles it may adopt the rules laid down in Table ‘A’ of the Companies Act, 1956);
(iii) Written consents of persons who have agreed to serve as directors of the company;
(iv) Notice of the registered office of the company (this may be filed even later within 28 days of registration); and
(v) A statutory declaration by the Secretary of the proposed company or a solicitor to the effect that all provisions regarding incorporation have been complied with.
Stamp duty has to be affixed on the Memorandum of Association according to the amount of the authorised capital and registration fee at prescribed rates has to be paid in. All these constitute the costs of incorporation. When the application of the company for registration is accepted, it is issued a Certificate of Incorporation which gives the company its corporate entity and attests the registration of the company.
In some other cases, a company may be set up by a special Act of Parliament.
In any case, a company cannot be formed just by mutual agreement and private arrangement like partnerships. Its formation generally involves compliance with legal provisions, and expense on incorporation.
Feature # 2. Financing:
When the company is to be a private limited one, capital is contributed by members through mutual agreement without public notice. But in case of a public limited company, business cannot be commenced unless the necessary capital is collected from the members of the investing public by the sale of shares.
For this purpose, a Prospectus has to be issued inviting the general public to take up the shares (i.e. the units of the capital of the company) of the company. The issue of Prospectus and the sale of shares through intermediaries involve additional costs.
But, then, by making an appeal to people residing far and wide in the country, the company is able to collect such large sums of money as will usually be beyond the imagination of partnerships. A company must collect at least the minimum subscription (i.e. the amount that the directors of the company consider necessary to start business) before it can be permitted to commence business.
Feature # 3. Control:
The members of a company, being the persons who buy shares in the capital of the company, are supposed to have ultimate control over company’s affairs. Law requires the approval of shareholders for all important decisions bearing on the company’s existence and working.
However, the control, in effect, lies generally with a group or clique of business magnates who take advantage of the fact that the shareholders are a kind of absentee owners who are widely scattered and are engaged in their respective vocations while holding shares in the company. However, those entrusted with the management have to publish and present to the shareholders the accounts and the results of the working of the company every year.
Feature # 4. Management:
Since the risk-takers or the owners of the capital of a company are widely scattered and are not necessarily whole-time businessmen, the management of the company has to be entrusted to a Board of Directors elected by, and responsible to, the general body of shareholders.
The Directors of the company lay down the corporate objectives and policies and secure their implementation through the rest of the organisation. They are also owners of shares in the capital of the company but all owners of capital do not have the opportunity of poking their nose in the day-to-day working of the company. It may also be noted that the shareholders can give broad directions at general meetings.
Feature # 5. Duration:
A company has perpetual existence in that its life is not affected or interrupted by the death, insolvency or withdrawal of any member. In case of a public limited company a member is free to transfer his shareholding to anyone but a company cannot buy back its own shares. In other words, the risk capital of a company will be paid back only when it is wound up.
Since a company gets its corporate entity by law, it can be wound up only through compliance with the provisions of the Companies Act. In this respect, too, a company differs from unincorporated or non-corporate organisations like sole proprietorships or partnerships which can be dissolved through a decision on the part of owners.
Feature # 6. Taxation:
A company’s profits are taxed at a flat rate against slab rates charged for non-corporate bodies. In other words, the rate of income-tax for a company will be the same irrespective of whether the profits are high or low. On the other hand, a partnership or a sole proprietorship will pay tax at increasing rates with increase in the amount of assessable income.
Company – Nature
Usually ownership, control and risk go together. “Bearing risk gives the right to control” – a say in management and risk should be borne by him who is the owner. So, ownership involves risk and the responsibility of risk gives the authority to control. Therefore, ownership, control and risk are generally inter-linked.
In a business organisation – sole proprietorship and partnership, ownership, control and risk are united in one and the same person – a proprietor or a partner.
But in the company form of organisation, there is a clear departure – here ownership, control and risk are not unified and there is a clear divorce or separation of management and control from ownership. The owners i.e., shareholders of a company, hold the power of management but in practice they do not manage it.
Since shareholders are a heterogeneous body of people, it is not possible for them to exercise the powers of controlling the affairs of the company which they legally possess; the control is held by a small group of shareholders who get themselves elected as directors and hold control over the company. This is the nature of company management. To be precise, the company management is democratic in name but oligarchic or autocratic or feudal in practice.
Since the shareholders reside in different places and are not acquainted with one another, they are not in a position to exercise the powers that they legally possess. The company law, therefore, authorises the shareholders to delegate their power of management to directors who are periodically elected by them.
Some matters of special importance affecting the interests of all, such as alteration of the Articles and Memorandum, sale or lease of the assets and change in the capital structure need the approval of shareholders.
The numerous, unorganised and mostly disinterested shareholders are ultimately placed in the hands of a few persons who are, of course, elected by them but once elected, they wield enormous powers. The law, however, empowers a general meeting of the company to remove a director before the expiry of his term but such removals are not an easy process, for the directors, after they are elected, develop certain vested interests which frustrate such a move.
Directors are not employees of the company or employed by the company, nor are they servants of the company or members of its staff. This being the position of directors, it is not so easy for the general shareholders to exercise control over them. In practice, therefore, the management of companies exhibit some marked features of oligarchy.
“In actual practice, management is the exclusive monopoly of a few business leaders. These persons constitute an ‘inner ring’ or a well-organised corporate group which is in a position to manipulate the working of the company to its own advantage without showing much regard for the shareholders’ interests” (Y. K. Bhusan).
But in law, shareholders appear to possess effective powers – as they have the right to elect directors, appoint auditors, summon meetings which are supposed to be conducted properly and matters are to be decided by voting after shareholders have been given proper opportunity to speak. It gives the impression of a perfect democracy prevailing in company management but as the matter stands in practice, oligarchy is the feature and nature of company management.
This oligarchic nature of company management has been a natural consequence of a number of factors such as ineffective company meetings, lack of unity and organisation among shareholders, defective system of directors’ election, system of proxies, closure of transfer books and corporate industrial groups.
So, the nature of company management is oligarchic and the democratic look is ‘illusory and unreal’.
Company – Mission or Purpose (With Examples)
Mission or purpose describes the boundaries of business operation in future perspective. It may not be very specific as future may demand change in the present set of activities. Consequently, the mission is so broad-based as to incorporate a paradigm of wide range of activities.
The Mission is contained in the Charter of the Company. A Charter once approved will vouch safe only those activities which conform to the tenets and the scope of the activity spectrum. Any activity or set of activities falling outside the scope of the Charter are ultra vires. The definition of the mission or the purpose of an organisation is a difficult task to be performed by the top management.
A classic example of objective is given in a rhyme given below:
“We shall build good ships.
At a profit if we can,
At a loss if we must,
But always good ships.”
The Shipping Company defines its mission as well as the goal. The mission is the “Quality” which is to be maintained under all circumstance. The goal is ship building.
Another example of mission or purpose is of a printing company which defines its mission as to publish only that material which falls within the tenets of Christian religion. The Managing Director in a Board Meeting declined the offer to print the labels of Whisky bottles as it conflicted with the principles of religion.
In spite of the examples given above, the description of the mission or purpose by top management it is a difficult proposition as stated by Selznick.
“… The aims of large organisations are often very broad. A certain vagueness must be accepted because it is difficult to foresee whether more specific goals will be realistic or wise…. This situation presents the leader with one of his most difficult but indispensable tasks.”
King and Cleland have given a semantic description of “Purposes” and “Missions”.
“The strategic planning process begins with the delineation of tentative organisational purposes, essentially a mission statement describing the “business that the organisation might pursue in the future. This statement, preliminary in nature, is indeed to put boundaries on future opportunities and to provide a point of departure from which the uniform requirements for assessing future opportunities can be assembled and evaluated.
Every Mission has to fit in the broader framework of socio-economic object of the society in which the organisation has to operate. According to Steiner, the organisation has to make use of socio-economic apparatus available in the society. If the business does it, it will survive and make profit, if it does not, it will die unless the society strikes to subsidise its survival.
Debating on the issue of mission further, it may be stated that mission may be (1) Abstractional or (2) Operational. Abstractional is like ethical code of good quality, honesty, integrity etc. Operational mission is more positive in terms of markets to be served, products and services to be produced and manner in which it would like to compete with other competitors.
Mission, on the other hand, reflects the organisation’s long term commitment in order to establish the identification and direction towards activity. The mission of an Oil Company like Oil and Natural Gas Commission is “to stimulate, continue and accelerate efforts to develop and maximise the contribution of the energy sector to the economy of the country.”
Likewise, the mission of Madras Fertilizers is to produce as well as market fertilizers and bio-fertilizers and market agro-chemicals efficiently and economically and serve the farmers and other customers with quality products and services to the benefit of the national economy.
National Thermal Power Corporation states its mission in the following words:
“To plan, promote and organise an integrated and efficient development of thermal power in the country including the formulation of plans, investigation, research and design preparation of project repairs, construction, generation, operation and maintenance of thermal power stations and the associated transmissions and distribution network.”
Company – 4 Main Stages Involved in the Formation of a Company (With Steps)
A company comes into existence after taking a series of steps.
These steps can be broadly grouped under the following stages:
(1) Promotion stage
(2) Incorporation or Registration stage;
(3) Capital Subscription stage
(4) Commencement of Business stage.
A company is born when a Certificate of Incorporation is issued by the Registrar of Companies. The last two stages are required for the floatation of the company. The term ‘floatation’ means to get the company going. This requires raising of the capital and obtaining the Certificate to Commence Business.
A private company can commence its operations immediately after the second stage. But a public company has to obtain the “Certificate of Commencement of Business” in order to commence its operations.
The steps under various stages have been shown below:
Promotion begins when someone identifies an idea regarding some business which can be profitably undertaken by a company. It includes preliminary investigation of the feasibility of the idea, assembling of business elements and making arrangement of the funds necessary to launch the enterprise as a going concern. Persons who assume primary responsibility with regard to these matters are termed as – “Promoters”.
The promotion stage involves the following steps:
(i) Identification of business opportunity.
(ii) Analysing feasibility of the business proposition.
(iii) Arranging for capital, workforce, machines, materials, etc.
(iv) Motivating influential people to act as founder members or signatories to the Memorandum of Association.
(v) Appointing first directors who are reputed businessmen or professional managers.
(vi) Entering into arrangements with bankers, brokers, underwriters, etc., for raising capital from the public.
Incorporation of a company is the second stage of the company formation which leads to registration with the Registrar of Companies.
It involves the following steps:
(i) Approval of Name:
The first task for the promoters is to check up with the Registrar of Companies about the availability of the proposed name of the company. The approval of the name must be obtained to rule out the possibility of resemblance with the name of any other company.
(ii) Filing of Documents:
After the approval of the name, the following documents have to be submitted to the Registrar of Companies:
(a) Memorandum of association,
(b) Articles of association,
(c) Statement of authorised capital,
(d) A list of directors with their names in full, addresses and occupations and age,
(e) Consent of the directors to act as directors,
(f) Notice of the address of the registered office,
(g) A statutory declaration that all the requirements of the law for registration have been duly complied with.
(iii) Payment of Registration Fee:
(iv) Registration and Certificate of Incorporation:
On filing the above documents and payment of necessary fees, the Registrar, if satisfied that all the legal formalities have been fulfilled, will register the company and issue a Certificate of Incorporation under his seal. The Certificate of Incorporation brings the company into existence as a legal person and may be termed as its birth certificate. It is a conclusive proof of the fact that the company is duly registered and all the requirements of law have been complied with.
A private company can commence business immediately after its incorporation. But a public company having share capital has to pass through two more stages before actually starting its business operations.
After obtaining the Certificate of Incorporation, the promoters and directors proceed to ensure floatation of the company. Floatation of a company means to get it going. For this purpose, a public company must – (a) raise capital; and (b) obtain Certificate to Commence Business.
The following steps are taken to raise capital for the company:
(i) SEBI Approval:
The Securities and Exchange Board of India (SEBI) which is the capital market regulatory authority in India has issued guidelines for disclosure of information and investor protection. A company inviting funds from the general public must make adequate disclosure of all relevant information and must not conceal any material information from the potential investors. This is necessary for protecting the interest of the investors. Prior approval of the SEBI is, therefore, required before going ahead with raising capital from the general public,
(ii) Filing of Prospectus:
In order to raise capital from the public, a prospectus is to be issued or a statement in lieu of prospectus is to be filed with the Registrar of Companies. The draft prospectus or statement in lieu of prospectus is approved by the Board of Directors in its meeting. The Board may decide to get the issue of share capital underwritten to ensure that minimum subscription is raised.
(iii) Appointment of Bankers, Brokers and Underwriters:
Raising funds from the public is a complex task.
In order to ease the process, experts in different fields are appointed:
(a) Bankers are appointed to receive and deposit the application money.
(b) Brokers are appointed to distribute the share application forms and encourage the public to subscribe the company’s shares.
(c) Underwriters are appointed if the company is not sure of receiving the minimum subscription of shares by the public. Underwriters undertake to buy the shares if they are not subscribed by the public. They receive a commission for the same.
(iv) Minimum Subscription:
The application forms for the allotment of shares along with the application money are received by the bankers of the company mentioned in the prospectus. Before the allotment of shares, it must be ensured that the ‘minimum subscription’ as mentioned in the prospectus has been received in cash by the public subscription.
In case the company fails to raise the minimum subscription (90 per cent of the amount of capital issued to the public, as per SEBI guidelines) within 30 days from the date of issue of the prospectus, all money received from the public will be repaid within such time as may be prescribed by the SEBI and no allotment of shares will be made.
(v) Qualification Shares:
It is compulsory for the directors of a public company that they must buy qualification shares and make the payment for that. It means that each proposed director must be a shareholder first in order to become a director. The company must make a declaration that the directors have paid in cash for the qualification shares allotted to each of them.
(vi) Application to Stock Exchange:
A public company must make an application at least to one recognized stock exchange for permission to deal in its shares. If the company does not get permission within 10 weeks from the date of closure of subscription list, then the allotment will become void and all the money received from the applicants will have to be returned within such time as may be prescribed by the SEBI.
(vii) Allotment of Shares:
The public company having received the minimum subscription will proceed with allotment of shares to the applicants. Allotment letters are issued to all successful applicants. Excess application money, if any, is returned to the applicants or adjusted towards allotment money due from them. It is required to submit a return of allotment to the Registrar of Companies containing the names and addresses of the shareholders and the number of shares allotted to each.
A public company, having a share capital will have to file the following documents with the Registrar to secure the Certificate of Commencement of Business:
(i) The declaration that shares payable in cash have been allotted at least up to the amount of the minimum subscription.
(ii) The declaration that every director has paid in cash the application and allotment money on the qualification shares allotted to him.
(iii) The declaration that no money is pending to pay back to the applicants.
(iv) The statutory declaration by the secretary or one of the directors that the necessary requirements have been complied with.
The Registrar will scrutinise the above documents and if satisfied, he will issue a Certificate of Commencement of Business. It is after getting this certificate that the process of formation of a public company having share capital is completed. This certificate entitles the company to start its business.
Company – 3 Basic Documents Required in the Formation of a Public Company
There are three basic documents which are required to be filed with the Registrar of Companies in the formation of a public company.
1. Memorandum of Association,
2. Articles of Association, and
3. Prospectus or Statement in lieu of Prospectus.
The Memorandum of Association is the most important document of a company. It is the charter or constitution of the company. It lays down the objects and powers of the company as well as the scope of operations of the company beyond which it cannot go. It is the basic document on which alone the company can be incorporated. It is unalterable except in cases, in the mode and to the extent for which express provision has been made in the Companies Act.
The purpose of the memorandum is to enable the shareholders, creditors and those who deal with a company to know what is its permitted range of enterprise. In fact, it can be considered as the foundation on which the structure of a company is based. Its primary importance lies in the fact that a company cannot undertake such operations which are not mentioned in its memorandum.
Contents of Memorandum:
The Memorandum of Association contains the following clauses:
i. The Name Clause:
Under this clause, the corporate name of the company is stated.
Any suitable name can be chosen by a company subject, however, to the following restrictions:
a. The word “Limited” or “Private Limited” must be the last word in the name of every public or private company limited by shares respectively.
b. The proposed name should not be too identical or similar to the name of another existing company or firm.
c. The proposed name should not convey any connection or link with a government department or local authority.
The name of the company is required to be engraved in the common seal of the company and affixed on all important documents.
ii. The Situation or Registered Office Clause:
This clause contains the name of the State in which the Registered Office of the company is to be situated. This is required in order to fix the domicile of the company, i.e., place of its registration. Along with the name of the State in which the Registered Office is situated, the address of the Registered Office is also given.
The purpose of giving the address of the registered office is that all communications and notices to the company may be sent at this address. Further, all important documents like register of members, register of debenture holders, register of charges, minute books, etc., are to be kept at the registered office. These could be inspected by the members at the given address of the company.
iii. The Objects Clause:
This clause sets out the objects with which a company is formed. The company is not legally entitled to do any business other than that specified in its objects clause.
The objects clause is divided into – (a) the main objects of the company and the objects incidental to the attainment of main objects; and (b) the other objects of the company not included under (a).
While deciding upon the objects of the proposed company, the following points must be kept in mind:
b. They must not be against the provisions of the Companies Act.
c. They must not be against the public policy or interest of the general public.
d. They must be stated clearly and definitely.
e. They must be quite comprehensive. Both the main objects and the subsidiary or incidental objects must not be restrictive.
iv. Liability Clause:
This clause states that the liability of members is limited to the amount, if any, unpaid on their shares. In case of ‘companies limited by guarantee’, this clause will state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.
v. The Capital Clause:
Every limited company (whether limited by shares or limited by guarantee), having a share capital must state the amount of its share capital with which the company is proposed to be registered and the division thereof into the shares of fixed denomination.
vi. The Association or Subscription Clause:
Under this clause, the signatories to the memorandum “declare association”, i.e., they desire to be formed to a company and that they agree to the purchase of qualification shares, if any. Each subscriber must take at least one share. There must be at least 7 signatories in case of a public company and at least 2 in case of a private company. The provision to purchase the qualification shares does not apply in case of companies limited by guarantee or companies with unlimited liability.
The Articles of Association of a company contain the rules relating to the management of its internal affairs. The articles define the duties, the rights and the powers of the Board of Directors as between themselves and the company at large. They also prescribe the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may be made.
A public company limited by shares may opt for the adoption of Table F (i.e., the model set of articles given in Schedule I appended to the Companies Act). The other types of companies are required to file their articles of association along with the memorandum at the time of registration.
Role of Table F:
The Table F contains the model set of articles for the internal administration of a public company. If a public company adopts Table F, it need not formulate Articles of Association. Table F is a substitute of Articles of Association. Adoption of Table F speeds up the process of formation of a public company. It saves both time and money in the drafting and printing of Articles of Association.
Contents of Articles of Association:
The Articles of Association usually contain provisions relating to the following matters:
i. The amount of share capital and different types of shares.
ii. Rights of each class of shareholders.
iii. Procedure for making allotment of shares.
iv. Procedure for issuing share certificates.
v. Procedure for transfer and transmission of shares.
vi. Procedure for forfeiture of shares.
vii. Lien over shares.
viii. Procedures for conduct of meetings, voting, quorum, poll and proxy.
ix. Appointment, removal and remuneration of directors.
x. The powers and duties of board of directors.
xi. Procedure regarding alteration of share capital.
xii. Matters relating to distribution of dividend.
xiii. Matters relating to keeping of statutory books.
xiv. Audit of books of accounts.
xv. Procedure regarding the winding up of the company.
The purpose of issuing a prospectus is to acquaint the investors about the proposed company and induce them to invest in its shares. The law with a view to protecting the interest of investors regulates the issue and the contents of prospectus.
A prospectus means “any prospectus, notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of a company”. The term “Prospectus”, therefore, includes any document which invites deposits from the public or invites offers from the public to purchase shares or debentures of a company.
The three essential elements of a prospectus are as follows:
i. There must be an invitation to the public.
ii. The invitation must be made “by or on behalf of the company”.
iii. The invitation must be “to subscribe or purchase its shares or debentures or such other instruments”.
Importance of Prospectus:
The prospectus of a company serves the following purposes:
i. Prospectus contains the summary of the company’s past history and present operations.
ii. It reflects the future programmes and prospects of the company.
iii. It serves as an invitation to the public to subscribe to the shares and debentures of the company.
iv. It provides a legal document of the terms and conditions on which shares and debentures have been issued.
v. It identifies the persons who can be held responsible for any untrue statements made in it.
Contents of a Prospectus:
Prospectus is the only document through which the prospective investors can evaluate the soundness of the company.
It must contain at least the following broad particulars:
i. Company’s name and address of its registered office.
ii. The nature and business of the company.
iii. The main objects of the company.
iv. The number and classes of shares, if any, and the nature and extent of the interest of the holders in the property and profits of the company.
v. The details about the redeemable preference shares intended to be issued, if any, i.e., the date and mode of redemption etc.
vi. Qualification shares of directors, if any.
vii. Any provision in the articles as to the remuneration of the directors, managing director or otherwise.
viii. The names, addresses, and occupations of the directors, managing director or manager.
ix. The “minimum subscription” that is, the minimum amount which, in the opinion of directors, must be raised by the issue of shares.
x. Rights, privileges and restrictions attached to each class of shares.
xi. The amount payable on application and allotment of each class of share.
xii. The date and time of the opening and closing of the subscription list.
xiii. Names of merchant bankers to the issue.
xiv. Registrar to the issue.
xv. A reasonable time and place at which copies of audited balance sheets and profit and loss accounts of the company may be inspected.
xvi. The names of Regional Stock Exchange and other stock exchanges where application has been made for listing of present issue.
A public company having a share capital may sometimes decide not to approach the public for securing the necessary capital because it may be confident of obtaining the required capital privately. In such a case, it will have to file a ‘Statement in lieu of Prospectus’ with the Registrar.
A ‘Statement in lieu of Prospectus’ is drafted in accordance with the particulars set out in “Schedule III” of the Companies Act. It contains information very much similar to a prospectus. It must be duly signed by all the directors and a copy thereof must be filed with the Registrar at least three days before the allotment of the shares. However, a private company is not required to either file “Prospectus” or a “Statement in lieu of Prospectus” with the Registrar.
Statement in lieu of prospectus is issued under the following situations:
(i) When the prospectus is not issued.
(ii) When the company has decided to raise capital from the private sources.
(iii) When a private company is converted into a public company and it is decided not to issue shares or debentures to the public.
Company – Structure of Company Management
Besides the Functional Managers, there are Heads of departments, subordinate officers and supervisory managerial groups.
Usually in a big company, there is an Executive Committee of the Board to control and supervise the Top Managerial Group and a number of Sub-Committees of the Board. These Sub-Committees may be permanent or on an ad-hoc basis. The permanent Sub-Committee, for example, Finance Committee and Ad-hoc Sub-Committee such as Allotment Committee.
Management by committee is the usual feature of the management of a big company. But it has to be observed that all committees and sub-committees derive their authorities from the Board. They have no original authority; their authorities are delegated and they are to do what they are told to do. Of course, all these are subject to Board Resolution, Company’s Articles and Companies Act.
The pattern of organisation may slightly differ from one company to another but the general pattern remains more or less the same. Big companies have similar nature of organisation pattern with the differences between a manufacturing and a trading company. However, we can say that the overall supervision rests with the Board and the company is managed by a large number of officials or management personnel of middle and low level under the leadership of the Managing Director.
No company can employ at the same time Managing Director and Manager, either of them will have to be appointed. Earlier, the managing agents used to be the chief executives of the company but now this system has been abolished. Along with them the system of appointment of Secretaries and Treasurers has also been abolished. Therefore, only Managing Director or General Manager can be entrusted with the functions of the chief executive of the company.
1. Chief Executive:
The chief executive of a company has the primary responsibility to run the entire business of the company to achieve its desired goals. Various management functions such as planning, organising, co-ordinating, control etc., to ensure smooth functioning of the organisation have to be performed by him.
We can sum up the functions of the chief executive of a company as follows:
(1) To formulate various policies, plans and sub-plans within the overall policy of the company as decided upon at the Board meeting. He will see to it that the policies taken at Board meetings are translated into action.
(2) To build up proper organisational structure where he will be the central authority. From him will emanate the powers and duties of other management personnel. As the chief executive of a big organisation (a company), he is to ensure harmonious co-ordination among the different parts of the organisation.
(3) To motivate the management personnel under him to work in a team-spirit, which is to be ensured by him as the leader of the organisation of management.
(4) The chief executive, as a matter of fact, acts as a liaison between the Board and the subordinate executives. Boards occasionally meet but the members of the Board are kept abreast of every information by the chief executive. The chief executive is a man of the Board as well as a man of the subordinate executives. His is a role of co-ordination, control and motivation – a very important part to play to lead a big organisation like a company. The credit or discredit of the performance of the organisation goes to him primarily and his is not a sine cure position. He is the pivot of the whole organisation.
(5) The chief executive must be a man with one eye inside the organisation and the other one outside, to keep constant watch to what has been happening in the environment which will have impact on the overall performance of the organisation. He will have to keep constant touch with the Government/Governments, trade associations, trade unions which matter in the efficient running of the organisation.
2. Managing Director:
On and from the commencement of the Companies (Amendment) Act, 1988, every Public Company or a Private Company which is a subsidiary of a Public Company, having a paid up share capital of such firm as may be prescribed, shall have a managing or whole-time director or a manager.
Certain Persons Not to be Appointed Managing Directors:
(1) An undischarged insolvent or one who has at any time been adjudged an insolvent.
(2) A person who suspends or has at any time suspended payment to his creditor or makes or has at any time made, a composition with them; or
(3) One who is or has at any time been, convicted by a Court of an offence involving moral turpitude and for any other offence.
(4) One who is not a citizen of India and is not resident in India.
(5) One who has not attained the age of thirty years or has attained the age of sixty five years.
Appointment of the Managing Directors must be made with the approval of the Central Government unless such appointment is made in accordance with the conditions specified in Parts I and II of Schedule XIII and a return in the prescribed form is filed within ninety days from the date of such appointment.
The Board of Directors appoints the managing Director as a whole-time officer of the company and is entrusted with the detailed management of the company. A managing director is one of the members of the Board of Directors. No association of persons or anybody corporate can be appointed as the Managing Director under the Companies Act 1956.
The Act defines the Managing Director as “a director who, by virtue of an agreement with the Company or of a resolution passed by the Company at the general meeting or by its Board or by virtue of its Memorandum or Articles of Association, is entrusted with substantial powers of management which would not otherwise be exercisable by him and includes a director occupying the position of a Managing Director, by whatever name called.” It lays emphasis that he should have “substantial powers of management”.
Major functions of this top managerial authority are:
(1) Within the established company goals and policy, the MD determines primary operating policies.
(2) MD organises and plans the organisation structure.
(3) In consultation with the Personnel Manager, MD plans and organises the Personnel Management.
(4) In the management of the personnel department of the company MD is directly involved in the selection, training, promotion and remuneration of the company’s managerial staff in ensuring management development.
(5) As the chief executive, MD exercises overall control and supervision over purchasing and inventories.
(6) He formulates and approves budgets.
(7) To ensure sound financial position of the company MD administers finances and financial controls.
(8) Marketing plans and programmes and overall control and supervision over production are within the administrative and managerial jurisdiction of the MD.
(9) He plans and organises accelerated growth of business.
(10) As the chief executive, he maintains external relations of the company with the Government, customers, trade unions, trade associations etc.
A manager is an individual who, subject to superintendence, control and direction of the Board of Directors, has the management of the whole or substantially the whole of the affairs of the company and includes a director or any person occupying the position of a manager by whatever name called and whether under a contract of service or not. [Sec. 2 (24)].
Only an individual can be appointed as the manager under the Companies Act. He is appointed for the general management of the company. There is no bar as to the appointment of a director as the manager of the company. No body corporate or association of persons can be appointed as the manager of the company.
The appointment, re-appointment, remuneration, terms of office and number of membership are all similar to those of a Managing Director. The specific provisions are with regard to the disqualifications of persons for the appointment as Manager.
(1) A person who is an undischarged insolvent or one who has been adjudged insolvent at any time within the preceding five years;
(2) A person who has suspended payment to his creditor or has made a composition with them; and
(3) A person who has been convicted of an offence involving moral turpitude at any time within the preceding five years by a Court in India.
These disqualifications can, however, be waived by the Central Government if it deems desirable to do so.
In a big company, the General Manager is appointed at the head of the departmental or functional managers. He acts as a ‘linking pin’ between the top level management and the middle level management. Generally, a business concern appoints a General Manager. He heads the ‘line’ people of the organisation.
There are functional managers in a business company in charge of production, purchasing and marketing. The General Manager is placed at the top of the line managers. He is, therefore, connected with technical and commercial activities unlike the Secretary of the company who is a specialist and a staff person and looks after the functions necessary to carry out the basic functions.
4. Organisation of the Board of Directors:
In all forms of company organisation the principal authority is the ‘Board of Directors’. Company is a person in the eye of law but it is an artificial person. It cannot think, it cannot move, it cannot see, it cannot hear – everything on its behalf has to be done by some other persons as its agents. These persons are called Directors. They are collectively called the “Board of Directors”.
The shareholders delegate the power of Company Management to the directors elected by them. They act as a Board and individually they have no powers. It is, however, possible that the Board may delegate its powers to either one director or to a committee of directors.
The Board of Directors is the ultimate executive authority of the company. Directors, therefore, carry on the business of the company, enter into contracts for the company and look after the property and assets of the company.
As to their position, judicial pronouncements are not unanimous – some have described them as agents, some as trustees, some as managing partners and it has also been held that they stand in a fiduciary position towards the company in regard to the power conferred on them by the Articles and also the capital under their control.
They are not persons in the employment of the company nor are they servants of the company or members of its staff. None of the aforesaid descriptions is exhaustive. “Directors are persons invested with strictly defined powers of management under the Articles of Association of a Corporation”. (L. J. Bowen)
Powers and Duties of Director:
The directors are the ultimate authority so far as the management and control of the company are concerned. All the property of the company is vested in their hands and they have to look into the affairs of the company. To discharge their duties, they have been given wide powers by the Act. Their power can be broadly divided as – (1) Statutory powers, and (2) Executive powers (exercised in connection with the management of the affair of the company).
(1) Statutory Powers:
These powers are derived from the Companies Act, 1956. The Act has laid down the manner in which such powers are to be exercised by the Board. These powers are of three types –
(i) Power which cannot be delegated. Sec. 292 of the Act provides that to make calls and to issue debentures are the power of the Board which cannot be delegated.
(ii) Power which can be delegated such as – to borrow money, to invest funds of the company and to advance loans,
(iii) There are powers which cannot be exercised by the Board without the approval of the company in its general meeting. They are –
(a) To sell, lease or dispose-off the undertaking of the company
(b) To remit or give time for repayment of a debt due by a director
(c) To make investment otherwise than in the trust securities
(d) To borrow money in excess of the paid-up capital and free reserves of the company (apart from the temporary loans obtained from the banks)
(e) To contribute to charities etc. not related to the business or welfare of its employees exceeding Rs. 25,000 or 5% of average net profits during the three financial years immediately preceding, whichever is greater.
(2) Executive Powers:
The Board is the chief executive. It has to exercise executive power for the efficient management of the company. The powers are –
(i) Appointment of officer – The Board is authorised to appoint officers such as Chairman, Secretary, Chief Accountant. The Board is empowered also to fix up their remuneration and decide their service conditions.
(ii) Formulation of main policies – The Board formulates the broad policies of the company. It is to see that the policies are translated into action.
(iii) Recommendation about dividend – The Board recommends rate of dividend in the general meeting. The shareholders are required to approve it but they do not have power to increase the rate of dividend recommended by the Board.
(iv) Making contracts – The Board enters into contracts such as purchase of fixed assets, construction of buildings etc. The important contracts are generally entered into by the Board.
(v) Issue of additional securities – The terms, conditions, time, amount of issue of additional shares and debentures are to be decided upon by the Board to raise funds required by the company but the issue of such securities is ultimately authorised by the company in its general meeting.
(vi) Other powers – To ensure smooth running of the company, the Board exercises some other powers. It has to decide about the organisation and charges required. The broad objectives of the company are to be laid down by it. It reviews the working from time to time. To direct and control the affairs of the company, the Board has to exercise these powers.
To prevent misuse of powers, various restrictions have been imposed on the powers of the directors by the Companies Act, 1956. These are restrictions as to the number of directorships, assignment of office, loans to directors, holding of office of profit, disclosure of director’s interest in any contract by the company and Board’s sanction for contracts. It is the duty of directors to see that these provisions of the Act are complied with.
A director has, in general, the duty to ensure protection of shareholders’ rights and safeguard their interests by participating in the management of the affairs of the company efficiently. From the legal point of view, a director has to observe all the legal formalities to maintain the legality of the company itself because a company, as a body corporate, is a ‘Contemplation of law’. As ‘officers’ of the company, the directors are subject to punishment if legal obligations are not fulfilled by them.
For their fiduciary relationship with the company, directors have the duty to act with good faith and loyalty. They have to apply care and skill in conducting the affairs of the company.
Duties of directors are both collective and individual. As the directors function collectively as a Board, most of the duties are collective.
Company – Difference between Company, Partnership Firm and Limited Liability Partnership
Difference # Company:
1. Registration – Compulsory registration required with the ROC. Certificate of Incorporation is conclusive evidence.
2. Name – Name of a public company to end with the word “limited” and a private company with the words “private limited”.
3. Capital Contribution – Private Company should have a minimum paid up capital of Rs. 1 lakh and Rs.5 lakhs for a public company.
4. Legal Entity Status – Is a separate legal entity.
5. Liability- Limited to the extent of unpaid capital.
6. No. of Shareholders / Partners- Minimum of 2. In a private company, maximum of 50 shareholders.
7. Foreign Nationals as Shareholder / Partner – Foreign nationals can be shareholders.
8. Taxability- The income is taxed at 30% + surcharge + cess
9. Meetings- Quarterly Board of Directors meeting, annual shareholding meeting is mandatory.
10. Annual Return- Annual Accounts and Annual Return to be filed with ROC.
11. Audit – Compulsory, irrespective of share capital and turnover.
12. How do the Bankers View – High creditworthiness, due to stringent compliances and disclosures required.
13. Dissolution-Very procedural. Voluntary or by Order of National Company Law Tribunal.
14. Whistle Blowing-No such provision.
Difference # Partnership Firm:
1. Registration – Not compulsory. Unregistered Partnership Firm will not have the ability to sue.
2. Name – No guidelines.
3. Capital Contribution – Not specified
4. Legal Entity Status – Not a separate legal entity
5. Liability – Unlimited, can extend to the personal assets of the partners
6. No. of Shareholder/ Partners – 2- 20 partners
7. Foreign Nationals as Shareholder/ Partner – Foreign nationals cannot form partnership firm.
8. Taxability – The income is taxed at 30% + surcharge + cess
9. Meetings- Not Required
10. Annual Return- No returns to be filed with the Registrar of Firms
11. Audit – Compulsory
12. How do the Bankers View – Creditworthiness depends on goodwill and credit-worthiness of the partners.
13. Dissolution- By agreement of the partners, insolvency or by Court Order
14. Whistle Blowing-No such provision.
Difference # Limited Liability Partnership (LLP):
1. Registration – Compulsory registration required with the ROC.
2. Name – Name to end with ‘LLP’ “Limited Liability Partnership”
3. Capital Contribution – Not specified.
4. Legal Entity Status – Is a separate legal entity
5. Liability – Limited to the extent of the contribution to the LLP.
6. No. of shareholders / Partners – Minimum of 2. No maximum.
7. Taxability – Tax rate for individual/ company is applied.
8. Meetings- Not required.
9. Annual Return- Annual statement of accounts and solvency & Annual Return has to be filed with ROC.
10. Audit- Required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs. 40 lakhs.
11. How do the bankers view- Perception is higher compared to that of a partnership but lesser than a company.
12. Dissolution- Less procedural compared to company. Voluntary or by Order of National Company Law Tribunal.
13. Whistle blowing- Protection provided to employees and partners who provide useful information during the investigation process.
Company – Social Responsibility
The Company Organisation is the best and the most important form of business organisation. The big business enterprises are usually in this form. So, the management of a company calls for an outlook which is compatible with social outlook. Social responsibilities of business can now be considered as the ultimate objectives of business in the changed concept of business. No doubt, a business is an economic unit and it must justify its existence on its economic performance but that is now considered as a means and not an end – the end is social service.
In the words of P. F. Drucker – “The business enterprise must be so managed as to make the public good the private good of the enterprise”.
The concept of trusteeship has been gaining ground and a business enterprise is a trust of the community and as such it must discharge its obligations towards the various sections of the society.
A company, popularly considered as a democratic organisation owned by a large number of shareholders scattered all over the country and even outside the country, has undoubtedly its obligations towards its shareholders. The company must provide a fair return on capital to shareholders. The shareholders, being owners, love the rights to be kept informed about their company affairs and, as such, it is the responsibility of the company to supply them regular, accurate and full information about the working of their company.
A big form of organisation as it is, a company has a large number of employees who constitute an important segment of society. The company should provide them with meaningful work. All possible endeavour should be made to ensure better living of the workers.
It should be the aim of the management to see that their economic rights are fully protected, their collective rights are not affected and their social rights and other benefits as member of society are encouraged and safeguarded through the benevolent attitude of their employers – the Company Management.
Consumers and the company are closely related and it does not require any elucidation. One cannot go without the other. They are interdependent. Therefore, goods and services provided by a company must be of such standard and quality which will be above any criticism. At fair price, better goods and services suitable and proper for the society should be provided.
No illegal and restrictive trade practices should be adopted to the detriment of the interest of the consumer. In short, in the whole form of business, a company should always hold the ethical standards at the highest level possible and under no circumstances sheer lust for profit should predominate. Here lies the social responsibilities of the company.
The company and the community are inseparable. So the company should behave like a good citizen – honest and scrupulous. Obedience to law, regular payment of taxes and discharge of other obligations – monetary and social as imposed by conscience and the Government of the country – should be the way of conduct of a good management of a company.
Besides the responsibilities of a company towards different segments of society, it must be observed that to build up an image of the company, it has a co-ordinative function. To help establish a relation among different sections of society, a company should maintain a good public relations department; the company will maintain a ‘liaison’.
In our country, we know the Tatas have very effective public relations organ of the organisation which maintains public relations in all its modern aspects. The results have been obvious – the image of the Tatas definitely beam brighter. This image building through the discharge of social responsibilities is a new technique in business management and the professional management of the companies today gives attention to this. Thus goodwill is created, more business is done, the company prospers and the objectives, both social and economic, are achieved.
So, social responsibilities of a company need be discharged not only in the interest of the society but also in the interest of the company itself. Business is not a one-way traffic. ‘Give and take’ should be the policy and it is now an accepted truth that business cannot survive without discharging its social responsibilities. Even a sole proprietorship concern is to admit it, not to speak of a big concern like a company which has interaction with various sections of the society.
Company Management should be based on ’Scientific Management’ principles, as far as possible, to establish the claim of the corporate form of organisation as the ‘best form’ and to pursue the changed concept of business as a social institution.
“Social responsibilities of business are now an accepted concept. All companies, public or private must work in public interest. The objective includes not only a reasonable return on capital but also a concern for the interest of the consumers, the interest of labour and an overall interest of the nation” (The Sachar Committee).
In explaining the concept of social responsibility of corporations, D. L. Majumdar indicated the important implications as follows:
(1) The responsibility of management for ensuring the continued efficient management of the company.
(2) The responsibility to employees for better wages, better standards of living, opportunities for improvement and participation at appropriate levels in management.
(3) The accountability of management to consumers.
(4) The responsibility of management for the physical health and well-being of the locality.
(5) The responsibility of management to the community at large.
Company – Problems of Company Management
The problems of company management mainly arise from the fact that the nature of the management is oligarchic.
A few persons manage and control the affairs of a huge number of persons – the shareholders – who are scattered and though they have common interest in the matter of their company, they are utterly disinterested and indifferent and there is very little scope for them to form a united front to ventilate their grievances jointly which create problems for the shareholders and can be considered as general problems of company management. So problems of company management emanate mainly from the problem of separation of ownership from management.
These are some problems of management common to all business enterprises. But company management has some special problems. The management entrusted to directors are just elected representatives and have not so much stake. Naturally, their interest and initiative are likely to be less. Even there are part-time directors whose interest and involvement are much less.
Besides, company management, as a big organisation, is very much complicated where specialisation is very much needed in various area managements. Directors who are policy-makers cannot be expected to be always experts in all areas of management and their special problem. So, decisions which they take in regard to a particular matter may not be correct, but the management personnel are to implement the decisions taken at Board meetings.
Again, because of various restrictions imposed on management by the Companies Act, the management does not feel happy and argues that the Board of the managers of the company cannot function properly because of too many constraints of law which create problems.
The emerging pattern of company management has been devised to plug various loopholes and to ensure solution of various problems confronting the management of the company.
Company management problems, therefore, relate to the oligarchic nature of management, lack of real democracy, and the ineffectiveness of the Board of Directors.
A widely owned company has to depend on a handful of directors for its management; it is unavoidable. Democracy in management cannot be expected nor is it feasible in a public company. But the problems with the Board of Directors can be solved to a great extent by various legislative measures and devices.
Shareholders’ various problems covering their interest have not been solved even after inserting more than 658 sections in the Companies Act. Lack of the sense of responsibility on the part of the directors cannot be ruled out. To solve shareholders’ problems, Responsible Management is a dire need since shareholders ‘associations, particularly in our country, are very difficult to form’ and even when formed they practically are ineffective.
In the emerging pattern of Company Management, a large number of companies are managed by Boards of Directors assisted by their committees. But in many companies, the Managing Director is the chief executive to implement the decisions of the Board. Management by experts has become the need of the hour to solve management problems to which direction the companies are now moving on the lookout for the solution of managerial problems.
Company – 6 Main Advantages
The advantages of company are as follows:
1. Permanent existence – The life of the company is permanent. It is not affected by the death, incapability, lunacy and insolvency of the shareholders. It has separate legal entity. The ownership and the management of the company changes smoothly without the dissolution of the company.
2. Limited Liability – The maximum liability of the shareholders of the company is limited to the face value of shares held by him. The personal assets of the shareholders cannot be attached, even if the company is unable to meet the claims of outsiders.
3. Availability of large capital – The capital of the company is contributed by its shareholders, whose number is unlimited as much as the company requires. The face value of shares being normal or nominal and the liability of shareholders being limited, these shares are easily sold and the required capital is collected.
4. Transferability of shares – The shares of the company are transferable easily. Whenever the shareholders want the money back, he can obtain it by selling his shares. It also ensures that the company will not be required to refund the capital. The shares of the company are purchased and sold in the stock exchange in the open market.
5. Tax relief – Tax laws offer certain developmental rebates and concessions on certain commodities of export promotion and for the establishment of industries in backward regions. The company charges income tax at flat rate. As such the tax liability on higher income is comparatively lower.
6. Diffused Risk – The risk of the business is shared among innumerable shareholders, so every shareholder has to bear nominal risk.
Company – 10 Major Limitations
The limitations of a company are as follows:
1. Lengthy and Expensive Procedure for Formation – Formation of a company (e.g. Memorandum of Association, Articles of Association, and Statutory Declaration) is required to be prepared and filled. It is Expensive in the sense that heavy fees for the preparation of required documents an for the registration is required to be paid.
2. More Government Regulations – A company is required to comply with various legal formalities at every stage of its working and to penalty for non-compliance of the legal requirement. It is required to spend considerable time and afford in complying with the various legal requirements.
3. Lack of Personal Interest – There is lack of personal interest in the management since day-today management is vested with the salaried executives who do not have any personal interest. This may lead to reduced motivation and result in inefficiency.
4. Delay in Decision-Making and Action – For a company, decision making process is time consuming since all important decision are taken by either the Board of Directors or Shareholders in their meetings and it is difficult to arrange meeting all of a sudden. The delay in decision making may result in loss of business opportunities.
5. Conflict of Interests – A company is bound to suffer when the interest of one group clash with group interests for example, If sales manager does not produce what is being demanded by sales manager, the company is bound to suffer unless such conflict is resolved.
6. Oligarchic Management – In actual practice the management of a company is oligarchic and not democratic. Its management is controlled by a small group of person who exploit the company to serve their personal interests.
7. Speculation by Directors – The Company form of organisation gives scope, for speculation in shares by directors. The directors can use the information about the working of the company to their directors may but shares when prices are to go up due to high profits.
8. Growth of Monopolistic Decisions – Monopolistic tendencies may grow because of large size of accompany. Then, It may eliminate competition acquire major share of market and charge high prices.
9. Influencing Government Decisions – The large .size companies generally become in [position to influence government officials to make decision in their favour because these companies are in position to offer lucrative incentives due to availability of large financial resources.
10. Suitability – The company form of organisation is suitable for those business activities which are to be carried on a large scale, require heavy investment with limited liability of members. For example, Iron and Steel Industry, Automobile Industries, Computer Industries.