Government Company under Companies Act, 2013

BACKGROUND:

Government Company: means any Company in which not less than 51% (fifty one per cent). of the paid-up share capital is held by:-

♠ The Central Government, or Any State Government or Governments, or Partly by the Central Government and partly by one or more State Governments, or includes a Company which is a Subsidiary Company of such a Government Company;

A Subsidiary of Government Company shall also be treated as a Government Company. These Companies are registered as Private Limited Companies through their management and their control vest with the Government. This is a type of organization where both the Government and Private individuals are shareholders. Sometimes these Companies are called as  Mixed Ownership Company.

Government Company subject to all provisions of the Act unless specified otherwise: 

• All the provisions of the Act are applicable to Government Companies unless otherwise specified.
• A Government Company may be formed as a Private Limited Company or Public Limited Company. 

No Need to use word Limited or Private Limited:

The name of all Government Companies shall end with the word “Limited”, be it Public or a Private Company.”

Name:

In case of Government Company the word “STATE” is allowed in name.

Transfer of Shares:

Provisions of Sub Section 1 of Section 56 (Transfer of Shares) are not applicable on Government Company in respect of Securities held by nominees of the Government.

The requirement of execution of an instrument of transfer (SH-4) and delivering the same to the company has also been done away with in case of transfer of securities held between nominees of the Government.

Transfer of Bonds:

As per Second proviso of Section 56(1) [this proviso came from exemption notification dated 05.06.2015)

In case of transfer of Bonds issued by a Government Company, Instrument of transfer is not required to be executed and delivered to the Company provided an intimation regarding the transfer supported by the details of the transferee and the relevant bond certificate is delivered to the Company.

Deposits:

A Government Company eligible to accept deposits under section 76 upto 35% (thirty five per cent) of the aggregate of its paid up share capital and free reserves of the Company. The limit of 35% will be inclusive of deposits outstanding as on the date of acceptance or renewal. 

Annual General Meeting:

Every Annual General Meeting shall be called during business hours, that is, between 9 a.m. and 6 p.m. on any day that is not a National Holiday and shall be held either at the registered office of the Company or at some other place as the Central Government may approve in this behalf:

Director Report:

Clause (e) Sub Section 3 of Section – 134(c) (Not Apply)

Directors’ Report of Government Company Should Not Include the below given clause, which shall include—

In case of a Company covered under sub-section (1) of section 178, Company‘s policy on Directors‘ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;

“The requirement of disclosing the Company’s nomination and remuneration policy etc in the Board’s Report has been relaxed for Government companies.”

Clause (p) Sub Section 3 of Section – 134L(Not Apply)

Provision:

In case of a Listed Company and every other Public Company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

This disclosure Requirement Shall Not Apply in case the Directors are evaluated by the Ministry or Department of the Central Government which is administratively in charge of the Company, or, as the case may be, the State Government, as per its own evaluation methodology.

Appointment of more than 15 Directors:

As per Section 149(1) (b) and first proviso to Section 149(1), a Government Company can have more than 15 directors. Such a company is now no longer required to pass a special resolution for appointing more than 15 directors.

Independent Director:

The following requirement for selecting a person as Independent Director will not apply to a Government Company:

149(6)(c) – who has or had no pecuniary relationship with the Company, its Holding, Subsidiary or Associate Company, or their Promoters, or Directors, during the two immediately preceding financial years or during the current financial year.

Appointment of Director:

The requirement of seeking consent from a Director and filing the same within 30 days of appointment to ROC is relaxed where appointment of such Director is done by the Central Government or State Government.

Below given list of provisions are not applicable on following Companies relating to Directors: 

(a) A Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) A subsidiary of a Government Company, referred in on (a) above, in which entire paid up share capital is held by that Government Company. 

LIST OF PROVISIONS: 

Register of Directors, KMP and their shareholding & its inspection: 

Section 170 and 171 shall not apply to a Government Company in which the entire paid up share capital is held by the Central Government, or by the State Government or Governments or by the Central Government and one or more State Governments.

IMPACT OF SECTION: 

The requirement relating to maintenance of register of Directors, KMP and their Shareholding and the right of members to inspect it has been relaxed for a government company as specified in the left hand column.

Author View: As per Section 170 there is no need to file e-form DIR-12 also for Government Companies.

Loan to Director (185): 

The restrictions contained in Section 185 regarding giving of loans / guarantees / securities etc. by a Company to its Directors and other entities in which a Director is interested has been relaxed for Government Companies.

“Provided It Seeks Prior Approval of Their Administrative Ministry or Department for the Proposed Transactions.”

Loan and Investment by Company (186): 

The requirement of seeking member’s approval by means of a Special Resolution for making loan/investments or giving guarantee/security in excess of the threshold limits specified in Section 186 has been relaxed for following Government Companies: 

• Engaged in Defense production and
• Other Unlisted Government Companies which seek prior approval of their administrative Ministry or Department for the proposed transactions.

Related Party Transaction (188):

PROVISIONS:
First and Second proviso to sub-section (1) of Section 188 shall not apply to following-

(a) A Government Company in respect of contracts or arrangements entered into by it with any other Government Company;

(b) a Government Company other than a Listed Company in respect of contracts or arrangements other than those referred to in clause (a), in case such Company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the Company, or, as the case may be, the state Government before entering into such contract or arrangement.

IMPACT:

The requirement of seeking member’s approval by means of a special resolution for Related Party Transactions as contained in Section 188(1) and the restriction on a member, being a Related Party, to vote thereon has been relaxed for transactions entered between two Government Companies and for transactions entered into by an unlisted government Company with a Company other than a Government Company, provided the Unlisted Government Company seeks prior approval of its administrative Ministry or Department for the proposed transactions.

Appointment of Managerial Personnel (196):

Sub-sections (2), (4) and (5) of Section196 shall not apply

The following provisions of Section 196 shall not apply to Government Companies:

• Requirement of Appointment/Re-appointment of MD/WTD/Manager for a term not exceeding 5 years at a time.

• Requirement of seeking approval of Board and Members at a meeting for appointment of Managerial Personnel and also of Central Government where such appointment/ remuneration of Managerial Personnel is not in accordance with provisions of Schedule V.

• Requirement that notice convening the Board or General Meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including, interest, of a Director or Directors, in such appointment, if any

• Requirement of filing return of appointment of Managerial Personnel within 60 days with the ROC

• Provision that where an appointment of a Managing Director, Whole Time Director or Manager is not approved by the Company at a General Meeting, any act done by him before such approval shall be deemed to be invalid.

Appointment of Key Managerial Personnel (203):

• (4A) the provisions of sub-sections (1), (2), (3) and (4) of this section shall not be applied to a Managing Director of Chief Executive Officer or Manager and in their absence, a Whole-Time Director of the Government Company.

• All the provisions of Section 203, barring the penal provision contained in subsection (5) will not apply to a Managing Director or Chief Executive Officer or Manager and in their.

• Absence, a Whole-Time Director of the Government Company.

• All the provisions of Section 203 will continue to apply to CFO and CS of Government Companies as only these persons will be mandatorily required to be appointed as whole time KMP in case of select class of companies prescribed in the Act.

Provisions of the Act DO NOT APPLICABLE to a Government Company OR apply with some Modifications

ADVANTAGES:

Features of Government Company:

♠ State ownership:

The entire capital or 51% or more of the capital is owned by the Government or Governments. 

♠ Nomination of Directors:

As in case of Public Corporations, even in a Government Company the Directors are nominated by the Government (State or Central). 

♠ Government Auditors:

The Auditors are always appointed by the Government to inspect the books of accounts of the Government Companies. 

♠ Management and control:

Management of Government Company is vested in the hands of Board of Directors. The Directors may be nominated by government or even the shareholders can appoint the Board of Directors. 

♠ Separate Legal Status: 

A Government Company, like a Joint Stock Company is an incorporated association & artificial person having a common seal & perpetual succession. It has a separate legal entity from its owners.

♠ Capital Collection: 

A Government Company requires huge capital for its business operations. The Company is free to collect capital through its own sources & it can even borrow the money depending upon its requirements.

♠ Regulation:

 It is created by the provisions of the Companies Act. However, the Central Government may, by notification in the Official Gazette; direct that any of the Provisions of the Act.  

♠ Operational autonomy and flexibility:

Being a separate legal entity, a Government Company enjoys operational autonomy an can be run in a business-like manner., It enjoys flexibility of operations due to freedom from bureaucratic control and red-tapism.

♠ Discipline:

The management of a Government Company is governed by the Companies Act. The healthy discipline of the Act helps to keep the management active and efficient. It puts the enterprise at par with a Private Enterprise.

♠  Private participation. 

Company form of organization permits Foreign Collaboration and Private Participation. The Hindustan Steel Limited has obtained technical and financial assistance from the U.S. S.R., West Germany and the U.K. for its steel plants located at Bhilai, Rourkela and Durgapur. Similarly, capital and technical knowledge of the Private Sector can be obtained through a mixed ownership Company.

♠ Easy to establish and alter. 

It is very easy to establish Government Company as no law needs to be passed by the Parliament and State legislature. Similarly, it’s objectives and powers can be changed simply by altering its Memorandum of Association without seeking the approval of the Parliament. 

Demerits of Government Company:

♠ Avoids Constitutional Responsibility:

Parliament’s approval is not required for the creation and alternation of a Government Company. Therefore, it may evade its constitutional responsibility to the elected representatives of the public.

♠ Ineffective Control: 

Regulations of the Companies Act become meaningless because the controlling votes always lie in Government hand. Moreover, the Government can exempt the enterprise form in most of the provisions of the Act. Therefore, Government Company organization has been criticized as “a fraud on the Companies Act and the Constitution.”

♠ Doubtful Autonomy:

The operational autonomy of a Government Company exists only on paper. In real practice, there is ministerial and bureaucratic interference in its functioning. Since the directors are appointed by the Government they often fail to act independently.

♠ Fear of Exposure:

The annual reports of Government Companies are placed before the Parliament. Therefore, their working is exposed to the glare of public and press criticism. The strong phobia of public accountability often results in undue publicity and unwarranted criticism of the companies. Therefore, the management because demoralized and does not take initiative to enter new areas of activity. This has an adverse effect on the efficiency and profitability of the enterprise.

In spite of its drawbacks, the Government Company is very useful under the following circumstances:

• When the State wants to regulate a Company in the Private Sector without nationalizing it. Due to an emergency created by a financial or employment crisis, the Government may have to take over an existing company. Merely by acquiring majority of shares the State can control such an enterprise. Eastern Shipping Company, Indian Iron and Steel Co., Swadeshi Cotton Mills, FACT, etc., are examples of such Companies in India.
• When the Government wishes to start an enterprise entirely as a public venture in order to put it on sound footing and to transfer it as soon as possible to the private sector.
• To promote trade and commerce or to promote a particular field of economic activity. State Trading Corporation and the Export Credit and Guarantee Corporation have been formed for this purpose.
• To enable Private Enterprise to set up subsidiary operating companies and to acquire interest in them.

Auditor Relating Provision: 

I. Appointment of First Auditor in a Government Company: 

• In the case of Government Company, the First Auditor shall be appointed by the Comptroller and Auditor General if India (C & AG) within 60 (Sixty) days from the date of registration of the Company.
• If CAG fails to appoint first Auditor within 60 days then the Board of Directors of the Company shall appoint the Auditor within the next 30 days.
• The First Auditor holds office till the conclusion of the First Annual General Meeting.

II. Appointment of for Subsequent Financial year:’

• The appointment of Auditor in a Government Company in every subsequent financial year shall be made by C & AG within period of 180 days from the commencement of the financial year who shall holds office upto the conclusion of the Annual General Meeting.

III. Appointment of for Subsequent Financial year:

Where a casual vacancy arise in the office of the Auditor in a Government Company other than by resignation of Auditor, the causal vacancy will be filled by the Comptroller and Auditor General of India within 30 days.

Auditor Report in a Government Company: 

In case of GOVERNMENT COMPANY the Controller and Auditor General of India shall appoint the auditor under sub-section (5) or sub section (7) of Section 139 and direct such Auditor the manner in which the Accounts of the Company are required to be audited. Accordingly, the Auditor shall submit a copy of the report to the C and AG which shall include the directions, if any, issued by the C and AG, the action taken thereon and its impact on the accounts and financial statement of the Company.

Supplementary Audit Ordered by C & AG:

The C & AG shall, with in 60 (Sixty) days of the receipt of the Audit Report, have a right to—-

a) Conduct a supplementary audit of the Company’s accounts by himself or by such person or persons as he may authorize and for the purpose of such audit require information or additional information to be furnished to any person or persons, so authorized, on such matters, by such person or persons and in such form as the C & AG may direct.

b) Comment upon the Audit Report or supplement such Audit Report.

The Company shall send copy of the C & AG reports to every member and other as applicable as per Section 136(1) and also the same at the Annual General Meeting of the Company.

Annual Report of Government Company:

In terms of Section 394, where the Central Government is a member, the Central Government shall, within 3 (three) months after the Annual General Meeting is held cause an Annual Report on the working and affairs of a Government Company prepared and have the same laid before the Both House of Parliament together with a copy of the Audit Report and comments upon or supplemental to the Audit made by the C & AG explained above.

Where in addition to the CG, any State Govt. is also is a member of Govt. Co, the State Govt. shall cause a copy of the Annual Report referred to above laid before both House of the State Legislature together with copy of the said enclosures.

(Author –Divesh Goyal is a Company Secretary in Practice from Delhi and can be contacted at [email protected])