Important Sections of Companies Act 2013 – Explained Simply
With Checklists, Examples & References
CA Rishabh Mehta 15 min read
The Companies Act, 2013 is the primary legislation governing the formation, operation, and regulation of companies in India. Enacted by the Parliament of India, it replaced the earlier Companies Act, 1956 with the aim of creating a more transparent, modern, and investor-friendly framework of corporate law in India.
This Act defines the legal structure of companies — from incorporation to management, shareholder rights, board of directors' duties, audit requirements, Corporate Social Responsibility (CSR), and winding up. In simple terms, it lays down the rules of the game for how companies are created, how they run, and how they are monitored.
📌 Why it matters: India has more than 25 lakh registered companies, and over 1.9 lakh new companies were incorporated in FY 2022–23. For entrepreneurs, professionals, and especially students of CA, CS, CMA, MBA, and law, understanding the section-wise provisions of Companies Act 2013 is not just academic—it is essential for compliance, business decision-making, and career growth.
The Act also introduces concepts such as:
MOA (Memorandum of Association) and AOA (Articles of Association) — the constitutional documents of a company.
Types of companies — private limited, public limited, one person company (OPC), small company, producer company, etc.
Schedules and rules — like Schedule VII for CSR activities.
Corporate governance standards to ensure accountability of directors and protection of minority shareholders.
In short, the Companies Act 2013 is not just a piece of law—it is the backbone of corporate regulation in India, shaping how businesses operate and how stakeholders interact.
📌 Section 188 of Companies Act 2013 – Related Party Transactions (RPTs)
What it says (simple):
If your company buys/sells goods/services, leases property, appoints agents, or underwrites securities with a "related party", you must follow board/shareholder approval rules and disclose these in the board's report (AOC-2). "Related party" includes directors/KMP/relatives and entities where they have significant interest.
When approvals are needed:
Board approval is the baseline for the transactions covered in Section 188(1).
Shareholder approval (ordinary/special resolution as applicable) is needed above the Rule 15 thresholds prescribed under the Companies (Meetings of Board and its Powers) Rules, 2014 (these thresholds have been amended over time; always check the latest text before the meeting).
🔎 Update watch (listed companies):
SEBI has proposed turnover-linked thresholds for "material" RPTs under LODR in 2025 (separate from the Companies Act). Keep an eye if you are listed.
Disclosures/filings:
AOC-2 annexed to the Board's Report (Section 134; Rule 8(2), Companies (Accounts) Rules, 2014).
Register MBP-4 under Section 189 for contracts/arrangements in which directors are interested.
Directors/KMP must give MBP-1 disclosure of interests (Section 184 and Rule 9).
Penalties (core Act):
Section 188 prescribes penalties on the company and officers in default for contraventions. Check the India Code version for the current penalty text before taking action (amendments decriminalised/modified several offences).
Common mistakes we see:
Treating a sister-concern sale as "at arm's length" without contemporaneous benchmarking.
Missing shareholder approval when cumulative transactions cross Rule 15 thresholds during the year.
Not maintaining MBP-4 or not annexing AOC-2 with specific details.
TaxItEazy case file (composite):
A mid-size auto-components company leased a warehouse from a director's HUF. The rent was based on an old oral understanding. We: (1) benchmarked rent with three comparable leases; (2) placed the item for audit committee and board approval with a speaking note; (3) obtained members' approval due to Rule 15 thresholds; (4) updated MBP-4 and AOC-2. A later diligence by a PE fund flagged no deficiencies, preserving valuation.
📌 Section 185 of Companies Act 2013 – Loans to Directors
Simple meaning:
Companies cannot give loans (directly/indirectly), provide guarantees, or securities to directors or to entities in which directors are interested, except for limited carve-outs (e.g., schemes approved by members, loans to WTD/MD as a part of service conditions, and companies whose ordinary business is lending).
Why this exists:
To prevent misuse of company funds for personal benefit.
Penalties:
The section specifies penalties on the company and the recipient/concerned person for contravention. Always rely on the current India Code text or MCA notification because amounts and treatment have changed through amendments.
Common mistakes:
Labeling the amount as "advance", "security deposit" or "temporary accommodation" without real substance.
Group treasury sweeping cash into a director-owned LLP.
TaxItEazy example:
A consumer-tech startup had reimbursable travel costs to a founder piling up; finance briefly showed a loan receivable – director. We: (1) re-papered as reimbursement with bills; (2) put a policy cap and monthly settlement cycle; (3) trained the accountant. This avoided a Section 185 issue during a VC round.
1-minute checklist (Section 185):
Identify counterparty → map "interest" of any director → if prohibited, stop → if potentially allowed, test carve-out + members' approval (if applicable) → maintain clear documentation → disclose where required.
📌 Section 186 – Loans, Guarantees, Investments & Securities by Company
Simple meaning:
There are limits on how much a company can give as loan/guarantee/security or make investments. Crossing the limit requires shareholders' special resolution. Charge a rate of interest not lower than the prevailing G-sec yield corresponding to the loan tenor.
Core limits (high level):
Aggregate up to the higher of:
60% of paid-up share capital + free reserves + securities premium; or
100% of free reserves + securities premium.
Beyond this → special resolution. Maintain a register and disclose in the financial statements. Interest rate must meet Section 186(7) G-sec yield requirement.
Common mistakes:
Charging a flat 8% interest when the matching G-sec makes the floor higher.
Forgetting that corporate guarantees also count for the limit.
Missing the register and note disclosure.
TaxItEazy example:
A manufacturing company extended a ₹12 cr inter-corporate loan to a subsidiary at 7.5% for 5 years. We checked 10-year G-sec yield floor, revised to 8.2%, obtained special resolution (limit exceeded), and filed the necessary forms. No adverse remark in statutory audit.
1-minute checklist (Section 186):
Compute headroom → check G-sec floor → draft explanatory statement for members (if needed) → pass special resolution → update register & financial statement note.
📌 Section 134 – Board's Report (and AOC-2 for RPT)
Simple meaning:
The Board's Report communicates financial performance, state of the company's affairs, risk management, CSR (if applicable), meetings held, directors' responsibility statement, RPT disclosures (AOC-2), and other mandated information.
Why it matters:
It's the single most-read shareholder document after the financials — a hotspot for examiners, lenders, and investors.
TaxItEazy example:
We overhauled a client's Board's Report to include: section-wise compliance table, AOC-2, ESG initiatives, and website link for policies. In their next bank renewal, the relationship manager remarked the report was "due-diligence ready," reducing clarifications.
1-minute checklist (Section 134):
Use latest Rule 8 list → include AOC-2 → ensure web-address disclosures → ensure D.R.S. (Directors' Responsibility Statement) → align with CSR (Section 135) if applicable.
Covers appointment of auditors and rotation norms for listed and certain big public companies.
Section 143 (powers & duties):
Gives auditors unrestricted access to records, requires enquiries, sets fraud reporting obligations. Rule 13 of the Companies (Audit and Auditors) Rules prescribes the fraud reporting process and monetary threshold for reporting to the Central Government.
TaxItEazy example:
An auditor flagged frequent "support service" payments to a promoter entity. We helped the company: document scope, benchmark pricing, obtain Section 188 approvals, and update AOC-2 — closing the audit with only an emphasis of matter, not a qualification.
1-minute checklist (139/143):
Check rotation class → file appointment → ensure management representations → reconcile RPT trail → implement whistle-blower and fraud escalation.
Listed companies need at least one-third independent directors; certain public companies must also appoint independent directors as per Rule 4 thresholds (paid-up ₹10 cr, turnover ₹100 cr, or loans/debentures/deposits ₹50 cr). Schedule IV sets their code of conduct.
Common mistakes:
Tagging a long-time vendor as an "independent" director.
Missing familiarisation programmes and declarations on independence.
Audit Committee is mandatory for listed public companies and such other public companies as prescribed (Rule 6 thresholds, same as above). Oversees financial control, RPTs, auditor appointment, and vigil/whistle-blower.
1-minute checklist (177):
Check applicability → constitute the committee with required independent directors → adopt charter → route RPT and internal audit to it → set up vigil mechanism.
📌 Section 179 – Powers of Board
Simple meaning:
Specifies key powers to be exercised by board resolutions, e.g., borrow, invest, approve financials, diversify business, approve amalgamations, etc. Some powers may also require MGT-14 filings under Section 117 (see below).
1-minute checklist (179):
Map decision → confirm if board resolution is mandatory → check if MGT-14 filing is required within 30 days.
📌 Section 203 – Key Managerial Personnel (KMP)
Simple meaning:
Certain companies must appoint MD/CEO/Manager/WTD, Company Secretary, and CFO as KMP. Non-compliance attracts penalties on the company and officers.
1-minute checklist (203):
Test applicability → appoint KMP → file appointments → maintain role charters → ensure board reporting lines are clear.
Raising funds privately requires offer letter, PAS-4/PAS-3 filings, money via banking channels, and cap on offerees. No public advertisements.
Section 62 – Further Issue/ESOP:
Rights/bonus, preferential allotments, and ESOPs (via Rule 12) are governed here. Ensure pricing, valuation, timelines, and disclosures.
Section 68 – Buy-back:
Permits buy-back subject to limits, sources of funds, debt-equity ratio post buy-back, extinguishment timelines, and filings.
TaxItEazy example:
We guided a SaaS company through a Section 62(1)(c) preferential allotment to angels: board/EGM notices, valuation report, PAS-4, monies via banking channel, PAS-3 within timeline, and cap-table reconciliation. Their Big-4 diligence later passed cleanly.
Hold the AGM within 6 months of FY-end (with limited extensions). Timing, venue/VC, and notice rules apply.
Section 117 (MGT-14 filing within 30 days):
Certain board and shareholder resolutions/agreements must be filed within 30 days in Form MGT-14. Non-filing attracts adjudication penalties on both company and officers (with daily continuing penalties up to statutory caps).
Section 184 (MBP-1):
Every director discloses interests at first meeting, annually, and when changes happen using Form MBP-1.
Section 189 (MBP-4):
Maintain Register of contracts and arrangements (MBP-4) in which directors are interested, open for inspection.
TaxItEazy example:
A private company forgot to file MGT-14 for a special resolution changing its articles. We prepared condonation papers, coordinated with the ROC, paid adjudication penalty, and fixed the minutes/registers to align with the resolution text — avoiding issues during a later bank CC renewal.
1-minute checklist (96/117/184/189):
AGM calendar → identify resolutions needing MGT-14 → ensure MBP-1 from all directors → keep MBP-4 updated and accessible.
📌 Quick Reference Table
Section
Simple Meaning
Key Filings/Artifacts
Typical Tripwires
188
Related party transactions
AOC-2, MBP-4, minutes
Missing shareholders' nod above Rule 15 thresholds; no benchmarking.
185
Loans to directors (mostly prohibited)
Board note, legal memo
Dressing loans as "advances"; routing via LLPs.
186
Limits on loans/guarantees/investments
Special resolution (if limits crossed), register
Interest below G-sec floor; ignoring guarantees in headroom.
134
Board's Report + AOC-2
Board's Report, website links
Boilerplate without Rule-8 specifics.
139/143
Auditor appointment; powers/fraud
ADT-1, fraud reporting under Rules
Weak documentation for RPTs.
149/177
Independent directors; Audit Committee
Declarations; committee charters
Independence gaps; wrong committee composition.
42/62/68
Private placement; further issue; buy-back
PAS-4/PAS-3; valuation; filings
Bank channel lapses; timeline misses.
96/117/184/189
AGM; MGT-14; MBP-1; MBP-4
AGM record; e-forms; registers
Late MGT-14; stale MBP-1; no MBP-4.
📌 Frequently Asked Questions (FAQs)
India's principal company law replacing much of the 1956 Act, covering incorporation, management, audit, accounts, governance, and penalties.
Directors/KMP/their relatives, and entities in which they hold specified interests; also certain holding/subsidiary/associate relationships.
No. Board approval is the baseline; members' approval is required beyond Rule 15 thresholds for the specified transaction categories. Listed companies must also consider SEBI LODR.
Limited carve-outs exist (e.g., MD/WTD loans under service conditions, member-approved schemes, lending companies in ordinary course with prescribed interest). Document carefully.
Based on paid-up capital + free reserves + securities premium (or 100% of free reserves + premium), whichever is higher; beyond that, take a special resolution. Charge ≥ G-sec yield for matching tenure.
Particulars of contracts/arrangements with related parties under Section 188, including those not at arm's length, annexed to the Board's Report.
MBP-1 is a director's notice of interest (Section 184). MBP-4 is the register of contracts/arrangements in which directors are interested (Section 189).
A statutory list under Section 117(3) and relevant rules — e.g., altering AOA/MOA, certain borrowings, etc. File within 30 days; delays attract adjudication penalties.
📌 Practical "close-the-loop" controls TaxItEazy sets up for clients
RPT gate: pre-PO review for any counterparty with promoter/director/KMP link; templated pricing memo; quarterly MBP-4 audit.
Loans/Investments dashboard: live headroom calculator for Section 186 with G-sec floor auto-prompt.
Board & Members calendar: auto-flags MGT-14 items with a 20-day buffer.
Disclosure hygiene: annual MBP-1 refresh cycle; AOC-2 draft locked 30 days before board's report.
Committee governance: applicability matrix for 149/177/203 with composition alerts.
This article is educational, not legal advice. For decisions, rely on your company's facts, your auditors/CS/legal counsel, and the current text of the Act/Rules/SEBI LODR.
Penalties and thresholds change via amendments and circulars. Always cross-check the latest India Code text and MCA/SEBI notifications before board/EGM action.
