Growth of Corporate Sector in India
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| Growth of Corporate Sector in India The Indian corporate sector comprises of two main components—the Government-owned and privately held companies. Government companies are mainly in the basic, heavy and capital intensive industries, whereas the private sector is predominantly in industries which cater to the consumer markets directly. The origin of the corporate sector in India dates back to the mid-19th century when the Joint Stock Companies Act, 1850, gave birth to the legal institution of Joint Stock Companies. Corporate sector, today, occupies a pivotal place not only in developed economies but also in developing economies like India. The origin of the corporate sector in India dates back to the mid- 19th century when the Joint Stock Companies Act, 1850, gave birth to the legal institution of Joint Stock Companies. After the World War II, on October 25, 1950, the Government of India appointed a committee comprising 12 members under the Chairmanship of H C Bhabha for the revision of the Indian Companies Act. Based largely on the recommendations of the Company Law Committee, a bill–the Companies Act, 1956–was introduced in Parliament. This Act brought about many changes in the Indian corporate sector. The corporate sector has witnessed an unprecedented growth with the introduction of the Companies Act, 1956. Not only there was spurt in the formation of new companies, but also there was an all-around expansion in the capital base of the existing companies. It is noticed that coinciding with the relaxation of control and liberalization of the economy since the beginning of the 1980s, Indian companies have grown by leaps and bounds in term of numbers and paid-up capital. Another important event in 1956 was the initiation of the Second Five Year Plan, which specially targeted at the rapid development of industries in the country. In the same year, the new Industrial Policy was announced by the Government of India. Objective and Scope of the Study This article studies the growth of the corporate sector in India after the enforcement of the Companies Act, 1956. It covers a period of 49 years period, i.e., from April 1956 to March 2005. It covers all types of companies that can be registered under the Companies Act, 1956, namely: (i) companies with liability limited by shares; (ii) companies with unlimited liability; (iii) companies with liability limited by guarantee; (iv) association not for profit; and (v) branches of foreign companies. Data related to number of companies at work over time and their paid-up capital has been taken from the various issues of the Annual Reports on the Working and Administration of the Companies Act, 1956, issued by the Ministry of Corporate Affairs in pursuance of the provisions of Section 638 of the Companies Act, 1956. Companies Limited by Shares A company limited by shares is one where the liability of the members of the company is limited to the amount unpaid on the shares. In such companies, each share has a fixed nominal or face value which the shareholder is required to pay either at a time or in installments. Whatever may be the liabilities of a company, shareholders are not bound to pay anything more than the face value of the shares held by them. Thus, the liability of each of the shareholders of such a company is always limited to the extent to the amount unpaid on his shares. Companies limited by shares are the most common. This type of a company may be a public company or a privately held one. Table 1 represents the companies limited by shares at work in India during the last five decades of operation of the Companies Act, 1956 i.e., the year 1956-57 to 2004-05.  During 1956-57, the total number of companies operating in India was 29,357 and the paid-up capital was Rs. 1,078 cr. From 1956-57 to 1960-61, the total number fell by 10.92%, and the same came down to 26,149, whereas their paid-up capital rose by 68.74% and touched Rs. 1,819 cr. An increase of nearly 15.96% was witnessed in the total number of companies functioning in India from 1960-61 to 1970-71. During 1970-71, the number was 30,322 and the paid-up capital was Rs. 4,504 cr - an increase of 147.60% from 1960-61. During 1980-81, the total number of companies at work was 62,714 and their paid-up capital was Rs. 16,357 cr - an increase of approximately 106.82% and 263.17% respectively. In next decade, there was a tremendous growth both in the number of companies at work and their paid-up capital. The total number of companies increased by 257.90% and their paid-up capital by 357.28% over the 1980-81, and touched 224,452 and Rs. 74,798 cr respectively. During 2000-01, there was an increase in number of companies and paid-up capital but in terms of the growth rate of number of companies, it was slow, when compared to the previous decade. The total number of companies rose by 153.55% during the decade and their paid-up capital increased by 377.62%. In 2000-01, the total number of companies at work was 569,100 and their paid-up capital was Rs. 357,247 cr. From 2000-01 to 2004-05, the total number of companies increased by 19.43% and their paid-up capital grew by 83.07%. This led to an increase in the total number of companies and their paid-up capital and the figure touched 679,649 and Rs. 654,022 cr respectively. At the time of commencement of the Companies Act, 1956, the total number of companies at work was 29,357 and their paid-up capital was of the order of Rs. 1078 cr. As on March 31, 2005, i.e., within a span of 49 years, the number of companies increased to 679,649 (45.21% growth annually) and their paid-up capital aggregated Rs. 654,022 cr (1,236.12% annual growth rate). Figure 1 shows the trends of the number of companies at work in India and their paid-up capital. From the figure, it becomes clear that after, 1990-91, there was tremendous increase both in the number of companies at work and their paid-up capital.  It can be observed that the companies limited by shares have recorded a phenomenal growth during this period. The number of such companies increased over 23.15 times from 1956-57 to 2004-05. Their paid-up capital also increased over 606.7 times during the same period. The average paid-up capital of the companies went up from Rs. 3.67 lakhs to Rs. 96.23 lakhs during this period. Government and Non-Government Companies The joint stock companies have acquired a prominent place in the corporate sector as a result of their rapid growth and increasing scale of operations and investments. The rapid growth of Joint Stock Companies over time and the increasing scale of their operations and investments make them the most dominant form of economic life that far transcends the immediate interests of their shareholders, creditors, and employees. Moreover, it is not only in the private sector that joint stock companies have acquired a position of eminence, but they have also become the most favored form of public enterprises in India, particularly after 1956. This is because the Companies Act, 1956, for the first time, created a category called `Government Companies'. Section 617 of the Companies Act defines a government company as any company in which not less than 51% of the paid-up share capital is held by– • The Central Government; or • Any State Government/Governme nts; or • Partly by the Central Government and partly by one or more than one State Government. A subsidiary of a Government company has also been treated as a Government company. A company which is controlled and operated by a private capital is called Non-Government Company. The Companies Act, 1956, came into force on the April 1, 1956. The corporate sector, at the time of the commencement of the Companies Act, 1956, comprised of 29,357 companies limited by shares with a paid-up capital of Rs. 1,077.6 cr (this included 74 government companies with a paid-up capital of Rs. 72.6 cr and 29,283 non-Government companies with a paid-up capital of Rs. 1,005 cr). The total number of companies limited by shares, i.e., 679,649 with a paid-up capital of Rs. 654,021.6 cr in 2004-05, included 1,328 Government companies with a paid-up capital of Rs. 155,814.5 cr and 678,321 non-government companies with a paid-up capital of Rs. 498,207.5 cr. The growth of corporate sector shows that the number of government companies over a period of 49 years has increased more than 17.94 times and paid-up capital has increased by 2,146.19 times. The number of non-government companies has increased 23.16 fold while their paid-up capital has increased 495.72 times during the said period. Share of paid-up capital of government companies in their total paid-up capital of the corporate sector has increased from 6.74% as on March 31, 1957 to 23.82% as on March 31, 2005. Table 2 gives the number and paid-up capital of government companies limited by shares during the years 1956-57 to 2004-05 and also the position of non-government companies limited by shares over the same period.  Companies with Unlimited Liability Section 12(2)(c) of the Companies Act provides for the formation of the companies not having any limit of the liability of its members, i.e., companies with unlimited liability. An unlimited company may or may not have a share capital. If it has a share capital, it may be a public company or a private company. An unlimited company must have Articles of Association, stating the number of members with which the company is to be registered, and if the company has a share capital, the amount of share capital with which the company is to be registered. An unlimited company can get itself registered as a limited liability company under the Section 32 of the Companies Act. These type of companies, however, were incorporated under the Companies Act for the first time in 1973-74 when one such company was registered in the Union Territory of Delhi. Table 3 shows the number of companies at work in India with unlimited liability. Their number as on March 31, 2005 was 196. All these are non-government private companies.  Companies Limited by Guarantee and Association not for Profit As per the provision of the Section 12(2)(b) of the Companies Act, 1956, "a company having the liability of its members limited by memorandum to such an amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up" is called a company limited by guarantee. These type of companies may or may not have a share capital. A company limited by guarantee and having a share capital may be a public company or a private company (Refer Figure 2).  According to the Sachar Committee, "although guarantee companies,… constitute a very negligible fraction of less than 3% of total companies at work in India, they still do have a useful role to play as companies for furthering the objects of commerce, art, science, religion, charity or some other useful objects and usually such a company does not apply its profits or rather income except for these desirable objectives. It is, however, inherent in the very nature of these objectives that such companies be formed as public limited companies, limited by guarantee only and for the purpose enumerated in the present Section 25 of the Act". The companies limited by guarantee are generally associations formed for promoting arts, science, religion, charity or for any other useful object and intend to apply their members. These associations, in general, are `not for profit' (Section 25(1) of the Companies Act). Majority of these companies do not have share capital, but have only membership fee. The position about the companies limited by guarantee over the period 1956-57 to 2004-05 has, therefore, been shown in terms of their numbers only (Refer Table 4). It is seen that there has not been much variation in the number of these companies over these periods. The number of such companies was 3,432 by 2005.  Foreign Companies Foreign companies have been defined under the Section 591(1) of the Companies Act as companies incorporated outside India that have established a place of business within India. According to Section 591(2) of the Companies Act , any foreign company may be prescribed as an Indian company, when a minimum of 50% of the paid-up share capital of a foreign company is held by one or more citizens of India or/and by one or more bodies corporate incorporated in India, whether singly or jointly. At the time of introduction of the Companies Act, 1956, the number of foreign companies operating in India was 551 and this figure remained almost constant until 1973-74. It started declining after the Foreign Exchange Regulation Act, 1973 came into force on January 1, 1974. The number of foreign companies during 1973-74 was 540 and by 2004-05, it touched 1840. Table 5 shows the number of foreign companies from 1956-57 to 2004-05.  Conclusion In the wake of new economic policies, the corporate sector has been assigned the role of the main leader of the growth process. Joint stock companies occupy an important position in organized economic activity. The corporate sector has witnessed an unprecedented growth after the enforcement of Companies Act, 1956. Not only there was spurt in new company formation, but there was an all-around expansion in the capital base of the existing companies. It has been noticed that coinciding with the relaxation of control and liberalization of the economy since the beginning of the 1980s, the Indian corporate sector has grown by leaps and bounds in term of numbers and paid-up capital.  |
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