When starting a company in India, one of the most crucial steps is drafting the Memorandum of Association (MoA), a legal document that defines the company’s structure and its business activities. Among its various components, the Object Clause holds particular importance. The Object Clause outlines the scope of operations that a company is permitted to engage in and carry out its business. It serves as the legal foundation for its activities.
In this guide, we will explore the meaning and types of object clauses of the company in detail, along with the process to amend them.
What is an Object Clause?
The Object Clause is an integral part of the company’s Memorandum of Association (MoA), which defines the company’s purpose and sets boundaries for what the company can and cannot do. It clearly states what the company is legally permitted to do. It defines the goals and operations of the company. If a company starts doing something that is not mentioned in the object clause, it can face legal trouble.
Importance of the Object Clause
The object is important for the company as it:
- Defines the company’s core activities and ensures it operates within its legal boundaries.
- Provides clarity on the company’s goals, making it easier to attract investors and partners.
- Clarify the main and ancillary activities of the company.
- Helps in the decision-making of the business.
- Provides a framework for future business expansion and growth.
- It helps maintain legal compliance by ensuring that all business operations are authorised under the Companies Act, 2013.
- Ensures transparency and corporate governance
Different Types of Object Clauses
There are mainly five types of object clauses:
1. Main Object Clause
The main object clause outlines the core business activities that the company plans to engage in. The main objectives are the primary goal of the company’s business, and it is the “big picture” of what the company aims to do. Everything the company does must be in line with this clause. If the company expands or shifts its focus in the future, the main object Clause must be updated to reflect the new goals.
- It defines the core purpose of the company
- It limits the operational scope of the company
- It helps in Regulatory Approvals
Example:
- Manufacturing company: “To manufacture and sell furniture.”
- Financial company: “To provide loans, insurance, and investment advisory services.”
- Technology company: “To develop, market, and sell software and IT services.”
2. Ancillary Object Clause
While the main object clause defines the company’s primary purpose, the ancillary object clause allows the company to do secondary activities that support its primary business. These activities enable the company to carry out its core functions more effectively, but they are not the primary focus of the business.
- It supports primary business activities
- It provides an opportunity for the company to engage in secondary activities without the need to modify the main object clause
- It helps in the expansion of business without making constant changes to the MoA.
For example, a furniture company might want to buy raw materials like wood and fabric, or a software company might want to set up a research lab. These activities are directly related to the company’s primary goal but don’t necessarily fall under the main business activity itself.
Example:
- Manufacturing company: “To trade in raw materials required for furniture manufacturing.”
- Real Estate company: “To provide consulting services related to property development.”
These ancillary objects allow the company to function smoothly and legally without constantly updating its object clause for each new supportive activity.
3. Implied Object Clause
Sometimes, a company may not explicitly mention every possible activity it might engage in, but there are certain actions/activities that are considered implied in nature on the basis of the main business of the company. These are activities that are naturally linked to the company’s objectives, even though they are not specifically mentioned in the object clause.
For example, a company that manufactures bicycles may not mention the need to buy equipment or invest in bicycle designs because these activities are “implied” as they are naturally part of running a bicycle manufacturing business.
Example:
- Furniture Manufacturing: Implied activities might include purchasing machinery or securing patents for new designs.
Though these activities aren’t always listed in the object clause, they are considered necessary to carry out the main business.
4. Other Object Clause
The other object clause enables the company to undertake additional activities that are not directly related to its primary or ancillary objectives. This clause provides extra flexibility as it allows the company to engage in some unrelated activities, as long as they are aligned with its main objects. It is pertinent to note that the company cannot take on activities that are entirely disconnected from its main business.
Example:
- Real Estate Company: “To invest in unrelated industries like hospitality or retail.”
- Technology Company: “To enter into partnerships with international tech companies.”
This clause allows the company to explore new opportunities without having to change its object clause constantly.
5. Special Object Clause
The special object clause is used when a company wants to engage in a specific activity that requires special legal approval or is of a specialised nature. These activities require careful consideration and are mentioned in a specific, detailed manner, as they have legal or regulatory implications. Any wrong placement of the word can lead to rejection by the MCA.
Example:
- Pharmaceutical Company: “To conduct clinical trials and research for new medical treatments.”
Special object clauses are used when the company’s operations need special permission from regulatory bodies or government agencies.
Can We Amend the Object Clause?
Yes, the object clause can be amended with prior approval. According to the Companies Act, 2013, a company must pass a special resolution, meaning at least 75% of shareholders must agree to change the object clause. Once approved, the changes must be filed with the Registrar of Companies (RoC).
For example, if a furniture company that sells products offline wants to sell its products online, it would need to update its object clause to include e-commerce activities.
Conclusion
Understanding the object clause is important for entrepreneurs and business owners as it serves as a road map for the operation of the business. It offers flexibility for the company’s growth and expansion while also assisting in directing its operations to guarantee legal compliance. By properly drafting the object clause, a business can stay within the law while protecting its operations and interests.
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