Company Types

I. Private and Public Companies

Private Company
A private company is a company formed by two or more members (but not more than fifty), which has articles-

• Restricting the right to transfer its shares, if any
• Limiting the member strength to fifty- excluding employees, employee-members, after ceasing to be employees
• Prohibiting invitation to the public to subscribe for shares and debentures of the company.

Public Company
A Public company is one that is not a private company and is

• Promoted by a minimum of seven members
• Does not restrict the transfer of its shares
• Invites the public to subscribe to the shares and debentures of the company.

Private companies are exempt from several provisions of the Companies Act widely applicable to public companies, mainly relating to the following:

• Issue of type of share capital, voting rights, shares disproportionate to holdings, etc
• Financial assistance to purchase its own shares
• Remuneration payable to managerial personnel
• Powers of the Board of Directors
• Loans to Directors

The table below highlights certain key differences between a private and public company:

Key differences between private and public companies

A private company can commence business immediately on obtaining a Certificate of Incorporation from the Registrar of Companies (ROC). A public company is required to obtain a “Certificate of Commencement of Business” by filing additional documents with the ROC.
Foreign investors are advised to check the Memorandum and Articles of Association thoroughly, and ascertain that:

• The Articles embody all the mutual rights of the joint venture partners provided in the joint venture agreements; otherwise other shareholders and the JV company is not bound by the agreement conditions
• Eligibility of a partner to nominate directors is strictly in relation to actual shareholding at any point of time, or as provided by the JV agreement; other wise disproportionate control may ensue in the venture
• Blocking and special quorum rights of partners on important matters are specified in the articles
• Provisions exist for sending and providing sufficient notice of all meetings to non-resident shareholders, including by email and fax, and for adopting resolutions by circulation as an option to convening board meetings
• Procedures and conditions for exit of shareholders, sale and transfer rights of shares for under specific circumstances are clearly mentioned

Foreign entities must seek detailed and adequate explanation for various unfamiliar clauses in the Articles before signing or accepting them.
In addition to the above forms of companies, a new form of business structure in India was recently introduced which has been briefed below.
Limited Liability Partnership
The Limited Liability Partnership Act, 2008 has introduced a new form of business structure in India i.e. a Limited Liability Partnership (LLP). LLP is alike a private limited company having a distinct legal entity separate from its partners. It has perpetual succession and a common seal unlike a traditional partnership firm. LLP adopts a corporate form combining the organizational flexibility of partnership with advantage of limited liability for its partners. Currently there are no specific guidelines for foreign investment in LLP. The Ministry of Commerce and Industry has put up a discussion paper on FDI in LLPs and is inviting comments. As on April 27, 2011 eleven comments have been received (http://dipp.nic.in/ipr-feedback/Feedback_LimitedLiabilityPartnerships.htm).
II.Management Control

Based on the provisions of the Companies Act, shareholders can have five levels of management control:

• Portfolio ventures (25% or less holding), which offer no veto rights and reflect a ‘passive’ status
• Minority ventures (25-49% holding), which give blocking powers over matters to be decided by special resolutions (matters requiring 3:1 majority)
• Consensus ventures (50% holding), giving blocking powers in all decisions
• Majority ventures (51-75% holding), giving powers in all decisions except on matters requiring special resolutions
• Controlling ventures (more than 75% holding), giving a sweeping hand in all affairs of the company, not different from a wholly owned subsidiary.

The Companies Act requires special majority in respect of items such as change of name, changes in Memorandum Objects and Articles of Association, etc. However, even in minority ventures, foreign investors can ensure adequate control of their interests through powers to nominate a fixed number of Directors on the Board, and through other specific clauses in the Articles of Association.
Several high-profile joint ventures in India have failed in the past, ending in a sellout/ exit of one of the venture partners. The causes include:

• Difference in management culture and business policy
• Disagreement over core issues and strategy
• Change of international priorities of parent company
• Overestimation of partners’ strengths and market potential
• Complexities of the Indian market
• Inability of partners to bring in requisite financial resources
• Deadlocks arising from inadequate management control
• Lack of transparency and undisclosed personal gains from the venture

Exiting a joint venture is not always simple. The absence of a clearly defined exit route in the joint venture agreement and in the articles of the company has, perhaps, been the major failing in joint venture preparations in the past.
Foreign investment regulations discourage multiple ventures in the same or allied fields in India: prior approval, with due justification, is required in case a foreign company already having a joint venture/technical collaboration or even trademark licensing agreement seeks to establish a new venture in India in the same field of activity. Exemptions apply available in case of defunct or sick ventures.

III. Industry Approvals

Any industrial activity in India requires multiple clearances from the stage of initial incorporation of the entity until the launch of commercial production. Depending on the state, nearly every industrial activity involves 25 standard approvals as listed below.

DOWNSTREAM APPROVAL REQUIREMENTS

Additionally, there are several sector-specific clearances in sectors like civil aviation, telecommunications, power, mining etc. In effect, industrial approvals may involve contact with over 36 to 40 approving agencies, ranging from Central to State to local levels of government. Under normal conditions, implementing these approvals takes anywhere upwards of 15-18 months from the application stage, through construction and installation, until the start of commercial production.