Indian Companies Act 2013 Highlights and Review

Indian Companies Act 2013 –Highlights and Review Uttamkumar HATHI B.Sc., P.G.D.M.M.T., LL.B., LL.M. Dated:May 28, 2014 Email: [email protected] [email protected] Table of Contents I. BACKGROUND ..................................................................................................................................... 8 II. KEY DEFINITIONS AND CONCEPTS.............................................................................................. 9 Companies........................................................................................................................................................................... 9 Roles and responsibilities ................................................................................................................................................... 9 Investments ......................................................................................................................................................................... 9 Financial statements .......................................................................................................................................................... 10 Audit and auditors .............................................................................................................................................................. 10 Regulators .......................................................................................................................................................................... 11 Mergers and acquisitions ................................................................................................................................................... 11 Corporate social responsibility........................................................................................................................................... 11 Class action suits ................................................................................................................................................................ 11 Prohibition of association or partnership of persons exceeding certain number ............................................................. 11 Power to remove difficulties............................................................................................................................................... 12 Insider trading and prohibition on forward dealings ........................................................................................................ 12 Setting up of a company..................................................................................................................................................... 12 Postal Ballot [Sec 2(65) r/w 110] ........................................................................................................................................ 12 Registered Valuers [Sec 247].............................................................................................................................................. 12 III. TYPES OF COMPANIES: ................................................................................................................... 13 A Private Limited Company: ...................................................................................................................................... 13 B Small Company: ...................................................................................................................................................... 13 C One Person Company (OPC) [Sec 2(62)]: .............................................................................................................. 13 D Dormant Company (section 455): ........................................................................................................................... 14 E Foreign company: ................................................................................................................................................... 15 F Holding-Subsidiary Company: ............................................................................................................................... 15 IV. INCORPORATION OF COMPANIES: ............................................................................................. 17 A Mandatory formation .............................................................................................................................................. 17 B Contents of MOA and AOA .................................................................................................................................... 17 3|Page C Companies with charitable objects ......................................................................................................................... 18 D Incorporation process ............................................................................................................................................. 18 V. SHARE CAPITAL................................................................................................................................. 20 A Types of Share Capital ........................................................................................................................................... 20 I) EQUITY SHARES ............................................................................................................................ 20 (I)WITH VOTING RIGHTS; OR........................................................................................................ 20 (II) WITH DIFFERENTIAL RIGHTS AS TO DIVIDEND, VOTING OR OTHERWISE ........... 20 II)PREFERENCE SHARES ................................................................................................................ 20 SHARES WITH DIFFERENTIAL RIGHTS ..................................................................................... 20 B Issue and redemption of preference shares ............................................................................................................ 21 C Voting rights on preference shares ......................................................................................................................... 21 D Further issue of capital............................................................................................................................................ 21 E Issue of Bonus shares.............................................................................................................................................. 21 F Allotment, transfer and transmission of securities ................................................................................................ 22 G Issue of shares at a discount .................................................................................................................................. 22 H Utilization of securities premium .......................................................................................................................... 22 VI. PROSPECTUS AND ALLOTMENT OF SECURITIES (CH III PART 1) ...................................... 23 A Public offer and private placement [Section 23]. ................................................................................................... 23 I)TO PUBLIC THROUGH PROSPECTUS ....................................................................................... 23 II)THROUGH PRIVATE PLACEMENT .......................................................................................... 23 III)THROUGH RIGHTS ISSUE OR A BONUS ISSUE. .................................................................. 23 B Issue of prospectus................................................................................................................................................. 23 C Variation in terms of contract or objects ............................................................................................................... 23 D Offer of sale of shares by certain members of the company ................................................................................. 24 E Shelf prospectus ..................................................................................................................................................... 24 F Global depository receipts (GDRs) ........................................................................................................................ 24 G Private placement ................................................................................................................................................... 24 VII. DEBENTURES .................................................................................................................................... 25 VIII. DEPOSITS ............................................................................................................................................ 26 A Acceptance of deposit from members: .................................................................................................................. 26 4|Page B Acceptance of deposit from public: ....................................................................................................................... 26 IX. MANAGEMENT AND ADMINISTRATION ................................................................................... 28 A General Meeting ..................................................................................................................................................... 28 I)ANNUAL GENERAL MEETING ................................................................................................... 28 II)EXTRA ORDINARY GENERAL MEETING ............................................................................... 28 B Notice of General Meeting and Voting ................................................................................................................. 28 C Poll.......................................................................................................................................................................... 29 D Postal Ballot ........................................................................................................................................................... 29 E Quorum for general meeting ................................................................................................................................. 29 F Proxy....................................................................................................................................................................... 29 G Secretarial Standards .............................................................................................................................................. 29 H Reporting by listed company with ROC................................................................................................................ 29 I Annual Return [Sec 92] ............................................................................................................................................... 30 X. APPOINTMENT AND QUALIFICATIONS OF DIRECTORS (CH XI) ....................................... 31 A Directors of the Company: ...................................................................................................................................... 31 B Director elected by small shareholders: ................................................................................................................. 33 C Maximum number of directorships: ...................................................................................................................... 33 D Duties of directors: ................................................................................................................................................. 33 E Disqualification of a director: ................................................................................................................................ 33 F Vacation of office of director .................................................................................................................................. 33 G Resignation of directors: ........................................................................................................................................ 33 H Liability of independent directors.......................................................................................................................... 34 I Meetings of BOD ........................................................................................................................................................ 34 J Committees of BOD ................................................................................................................................................... 35 K Powers of BOD ...................................................................................................................................................... 35 L Director's Report ........................................................................................................................................................ 36 M E-Governance......................................................................................................................................................... 36 5|Page APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL (CHAPTER XIII) ................................................................................................................................................................ 37 XI. A Key Managerial Personnel (KMP): ........................................................................................................................ 37 B Key requirements in relation to KMP .................................................................................................................... 37 C Managerial Remuneration [Sec135 r/w Schdl V]: ................................................................................................. 38 XII. COMPANY SECRETARY, ITS FUNCTIONS AND SECRETARIAL AUDIT ............................... 39 A Appointment of CS: ................................................................................................................................................ 39 B Secretarial Audit: .................................................................................................................................................... 39 XIII. DIVIDEND: .......................................................................................................................................... 40 XIV. ACCOUNTS AND AUDIT .................................................................................................................. 41 A Financial Year ......................................................................................................................................................... 41 B Financial statements ............................................................................................................................................... 41 C Re-Opening of accounts and voluntary revision to Financial Statements or Board Report [Sec 130] ................. 42 D Cognisance of Accounting Standards .................................................................................................................... 42 E National Financial Reporting Authority [Sec 132] ................................................................................................ 43 XV. AUDITOR ............................................................................................................................................. 44 A Mandatory firm rotation......................................................................................................................................... 44 B Joint audits ............................................................................................................................................................. 44 C Non-audit services to audit clients ........................................................................................................................ 44 D Auditors liability ..................................................................................................................................................... 45 E Internal audit .......................................................................................................................................................... 45 XVI. LOAN TO DIRECTORS [SEC185] ..................................................................................................... 47 XVII. INVESTMENT, LOAN, GUARANTEE, SECURITY BY COMPANY: .......................................... 48 A Loan and investment by company [Sec 186] ......................................................................................................... 48 XVIII. RELATED PARTY TRANSACTIONS: ............................................................................................ 50 XIX. CORPORATE SOCIAL RESPONSIBILITY: ..................................................................................... 52 6|Page XX. COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS/ M & A LANDSCAPE .......... 53 A Streamlining requirements..................................................................................................................................... 53 B Mergers or division of companies .......................................................................................................................... 53 C Certifying the accounting treatment ...................................................................................................................... 53 D Simplifying procedures .......................................................................................................................................... 53 E Cross-border mergers ............................................................................................................................................. 54 F Squeeze out provisions........................................................................................................................................... 54 G Highlights of the revised process are as under:..................................................................................................... 54 XXI. BUY-BACK OF SECURITIES/ POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES [SEC 68] .................................................................................................................................. 56 A CAPITAL REDUCTION [SEC 66] ..................................................................................................... 56 XXII. NATIONAL COMPANY LAW TRIBUNAL - CHAPTER XXVII [SEC407-434]:............................ 58 A NCLT ..................................................................................................................................................................... 58 B Instances where approval of NCLT is required: ................................................................................................... 58 XXIII. ..... REVIVAL AND REHABILITATION OF FINANCIALLY DISTRESSED COMPANIES [SEC 253] ................................................................................................................................................................ 59 A Scheme of revival and rehabilitation [Sec 261] ...................................................................................................... 59 XXIV. PROTECTION OF MINORITY SHAREHOLDERS INTEREST: ............................................... 60 XXV. CONCLUSION: .................................................................................................................................... 61 XXVI. GLOSSARY .......................................................................................................................................... 62 XXVII. 7|Page ARRANGEMENT OF CHAPTERS AND SECTIONS IN THE COMPANIES ACT 2013.... 63 I. Background The Companies Act, 2013 (2013 Act) was assented by the President of India on 29 August 2013 and published in the Official Gazette on 30 August 2013. The objective behind the 2013 Act is lesser Government approvals and enhanced self-regulations coupled with emphasis on corporate democracy. The 2013 Act delinks the procedural aspects from the substantive law and provides greater flexibility in rule-making to enable adaptation to the changing economic and technical environment. Under this Act, it empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. It contains the mechanism regarding organisational, financial, managerial and all the relevant aspects of a company. The Companies Act, 1956 (1956 Act) has been under review for some time in view of the rapidly changing economic and commercial environment nationally as well as globally. The 2013 Act is expected to facilitate more business-friendly corporate regulations, improve corporate governance norms, enhance accountability on the part of corporates and auditors, raise levels of transparency and protect interests of investors, particularly small investors. MCA had initiated the process to implement 2013 Act in consultation with concerned regulatory authorities, Ministry of Law & Justice and other stakeholders. The rules rolled out and gazette are as:. Chapter1_Specification of definitions details Chapter2_ Incorporation Chapter3_Prospectus and Allotment of Securities Chapter4_Share Capital and Debentures Chapter5_Acceptance of Deposits Chapter6_Registration of Charges Chapter7_Management and Administration Chapter8_Declaration and Payment of Dividend Chapter9__Accounts Chapter10_Audit and Auditors Chapter11_Appointment and Qualification of Directors) Chapter12_Meetings of Board and its Powers Chapter13_Appointment and Remuneration of Managerial Personnel Chapter14_Inspection, Investigation and Inquiry Chapter21_Authorised to Registered Chapter22_Registration of Foreign Companies Chapter24_Registration Offices and Fees Chapter26_Nidhi Rules Chapter29I_Adjudication of Penalties Chapter29II_Miscellaneous 8|Page II. Key definitions and concepts The 2013 Act has introduced several new concepts and has also tried to streamline many of the requirements by introducing new definitions. This chapter covers some of these new concepts and definitions in brief. Companies A One-person company: The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a 'one-person company' (OPC). An OPC means a company with only one person as its member [section 3(1) of the 2013 Act]. B Private company: The 2013 Act introduces a change in the definition for a private company, inter-alia, the new requirement increases the limit of the number of members from 50 to 200. [Section 2(68) of the 2013 Act]. C Small company: A small company has been defined as a company, other than a public company. i) Paid-up share capital of which does not exceed 50 lakh INR or such higher amount as may be prescribed which shall not be more than five crore INR ii) Turnover of which as per its last profit-and-loss account does not exceed two crore INR or such higher amount as may be prescribed which shall not be more than 20 crore INR: As set out in the 2013 Act, this section will not be applicable to the following: -A holding company or a subsidiary company -A company registered under section 8 -A company or body corporate governed by any special Act [section 2(85) of the 2013 Act] D Dormant company: The 2013 Act states that a company can be classified as dormant when it is formed and registered under this 2013 Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Such a company or an inactive one may apply to the ROC in such manner as may be prescribed for obtaining the status of a dormant company.[Section 455 of the 2013 Act] Roles and responsibilities A Officer: The definition of officer has been extended to include promoters and key managerial personnel [section 2(59) of the 2013 Act]. B Key managerial personnel: The term 'key managerial personnel' has been defined in the 2013 Act and has been used in several sections, thus expanding the scope of persons covered by such sections [section 2(51) of the 2013 Act]. C Promoter: The term 'promoter' has been defined in the following ways: -A person who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92 of the 2013 Act that deals with annual return; or -who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or -in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. The proviso to this section states that sub-section (c) would not apply to a person who is acting merely in a professional capacity. [Section 2(69) of the 2013 Act] D Independent Director: The term' Independent Director' has now been defined in the 2013 Act, along with several new requirements relating to their appointment, role and responsibilities. Further some of these requirements are not in line with the corresponding requirements under the equity listing agreement [section 2(47), 149(5) of the 2013 Act]. Investments A Subsidiary: The definition of subsidiary as included in the 2013 Act states that certain class or classes of holding company (as may be prescribed) shall not have layers of subsidiaries beyond such numbers as may be 9|Page B prescribed. With such a restrictive section, it appears that a holding company will no longer be able to hold subsidiaries beyond a specified number [section 2(87) of the 2013 Act]. One of the measures adopted in 2013 Act to ensure transparency is to restrict one's ability to set up multiple investment companies. Sec 2(87) r/w Sec 186A of the 2013 Act, company unless permitted under the Rules can make investment through not more than 2 layers of investment companies. Exceptions to this basic law are: ■ acquisition of a foreign company which has investment subsidiary beyond 2 layers as per the relevant foreign law; and ■ a subsidiary company making investment to comply with any relevant law. "Investment Company1" has been defined to mean a company whose principal business is the acquisition of shares, debentures or other securities. Financial statements A B C Financial year: It has been defined as the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. [Section 2(41) of the 2013 Act]. While there are certain exceptions included, this section mandates a uniform accounting year for all companies and may create significant implementation issues. Consolidated financial statements: The 2013 Act now mandates consolidated financial statements (CFS) for any company having a subsidiary or an associate or a joint venture, to prepare and present consolidated financial statements in addition to standalone financial statements. Conflicting definitions: There are several definitions in the 2013 Act divergent from those used in the notified accounting standards, such as a joint venture or an associate,, etc., which may lead to hardships in compliance. Audit and auditors A B C D E F G 1 Mandatory auditor rotation and joint auditors: The 2013 Act now mandates the rotation of auditors after the specified time period. The 2013 Act also includes an enabling provision for joint audits. Non-audit services: The 2013 Act now states that any services to be rendered by the auditor should be approved by the board of directors or the audit committee. Additionally, the auditor is also restricted from providing certain specific services. Auditing standards: The Standards on Auditing have been accorded legal sanctity in the 2013 Act and would be subject to notification by the NFRA. Auditors are now mandatorily bound by the 2013 Act to ensure compliance with Standards on Auditing. Cognisance to Indian Accounting Standards (Ind AS): The 2013 Act, in several sections, has given cognisance to the Indian Accounting Standards, which are standards converged with International Financial Reporting Standards, in view of their becoming applicable in future. For example, the definition of a financial statement includes a 'statement of changes in equity' which would be required under Ind AS. [Section 2(40) of the 2013 Act] Secretarial audit for bigger companies: In respect of listed companies and other class of companies as may be prescribed, the 2013 Act provides for a mandatory requirement to have secretarial audit. The draft rules make it applicable to every public company with paid-up share capital > Rs. 100 crores. As specified in the 2013 Act, such companies would be required to annex a secretarial audit report given by a Company Secretary in practice with its Board's report. [Section 204 of the 2013 Act] Secretarial Standards: The 2013 Act requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India with respect to general and board meetings [Section 118 (10) of the 2013 Act], which were hitherto not given cognizance under the 1956 Act. Internal Audit: The importance of internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (the 'Order'), pursuant to which auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company's operations. However, the Order did not mandate that an internal audit should be conducted by the internal auditor of the company. The Order acknowledged that an internal audit can be conducted by an individual who is not in appointment by the company. Sec 186(13)proviso 10 | P a g e H I The 2013 Act now moves a step forward and mandates the appointment of an internal auditor who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. The class or classes of companies which shall be required to mandatorily appoint an internal auditor as per the draft rules are as follows: * ■ Every listed company ■ Every public company having paid-up share capital of more than 10 crore INR ■ Every other public company which has any outstanding loans or borrowings from banks or public financial institutions more than 25 crore INR or which has accepted deposits of more than 25 crore INR at any point of time during the last financial year Audit of items of cost: The central government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies. By virtue of this section of the 2013 Act, the cost audit would be mandated for certain companies. [Section 148 of the 2013 Act]. It is pertinent to note that similar requirements have recently been notified by the central government. Regulators A B C National Company Law Tribunal (Tribunal or NCLT): In accordance with the Supreme Court's (SC) judgment, on 11 May 2010, on the composition and constitution of the Tribunal, modifications relating to qualification and experience, etc. of the members of the Tribunal has been made. Appeals from the Tribunal shall lie with the NCLT. Chapter XXVII of the 2013 Act consisting of section 407 to 434 deals with NCLT and appellate Tribunal. National Financial Reporting Authority (NFRA): The 2013 Act requires the constitution of NFRA, which has been bestowed with significant powers not only in issuing the authoritative pronouncements, but also in regulating the audit profession. Serious Fraud Investigation Office (SFIO): The 2013 Act has bestowed legal status to SFIO. Mergers and acquisitions A The 2013 Act has streamlined as well as introduced concepts such as reverse mergers (merger of foreign companies with Indian companies) and squeeze-out provisions, which are significant. The 2013 Act has also introduced the requirement for valuations in several cases, including mergers and acquisitions, by registered valuers. Corporate social responsibility A The 2013 Act makes an effort to introduce the culture of corporate social responsibility (CSR) in Indian corporates by requiring companies to formulate a corporate social responsibility policy and at least incur a given minimum expenditure on social activities. Class action suits A The 2013 Act introduces a new concept of class action suits which can be initiated by shareholders against the company and auditors. Prohibition of association or partnership of persons exceeding certain number A The 2013 Act puts a restriction on the number of partners that can be admitted to a partnership at 100. To be specific, the 2013 Act states that no association or partnership consisting of more than the given number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this 1956 Act or is formed under any other law for the time being in force: As an exception, the aforesaid restriction would not apply to the following: ■ A Hindu undivided family carrying on any business ■ An association or partnership, if it is formed by professionals who are governed by special acts like the Chartered Accountants Act, etc.[section 464 of the 2013 Act] 11 | P a g e Power to remove difficulties A The central government will have the power to exempt or modify provisions of the 2013 Act for a class or classes of companies in public interest. Relevant notification shall be required to be laid in draft form in Parliament for a period of 30 days. The 2013 Act further states no such order shall be made after the expiry of a period of five years from the date of commencement of section 1 of the 2013 Act [section 470 of the 2013 Act]. Insider trading and prohibition on forward dealings A The 2013 Act for the first time defines 'insider trading and price-sensitive information and prohibits any person including the director or key managerial person from entering into insider trading [section 195 of the 2013 Act]. Further, the Act also prohibits directors and key managerial personnel from forward dealings in the company or its holding, subsidiary or associate company [section 194 of the 2013 Act]. Setting up of a company A The 2013 Act introduces a new form of entity 'one-person company' and incorporates certain new provisions in respect of memorandum and articles of association. For instance, the concept of including entrenchment provisions in the articles of association has been introduced. Postal Ballot [Sec 2(65) r/w 110 of the 2013 Act] A Voting by Postal ballot through post / electronic mode is made applicable to all companies. Registered Valuers [Sec 247 of the 2013 Act] B Where any valuation is required to be made in respect of any property, stocks, shares, debentures, securities, goodwill or other assets or of net-worth or liabilities under 2013 Act, such valuation shall be done by a person registered with the Government as a valuer. Registered valuer shall be appointed by the audit committee or in its absence by the BOD. 12 | P a g e III. Types of companies: Key highlights •Maximum number of members in a private company increased from 50 to 200 •One Person Company (OPC) - a new vehicle for individuals for carrying on business with limited liability •Difficult to maintain off the shelf company •Incorporation process tightened ------------------------------------------------------------------------------------------------------------------------------Types of companies that can be formed under 2013 Act has remained same as in 1956 Act except one more class of company has been added. The new class of company is OPC. This section deals with some of the significant changes with respect to types of companies. A Private Limited Company: -The maximum number of members in a private company is increased from 50 to 200 [Sec 2(68) (ii) of the 2013 Act] -The condition of 1956 Act to have a restriction in the AoA of a private company prohibiting invitation or acceptance of deposits has been removed. However, this deletion may not materially benefit a private company from borrowings by way of deposits as stringent measures have now been provided for acceptance of deposits by a company. -Directorships in private limited companies now counted for the purpose of maximum number of directorships i.e. 20 [Section 165 of the 2013 Act - Number of directorships.]. B Small Company: "Small company2"' means a company, other than a public company, whose paid-up share capital does not exceed Rs 5 million or such higher amount as may be prescribed (not exceeding Rs 50 million); or whose turnover as per its last profit & loss account does not exceed Rs 20 million or such higher amount as may be prescribed (not exceeding Rs 200 million). - Small Company cannot be a holding or subsidiary company. 2013 Act provides additional flexibility to small companies and OPC. Some of the relaxations provided to a small company and OPC are as indicated below: - Cash flow statement is not required - Annual Return can be signed by CS or one director if there is no CS - Board meeting is required to be held at least once in each half of a calendar year and the gap between the 2 meetings is not less than 90 days - Merger process between 2 or more 'small companies' is to be approved on fast track basis. Such merger would require approval of ROC, OL, members holding at least 90% of total number of shares and majority of creditors representing 9/10th in value [Section 233 of the 2013 Act]. C One Person Company (OPC) [Sec 2(62) of the 2013 Act]: "One Person Company" means a company which has only one individual as a member the procedural guidance is under Companies (Incorporation) Rules, 20143. A company may be an OPC having a sole member. The memorandum of such OPC is required to indicate the name of the person who shall become member in the event of death or incapacity of the sole member.4 2 2(85) "small company" means a company, other than a public company,— (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees: Provided that nothing in this clause shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act; 3 Applicable forms INC2-6 13 | P a g e OPC is required to specifically mention the word "one person company" below the name wherever it is used 2013 Act provides additional flexibility to OPC. Some of the relaxations provided to OPC are as under: i) OPC should have minimum 1 director ii) Where an OPC has only 1 director, the date on which the resolution is signed and dated by such director is considered as the date of the board meeting iii) Provisions of board meeting, quorum and interested director shall not apply to OPC iv) OPC need not hold an AGM v) Provisions relating to notice, explanatory statement, EGM, quorum, voting, chairman, poll, proxies, postal ballot, vi) NCLT's power of calling for EGM does not apply to OPC vii) Financial Statements can be signed by only one director viii) Financial Statements are to be filed with ROC within 180 days from the end of FY ix) OPC can contract with the sole member who is a director Converting a sole proprietary concern into an OPC will help carrying on the business with limited liability. If the conditions under the tax laws are satisfied, such conversion from sole proprietorship to an OPC may be tax neutral.5 D Dormant Company [section 455 of the 2013 Act]: Where a company is formed and registered under 2013 Act and has no significant accounting transaction but is for a future project or to hold an asset or intellectual property, such a company or an inactive company may make an application to ROC to obtain status as a "dormant company" i) "inactive company6" means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 FYs, or has not filed financial statements and annual returns during the last 2 FYs; ii) "significant accounting transaction" means any transaction other than (a) payment of fees by a company to ROC; (b) payments made by it to fulfill the requirements of the 2013 Act or any other law; (c) allotment of shares to fulfill the requirements of the 2013 Act; and (d) payments for maintenance of its office and records. In case of a company which has not filed financial statements or annual returns for 2 FYs consecutively, ROC shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies Cash flow statement is not required for dormant company i) Board meetings required to be held at least in each half of a calendar year and the gap between the 2 meetings is not less than 90 days ii) A dormant company shall have the prescribed minimum number of directors, file prescribed documents and pay prescribed annual fee to ROC to retain its dormant status Section 3(1) proviso Under Companies (Incorporation) Rules, 2014 Rule 3. One Person Company.(1) Only a natural person who is an Indian citizen and resident in India(a) shall be eligible to incorporate a One Person Company; (b) shall be a nominee for the sole member of a One Person Company. Explanation.- For the purposes of this rule, the term "resident in India" means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year. (2) No person shall be eligible to incorporate more than a One Person Company or become nominee in more than one such company. (3) Where a natural person, being member in One Person Company in accordance with this rule becomes a member in another such Company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub rule (2) within a period of one hundred and eighty days. (4) No minor shall become member or nominee of the One Person Company or can hold share with beneficial interest. (5) Such Company cannot be incorporated or converted into a company under section 8 of the Act. (6) Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporates. (7) No such company can convert voluntarily into any kind of company unless two years have expired from the date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees. 6 Section 455(1)(i) 4 5 14 | P a g e iii) The dormant company may become an active company by making necessary application to Registrar of Companies iv) ROC may strike off the name of a dormant company from the register of dormant companies, if the company fails to comply with the requirements E Foreign company: "Foreign Company" is defined [in Sec2 (42)] to mean any company or a body corporate incorporated outside India and which – i) has a place of business in India whether by itself or through an agent, physically or through electronic mode7; and ii) -conducts any business activity in India in any other manner. The expression 'place of business' is defined to include a share transfer or registration office. Application of Act to foreign companies: [Section 379 of the 2013 Act]. Where not less than fifty per cent of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India. -Applicable provisions Chapter XXII Companies Incorporated outside India and under Companies (Registration of Foreign Companies) Rules, 2014. -As per FEMA, no person resident outside India shall, without prior approval of RBI establish in India, a branch, project or a liaison office or any other place of business by whatever name called -A foreign company is required to register with ROC within 30 days from the date of its establishing a place of business in India [sec 380] -Setting up of place of business in India by a foreign company through an agent or electronic mode will require registration under 2013 Act. F Holding-Subsidiary Company: Subsidiary – meaning, under 1956 Act, a company shall be deemed to be subsidiary of other company, if other company exercise or controls the composition of Board of directors or controls more than 50% of total equity share capital or total voting capital. Under 2013 Act, the concept of holding-subsidiary company relationship, as far as it relates to exercise or control of more than half share capital is concerned, requires one to consider the investor company's shareholding in the total paid up share capital (i.e. equity and preference) of the investee company for which the relationship is to be examined. Under the 1956 Act, the investor company's shareholding in the total equity paid up share capital needed to be considered. -Class or classes of holding companies to be prescribed cannot have layers of subsidiaries beyond such numbers as may be prescribed Holding-subsidiary relationship will have to be re-examined especially where company is funded with lower equity share capital base and higher preference share capital. This is likely to trigger unintended consolidation. "subsidiary company 8 " or "subsidiary", in relation to any other company (that is to say the holding company), means a company in which the holding company— 7 Under the rules: For the purposes of clause (42) of section 2 of the Act, ”electronic mode” means carrying out electronically based, whether main server is installed in India or not, including, but not limited to (i) business to business and business to consumer transactions, data interchange and other digital supply transactions; (ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India; (iii) financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management; (iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and (v) all related data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise; 8 Section 2(87) 15 | P a g e (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Explanation.—For the purposes of this clause,— (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company's Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression "company" includes any body corporate; (d) "layer" in relation to a holding company means its subsidiary or subsidiaries; Subsidiary company not to hold shares in its holding company 16 | P a g e IV. Incorporation of companies: Key highlights •Incorporation process tightened •Limit of number of members in an association or partnership (without incorporation) to be prescribed (not to exceed 100). In the 1956 Act, this limit was 10 for banking companies and 20 for other than banking companies9. •Entrenchment clauses permitted in AoA •Scope of companies that may be formed with charitable objects enlarged •Elaborate rules under Companies (Incorporation) Rules, 2014. ------------------------------------------------------------------------------------------------------------------------------A Mandatory formation No association or partnership consisting of more than prescribed number of persons (not more than 100) shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company or is formed under any other law for the time being in force. This rule is not applicable to an HUF carrying on any business and association or partnership formed by professionals who are governed by special acts. (Sec 464 of the 2013 Act: Prohibition of association or partnership of persons exceeding certain number.) In the 1956 Act, the limit was 10 for entities carrying on banking business and 20 in other cases. B Contents of MOA and AOA -MOA10 to contain the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. It shall have the name clause, registered office, object clause11 , the liability/ies of member/s, capital clause as in the 1956 Act. However, as against the existing requirement of the 1956 Act, the 2013 Act does not require the objects clause in the memorandum to be classified as the following: (i) The main object of the company (ii) Objects incidental or ancillary to the attainment of the main object (iii) Other objects of the company [section 4(1) of the 2013 Act] The 2013 Act mandates inclusion of declaration to the effect that all provisions of the 1956 Act have been complied with, which is in line with the existing requirement of 1956 Act. Additionally, an affidavit from the subscribers to the memorandum and from the first directors has to be filed with the ROC, to the effect that they are not convicted of any offence in connection with promoting, forming or managing a company or have not been found guilty of any fraud or misfeasance, etc., under the 2013 Act during the last five years along with the complete details of name, address of the company, particulars of every subscriber and the persons named as first directors. The 2013 Act further prescribes that if a person furnishes false information, he or she, along with the company will be subject to penal provisions as applicable in respect of fraud i.e. section 447 of the 2013 Act [section 7(4) of the 2013 Act;] 2013 Act permits AOA12 of a company to contain provisions relating to 'entrenchment'13. An entrenchment clause is a provision which makes further amendments to AOA more difficult. 2013 Act provides that AOA of a company may contain provision for entrenchment whereby specified provisions of AOA may be altered only if conditions or procedures that are more restrictive than those applicable to a special resolution are complied with. Entrenchment provisions can be included in the AOA either on formation of a company or thereafter by an amendment to the AOA which is approved by all the members in case of a private company and by special resolution in case of a public company. Entrenchment clause may assist in protecting the rights of minority members or prevent unilateral amendments to the AOA which may be a joint venture company between 2 or more parties. The applicable forms are Form No.INC.2 or Form No.INC.7, or Form No.MGT.1414 Sec 464: Prohibition of association or partnership of persons exceeding certain number. Section 4 Memorandum 11 4(1)(c) the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof 12 Section 5-Articles 13 Section 5 (3-5) 14 rule 10 - Companies (Incorporation) Rules, 2014 9 10 17 | P a g e C Companies with charitable objects -Scope of companies that may be formed with charitable objects 15 (i.e. Section 25 Company under 1956 Act) increased to include sports, education, research, social welfare,16 protection of environment in addition to the promotion of commerce, arts, science, religion and charity. As against the provisions of the 1956 Act under which a company's licence could be revoked, the 2013 Act provides that the licence can be revoked not only where the company contravenes any of the requirements of the section but also where the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest. The 2013 Act thus provides for more stringent provisions for companies incorporated with charitable objects [section 8 of the 2013 Act]. -A section 8 company can merge only with another Section 8 company17 Note: The objects outlined above may not necessarily align with the charitable purposes as defined under the Income Tax Act, 1961. Hence, if registration is sought the provisions under the said Act, would also need to be considered. D Incorporation process ■ The principal document for incorporation under Companies (Incorporation) Rules, 2014 is INC-1 with a declaration wherein section 7(1)(b) of the 2013 Act states that “a declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with”18; i) Nationality and proof of identity of subscribers to MOA and AOA is to be provided19 ii) Promoters may provide a temporary address for correspondence till the company is formed. A new company should have a registered office address within 15 days from its incorporation (sec 7) iii) Particulars of interest in other firms and bodies corporate, if any, in relation to the first directors is to be filed with Registrar of Companies. ■ Commencement of business, etc: The provisions of the 1956 Act as set out in section 149 which provide for requirement with respect to the commencement of business for public companies that have a share capital would now be applicable to all companies. The 2013 Act empowers the ROC to initiate action for removal of the name of a company in case the company's directors have not filed the declaration related to the payment of the value of shares agreed to be taken by the subscribers to the memorandum and that the paid-up share capital of the company is not less than the prescribed limits as per the 2013 Act, within 180 days of its incorporation and if the ROC has reasonable cause to believe that the company is not carrying on business or operations [section 11 of the 2013 Act]. ■ A newly formed company cannot commence business or exercise any borrowing power unless it has filed with ROC a prescribed declaration to the effect that20: -every subscriber has paid-in the value of shares subscribed to MOA; -paid-up share capital of the company is not less than the minimum prescribed; and Section 8- Formation of companies with charitable objects, etc. Section 8 (1) (a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; 15 16 17 Section 8(10) A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. "Ministry of Company Affairs" exercises supervision over the three professional bodies, namely, Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI) and the Institute of Cost and Works Accountants of India (ICWAI). "Ministry of Company Affairs" is the concerned ministry which is primarily concerned with the administration of the Companies Act, 1956, other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with law. The intent of the Parliament is to permit advocates along with the class of professionals under the supervision of MCA in incorporation of a company, primary acknowledged domain knowledge of company law is with advocates and company secretaries. 19 Section 7(1)(c) 20 Sec 11 Commencement of business, etc. 18 18 | P a g e -verification of its registered office ■ A company may be struck off by the ROC on the following grounds21: -subscribers to the memorandum have not paid subscription money within 180 days from the date of incorporation -company has failed to commence its business within 1 year from the date of incorporation Registered office of company ■ Where a company has changed its name in the last two years, the company is required to paint, affix or print its former names along with the new name of the company on business letters, bill heads, etc. However, the 2013 Act is silent on the time limit for which the former name needs to be kept [section 12 of the 2013 Act]. Alteration of memorandum ■ The 2013 Act imposes additional restriction on the alteration of the object clause of the memorandum for a company which had raised money from the public for one or more objects mentioned in the prospectus and has any unutilised money. The 2013 Act specifies that along with obtaining an approval by way of a special resolution, a company would be required to ensure following if it intends to alter its object clause: ■ Publishing the notice of the aforesaid resolution stating the justification of variation in two newspapers ■ Exit option can be given to dissenting shareholders by the promoters and shareholders having control in accordance with the regulations to be specified by the Securities and Exchange Board of India (SEBI) [section 13 of the 2013 Act]. 21 Power of Registrar to remove name of company from register of companies. 248. (1) Where the Registrar has reasonable cause to believe that— (a) a company has failed to commence its business within one year of its incorporation; (b) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay within a period of one hundred and eighty days from the date of incorporation of a company and a declaration under sub-section (1) of section 11 to this effect has not been filed within one hundred and eighty days of its incorporation; or (c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455, he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice. 19 | P a g e V. Share Capital Key highlights •For defined infrastructural projects, preference shares can be issued for a period exceeding 20 years22 •Provisions relating to further issue of capital made applicable to all companies23 •The terms for offer of securities, form and manner of 'private placement' to be as prescribed •Shares cannot be issued at a discount except sweat equity shares24 •Time gap between 2 buy-backs shall be minimum 1 year25 ------------------------------------------------------------------------------------------------------------------------------A Types of Share Capital There is no change in the concept of types of share capital as in 1956 Act. The shares can be of the following types26: i) Equity shares (i) With voting rights; or (ii) With differential rights as to dividend, voting or otherwise ii) Preference shares Shares with Differential Rights The provisions relating to issue of shares with differential rights as to dividend, voting or otherwise have been retained in 2013 Act. The conditions for issuance for such shares are through the prescribed Rule 4 of Companies (Share Capital and Debentures) Rules, 201427. The proviso to section 48(1) of the 2013 Act states that if the variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation. Rule 2(r) of the 2013 Act :28 “Total Share Capital”, for the purposes of clause (6) and clause (87) of section 2, means the aggregate of the (a) paid-up equity share capital; and (b) convertible preference share capital; Section 55(2) Sec 62 24 Sec 63 r/w sec 64 25 Sec68 26 Sec 43 27 Chapter4_Share Capital and Debentures (rules) Rule 4. Equity shares with differential rights.(1) No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely:(a) the articles of association of the company authorizes the issue of shares with differential rights; (b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders: Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot ; (c) the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time; (d) the company having consistent track record of distributable profits for the last three years; (e) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares; (f) the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend; (g) the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government; (h) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators. 28 Companies (Specification of definitions details) Rules, 2014. 22 23 20 | P a g e B Issue and redemption of preference shares29 ■ Tenure of preference shares has been kept at 20 years30. However, companies having "infrastructural projects" (as defined) can issue preference shares for tenure beyond 20 years, subject to the redemption of specified percentage of shares as per Rules31 to be prescribed, on an annual basis at the option of the preference shareholders ■ Where a company is unable to redeem any preference shares or to pay dividend thereon in accordance with the terms of issue, it may redeem such preference shares by further issue of redeemable preference shares equal to the amount due and dividend due thereon. This is subject to i) consent of the holders of 3/4th in value of such preference shares; and ii) approval of NCLT. ■ On issue of such further redeemable preference shares, the preference shares not redeemed earlier shall be deemed to have been redeemed. C Voting rights on preference shares32 ■ 2013 Act provides that where a dividend in respect of a class of preferences shares has not been paid for a period of 2 years or more, such class of preferences shareholders shall have a right to vote on all the resolutions placed before a general meeting of the company. This is irrespective of whether the preferences shares are cumulative or noncumulative. Thus, unlike 1956 Act, 2013 Act makes no distinction between cumulative preferences shares and noncumulative preferences shares in the matter of the voting rights in the event of non-payment of dividend. D Further issue of capital33 ■ Provisions relating to further issue of capital are made applicable to all types of companies i.e. even private companies have to comply with these provisions for any further issue of capital. This extension to private companies is to ensure that the shareholders are consulted and their opinion considered for issue of shares by special resolution. ■ Pricing of a preferential issue of shares by a company shall be determined by a Registered Valuers34. Conditions are prescribed in the Rules for preferential issue by companies35. ■ Amounts received as share application money by private companies also will not be available for use until it allotment of shares. ■ Shelf prospectus (i.e. prospectus in respect of which securities are issued for subscription in one or more issues without the issue of a further prospectus) can be issued by classes of companies to be prescribed by Regulations of SEBI. E Issue of Bonus shares36 ■ Unlike 1956 Act, conditions are specified for issue of Bonus shares under 2013 Act which are made applicable to all companies. Accordingly, issue of fully paid-up bonus shares can be made out of its free reserves or the securities premium account or capital redemption reserve account. However, company cannot issue bonus shares by capitalizing revaluation reserves. ■ A company is required to comply with the following conditions in addition to the conditions to be prescribed under the Rules before issuance of bonus shares: i) authorization by AOA ii) shareholders' approval in a general meeting iii) not defaulted in payment of interest or principal in respect of fixed deposit or debt securities issued by it; iv) not defaulted in payment of statutory dues of the employees like provident fund, gratuity and bonus; v) partly paid shares outstanding on the date of allotment should be fully paid- up prior to issue of bonus shares and ■ 2013 Act further provides that bonus shares cannot be issued in lieu of dividend. Section 55 Section 55 31 Companies (Share Capital and Debentures) Rules, 2014 32 Section 47(2) 33 Section 62 34 Sec 62(1)(c) 35 Rule 13. Issue of shares on preferential basis -of Companies (Share Capital and Debentures) Rules, 2014. 36 Section 63 29 30 21 | P a g e F Allotment, transfer and transmission of securities37 ■ Securities or any interest of any member in a public company shall be freely transferable. However, any contract or arrangement between 2 or more persons in respect of transfer of securities shall be enforceable as a contract. ■ 2013 Act lays down new timelines for issuance of certificates in respect of allotment, transfer and transmission of securities. The revised timelines are as under: Time stipulated for issuance of certificates Certificates for Shares - on subscription to the MOA and AOA within 2 months from the date of incorporation i.e. on incorporation of a company Shares - allotted subsequent to incorporation within 2 months from the date of allotment if shares are issued in physical form; or immediately on allotment to the depository where shares are issued in demat form Shares - for transfer Debentures G within 1 month from the date of receipt of the instrument of transfer within 6 months from the date of allotment of debentures Issue of shares at a discount ■ 1956 Act permitted issue of shares at a discount to its par value subject to conditions. 2013 Act prohibits issue of shares at a discount except in case of "sweat equity shares" issued to the employees of the Company38. - "sweat equity shares 39 " means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called40 H Utilization of securities premium41 Securities premium may be applied for permitted purposes. Utilization of securities premium for any other purpose would entail compliance with provisions relating to reduction of capital. (a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or (e) for the purchase of its own shares or other securities under section 68. For classes of companies to be prescribed in the Rules, utilization of securities premium for the following purposes will require such a company to ensure that the Accounting Standards prescribed have been complied: (a) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or (b) in writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or (c) for the purchase of its own shares or other securities under section 68. Section 56 Sec 53 39 Sec 2(88) 40 Also see rule 8 under Companies (Share Capital and Debentures) Rules, 2014. 41 Sec 52(2) 37 38 22 | P a g e VI. Prospectus and allotment of securities (Ch III Part 1 of the 2013 Act) Key highlights •Specific provisions have been inserted in 2013 Act for private placement of securities by public and private companies42. •Allotment in respect of private placement of securities must be completed within 60 days from the date of receipt of application money and in the event of such non-allotment; the application money is to be refunded to the subscribers within 15 days from the date of completion of 60 days. If the company fails to refund, interest is payable @ 12% from the end of the 60th day. •All other provisions relating to public issue, rights issue and preferential issue are similar to those contained in 1956 Act. •An offer or invitation to subscribe securities on private placement can be made to persons not exceeding 50 or such higher number as may be prescribed by Rules (excluding QIBs and employees being offered securities under a scheme) in a FY43. - An offer of securities by a company to more than 50 or such higher number of persons as may be prescribed shall be deemed to be an offer to the public44. •A person who has been convicted for personating for acquisition etc. of securities is also liable for suffering disgorgement of gains, seizure and disposal of such securities and such amount received through disgorgement or disposal of securities is to be transferred to IEPF. ------------------------------------------------------------------------------------------------------------------------------A Public offer and private placement [Section 23 of the 2013 Act]. Sections 23 of the 2013 Act, explicitly provide the ways in which a public company or private company may issue securities. This section explains that a public company may issue securities in any of the following manners: i) To public through prospectus ii) Through private placement iii) Through rights issue or a bonus issue. For private companies, this section provides that it may issue securities through private placement, by way of rights issue or bonus issue. Section 23 of the 2013 Act also provides that compliance with provisions of part I of chapter III is required for the issue of securities to public through prospectus. For private placement compliance, with the provisions of part II of chapter III are required. The 2013 Act also introduces certain changes with respect to prospectus and public offers aimed at enhancing disclosure requirements as well as streamlining the process of issuance of securities. B Issue of prospectus The information to be included in the prospectus is specified in section 26 of the 2013 Act45 . The 2013 Act mandates certain additional disclosures to the 1956 Act: ■ Any litigation or legal action pending or taken by a government department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company ■ Sources of promoter's contribution The 2013 Act has also relaxed the disclosure requirements in some areas. Examples of certain disclosures not included in the 2013 Act are as follows. Particulars regarding the company and other listed companies under the same management, which made any capital issues during the last three years -Export possibilities and export obligations. -Details regarding collaboration. The 2013 Act states that the report by the auditors on the assets and liabilities of business shall not be earlier than 180 days before the issue of the prospectus [section 26 (1) (b) (iii) of the 2013 Act]. The 1956 Act required that the report not earlier than 120 days before the issue of the prospectus. C Variation in terms of contract or objects The 2013 Act states that a special resolution is required to vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued [section 27 (1) of the 2013 Act]. The 1956 Act currently requires approval in a general meeting by way of an ordinary resolution. The 2013 Act also requires that dissenting shareholders shall be given an exit offer by promoters or controlling shareholders [section 27 (2) of the 2013 Act]. Sec23 Sec42 44 Sec 25 r/w 42 45 Read with rules under Chapter3_Prospectus and Allotment of Securities 42 43 23 | P a g e D Offer of sale of shares by certain members of the company The 2013 Act that members of a company, in consultation with the board of directors, may offer a part of their holding of shares to the public. The document by which the offer of sale to the public is made will be treated as the prospectus issued by the company. The members shall reimburse the company all expenses incurred by it [section 28 of the 2013 Act]. E Shelf prospectus The 2013 Act extends the facility of shelf prospectus by enabling SEBI to prescribe the classes of companies that may file a shelf prospectus. The 1956 Act limited the facility of shelf prospectus to public financial institutions, public sector banks or scheduled banks [section 31 (1) of the 2013 Act]. F Global depository receipts (GDRs) The 2013 Act enables the issue of depository receipts in any foreign country subject to prescribed conditions [section 41 of the 2013 Act]. In several aspects across the 2013 Act, it appears that the 2013 Act supplements the powers of SEBI by incorporating requirements already mandated by SEBI. G Private placement The 2013 Act requires that certain specified conditions are complied with in order to make an offer or invitation of offer by way of private placement or through the issue of a prospectus. ■ The offer of securities or invitation to subscribe securities in a financial year shall be made to such number of persons not exceeding 50 or such higher number as may be prescribed {excluding qualified institutional buyers, and employees of the company being offered securities under a scheme of employees stock option in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed}. This provision of the 2013 Act is in line with the provision of the 1956 Act. ■ The allotments with respect to any earlier offer or invitation may have been completed. ■ All the money payable towards the subscription of securities shall be paid through cheque, demand draft or any other banking channels but not by cash. ■ The offers shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name. ■ The company offering securities shall not release any advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer [section 42 of the 2013 Act]. 24 | P a g e VII. Debentures46 A Company may issue debentures either with an option to convert such debentures into shares wholly or partly at the time of redemption. The issue of such debentures shall be approved by a special resolution passed at a general meeting. i) Debentures cannot carry any voting rights ii) Secured debentures may be issued by a company subject to prescribed terms and conditions iii) Compulsory creation of Debenture Redemption Reserve (DRR): Where the debentures are issued by a company, the company is required to create a DRR out of profits of the company available for payment of dividend and the amount credited to such account is to be utilized only for the redemption of debentures Appointment of Debenture Trustees: Before issuing a prospectus or making an offer or invitation to the public or to its members exceeding 500, for the subscription of its debentures, a company is required to appoint one or more debenture trustees Responsibility of Debenture Trustees: In cases where the debenture trustee comes to a conclusion that the assets of the company are insufficient to pay principal amount as and when it becomes due, debenture trustee may file a petition before NCLT to impose restrictions on the company from incurring any further liabilities 46 Debentures. Sec 71 & 72 25 | P a g e VIII. Deposits47 Key highlights •Stringent norms provided for acceptance of fresh deposits from members and public. •Any deposit accepted before the commencement of the 2013 Act or any interest due thereon to be repaid within 1 year from the commencement of the 2013 Act or from the date on which such payments are due, whichever is earlier. •Credit rating made mandatory for acceptance of public deposits. •Limits to be prescribed for accepting ICDs. ------------------------------------------------------------------------------------------------------------------------------Acceptance of deposits of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in the Rules48 in consultation with RBI. ■ On and from commencement of the 2013 Act, other than the following classes of companies, companies in general are not permitted to invite, accept or renew 'deposits' from public: -Banking company; -NBFC; and -such other company as CG may specify; Repayment of deposits accepted before commencement of the 2013 Act: Any deposit accepted before the commencement of the 2013 Act or any interest due thereon is to be repaid within 1 year from the commencement of the 2013 Act or from the date on which such payments are due, whichever is earlier.49 ■ NCLT may, after considering the financial condition of a company etc., allow further time as considered reasonable to the company to repay the deposit. ■ Stringent penalty and / or imprisonment provisions have been made for failure to comply with the repayment of deposit conditions. A Acceptance of deposit from members: A company may accept deposit from its members by passing a resolution in general meeting and subject to conditions as may be prescribed in the Rules. Such companies are also required to comply with the following additional conditions: i) Issuance of circular to its members showing financial position, credit rating etc. The circular must be filed with ROC 30 days before its issue; ii) Providing deposit insurance; iii) Depositing in a scheduled bank 15% of amount of its deposits maturing during the current and next FY; iv) Providing security, if any, for the due repayment of the amount of deposit or the interest thereon including the creation of charge on the property of assets of the company etc. B Acceptance of deposit from public: Public companies having such net worth or turnover as may be prescribed will be eligible to accept deposits from persons other than its members subject to conditions including: i) obtaining rating from a recognized Credit Rating Agency which ensures adequate safety, ii) creation of charge on the assets of the company etc. No dividend on equity shares can be declared during the period of non-compliance, if the Company fails to comply with provisions of acceptance and repayment of deposits. One would have to examine the Rules and identify the amounts which will not be regarded as a deposit. If a nonexempted company has accepted a deposit, it will have to organize for its repayment within 1 year from the date of Rules: Ch. V - ACCEPTANCE OF DEPOSITS BY COMPANIES sec 73 to 76 Refer Chapter5_Acceptance of Deposits –elaborate definition of deposit in Rule 2 (c) 49 See also rule (4) -No eligible company shall accept or renew(a) any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds ten per cent. of the aggregate of the paid-up share capital and free reserves of the company; ( b) any other deposit, if the amount of such deposit together with the amount of such other deposits, other than the deposit referred to in clause (a), outstanding on the date of acceptance or renewal exceeds twenty-five per cent. of aggregate of the paid-up share capital and free reserves of the company. 47 48 26 | P a g e commencement of the 2013 Act. The penalties for non-compliance are severe for the KMPs and such personnel should take adequate steps to ensure adequate compliance. 27 | P a g e IX. Management and administration Key highlights Management, administration and corporate governance •At least 1 director of a company shall be a person who has stayed in India for 182 days or more in the previous calendar year. Existing companies to comply with this provision within 1 year from the date of commencement of the 2013 Act.50. •Listed and prescribed class of companies to have at least 1 woman director. Existing companies to comply with this provision within 1 year from the date of commencement of the 2013 Act. •Prescribed class of companies to have whole-time Key Managerial Personnel (KMP) -Chief Finance Officer to be a whole time KMP for prescribed classes of companies -Whole time Director included in definition of KMP •Electronic voting for Board and shareholders meetings introduced •Following committees of the Board made mandatory for listed and prescribed classes of companies: -Audit committee51, -Stakeholder relationship committee52, -Nomination and Remuneration committee53, -Corporate Social Responsibility committee54. •Director to vacate office on remaining absent from all the meetings of the Board of Directors held during 12 months with or without obtaining leave of absence. •Contents of Directors' Report elaborated. Directors of listed companies to annually report on the existence and effective operations of systems on internal financial controls. Directors of all companies to annually report on the compliance with all applicable laws. •Secretarial audit mandatory for listed and prescribed classes of companies. •Approval of Central Government required for certain managerial remuneration. ------------------------------------------------------------------------------------------------------------------------------- A General Meeting 2013 Act has simplified the process of holding general meeting and has recognized voting by electronic means. Some significant features relating to general meetings of members are summarized as under: i) Annual General Meeting55 ■ The provisions relating to holding of AGM in 2013 Act are similar to 1956 Act ■ OPC is not required to hold AGM. This is for the reason that there is only one member in case of an OPC.56 ii) Extra Ordinary General Meeting57 BOD of the company or on requisition of prescribed number of members may call EGM whenever it deems fit. The provisions relating to holding of EGM in 2013 Act are similar to 1956 Act. B Notice of General Meeting and Voting ■ A notice of general meeting (at least 21 clear days' notice) can be given either in writing or by electronic mode.58 ■ For calling a general meeting at a shorter notice, consent of at least 95% of the members entitled to vote is required for both AGM and EGM. ■ 2013 Act provides that the explanatory statement to be annexed to the notice of a general meeting to also provide such information and facts that may enable members to understand the meaning, scope and implications of the items of business to be transacted. ■ A member may exercise his vote at a meeting by electronic means as prescribed. A notice of general meeting can be given either in writing or by electronic mode. This measure is expected to enhance participation of members in proceedings of general meeting and enable them to exercise their rights without being present at the meeting. Sec 149(3) Sec 177 52 Sec 178 53 Sec178 54 Sec135 55 Sec96 56 Sec 96(1) 57 Sec100 58 Sec101 50 51 28 | P a g e ■ business hours now defined as between 9 am and 6 pm. The 2013 Act states that annual general meeting cannot be held on a national holiday whereas the annual general meeting cannot be held on a public holiday as per the existing provisions of section 166(2) of the 1956 Act [section 96(2) of the 2013 Act]. Poll C The conditions for demanding a Poll at a general meeting on any resolution is made uniform for all companies having share capital. Postal Ballot D CG may declare by notification such items of business which must be transacted by means of postal ballot. All items other than ordinary business and any business, in respect of which directors or auditors have a right to be heard at any meeting, may be transacted by means of postal ballot. Quorum for general meeting59 E ■ Presence of members in person only will be counted for the purpose of determining quorum; -Quorum for a private company shall be 2 members personally present. -Quorum for a public company is depended on the number of members in the Company as shown below: Total number of members in a public company as on the date of meeting Upto 1,000 members Between 1,000 to 5,000 members More than 5,000 members Quorum(Members personally present) 5 15 30 Proxy60 F ■ Any member of a company entitled to attend and vote at a meeting of the company is entitled to appoint another person as a proxy to attend and vote at the meeting on his behalf. ■ A person can be appointed as a proxy for a member or such number of members not exceeding 50 and for such number of shares as may be prescribed. There was no similar provision in 1956 Act. The provision will have to be kept in mind for shareholders who are not likely to be present personally for the meeting. Secretarial Standards G Every company shall observe Secretarial Standards with respect to General and Board Meetings specified by ICSI and approved by the CG[section 118 (10) of the 2013 Act]. Duty is cast on the CS to ensure that the company complies with the applicable Secretarial Standards. Reporting by listed company with ROC H With a view to provide greater transparency and disclosure by listed companies, 2013 Act provides that: ■ Listed company to file with ROC a report in respect of change in number of shares held by promoters or top 10 shareholders within 15 days of such change [section 93 of the 2013 Act]. This requirement again demonstrates the effort made towards synchronising the requirements under the 2013 Act and the requirements under SEBI. This is an additional disclosure requirement which is independent of disclosures to be made under the SEBI Regulations relating to Takeovers and Prohibition of Insider Trading. ■ Listed companies are required to file a report with ROC within 30 days of the conclusion of the AGM including a confirmation that AGM meeting was convened, held and conducted. ■ make disclosures with respect to top shareholders annually. 59 60 Sec103 Sec 105 29 | P a g e I Annual Return [Sec 92 of the 2013 Act] The 2013 Act states that requirement of certification by a company secretary in practice of annual return will be extended to companies having paid up capital of five crore INR or more and turnover of 25 crore INR or more* (section 92(2) of the 2013 Act and the 1956 Act requires certification only for listed companies). ■ In order to have uniformity between all companies, 2013 Act, provides that Annual Return to contain details as on the end of the FY instead of as on the date of AGM as is required under the 1956 Act. ■ The disclosures in the Annual Return are enhanced. Information relating to remuneration of directors and KMP, details of meetings of members, BOD and its various committees, particulars of holding, subsidiary and associate companies, matters relating to certification of compliances, disclosures, penalty or punishment imposed on the company, its directors or officers, shares held by or on behalf of FII etc. are also to be provided. [Section 92(1) of the 2013 Act]. 30 | P a g e X. Appointment and qualifications of directors (Ch XI of the 2013 Act) A Directors of the Company: ■ Every company to have a BOD consisting of individuals as directors. The minimum number of directors for different classes of companies is as under61: -private company – 2(two) -public company – 3(three) -OPC – 1(one) ■ A director of a company can be resident or non-resident. ■ Where no provision is made in the AOA of the company for the appointment of the first director, the subscribers to the MOA who are individuals are deemed to be the first directors of the company and in case of OPC an individual being member is deemed to be its first director. ■ No person shall be appointed as a director of a company unless he has been allotted DIN. i) Maximum number of Directors62: The limit on maximum number of directors in a company is increased to 15 which can be further increased by passing a special resolution in the general meeting. This is to provide greater flexibility to a company to attract and retain talent and benefit from experience and expertise of a larger strength of the board. ii) Resident Director63: 2013 Act provides a new requirement for a company to have at least 1 of the directors who is resident in India i.e. a person who has stayed in India for at least 182 days or more in the previous calendar year. This requirement is to be complied within 1 year from the commencement of the 2013 Act or notification of rules by CG in this regards. iii) Women Director: Prescribed class of companies to have at least 1 woman director. This requirement is to be complied within 1 year from 2013 Act coming into force64, this read with rules under Chapter11_Appointment and Qualification of Directors65 iv) Independent Directors6667: An ID in relation to a company, means a director other than a MD or a WTD or a nominee director,(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; (b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company; (ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company; (c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding FYs or during the current FY; (d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its Sec149 Sec149 63 Sec 149(3) 64 Sec 149 proviso 65Chapter11_Appointment and Qualification of Directors Rule 3. Woman director on the Board.- The following class of companies shall appoint at least one woman director(i) every listed company; (ii) every other public company having (a) paid–up share capital of one hundred crore rupees or more; or (b) turnover of three hundred crore rupees or more: Provided that a company, which has been incorporated under the Act and is covered under provisions of second proviso to subsection (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation: Provided further that any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later. Explanation.- For the purposes of this rule, it is hereby clarified that the paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account. 66 Sec149(6) 67 Rule 4 & 5 - Chapter11_Appointment and Qualification of Directors 61 62 31 | P a g e gross turnover or total income or Rs 5 million or such higher amount as may be prescribed, whichever is lower, during the 2 immediately preceding FYs or during the current FY; (e) who, neither himself nor any of his relatives(i) holds or has held the position of a KMP or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 FYs immediately preceding the FY in which he is proposed to be appointed; (ii) is or has been an employee or proprietor or a partner, in any of the 3 FYs immediately preceding the FY in which he is proposed to be appointed, of(A) a firm of auditors or CS in practice or cost auditors of the company or its holding, subsidiary or associate company; or (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm; (i)holds together with his relatives 2% or more of the total voting power of the company; or (ii)is a Chief Executive or director, by whatever name called, of any non-profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or (f) who possesses such other qualifications as may be prescribed. Presently, clause 49 of the Listing Agreement provides for appointment of IDs by listed companies. In order to facilitate greater independence in decision making by BOD, 2013 Act provides the following requirements for IDs: ■ Listed companies to have at least 1/3rd of its total number of directors as IDs ■ CG may prescribe minimum number of IDs in case of any class of public companies. It may be noted that SEBI has put in place a proposed road map to align its requirement relating to ID as provided under clause 49 of the Listing Agreement (Corporate Governance) with 2013 Act requirement; ■ Alternate director of an ID can be appointed if such an alternate director is also an ID ■ ID is not liable to retire by rotation and is not to be included in the 'total number of directors' liable to retire by rotation. ■ An ID may be selected from data bank maintained by notified institute or association having expertise in creation and maintenance of such data bank. ■ ID shall be appointed at a general meeting for a term upto 5 consecutive years. Justification for choosing the appointee as ID to be included in the explanatory statement to the notice. ■ ID is eligible for re-appointment for another term of upto 5 years subject to compliance with conditions including performance evaluation by the entire BOD and approval by members through special resolution ■ Once the 2 consecutive terms of ID are completed, the ID will be eligible for appointment after a cooling period of 3 years, provided he is not associated with the company in any other capacity during this 3 years period, either directly or indirectly. ■ IDs are not entitled to any stock option but may receive remuneration by way of sitting fee, re-imbursement of expenses for participation in meetings, profit related commission as approved by the members of the company. ■ ID and NED (not being promoter or KMP), shall be held liable, only for such acts by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. ■ Detailed code of conduct to be followed by companies and their IDs has been included in 2013 Act. Schedule IV 'Code for Independent Directors' (Code) which broadly prescribes the following for independent directors: ■ Professional conduct ■ Role and functions ■ Duties ■ Manner of appointment ■ Reappointment ■ Resignation or removal ■ Holding separate meetings ■ Evaluation mechanism The code appears to be mandatory which would lead to some of the following concerns: ■ The code states that an independent director shall uphold ethical standards of integrity and probity, however what would constitute ethical behaviour is not defined and is open to interpretation. ■ The code does not give any cognisance to the need for training for the independent directors. 32 | P a g e ■ The code refers to appointment of independent directors by the board after evaluating certain attributes. The concern that remains unaddressed is the manner in which companies need to carry out an assessment of the attributes of an independent director as specified under 'manner of appointment' in the code from the databank maintained by the MCA. B Director elected by small shareholders68: Presently, 1956 Act gives an option for appointment of a small shareholder's director for a public company having paid up capital of Rs 50 million or more and having 1000 or more small shareholders. Under 2013 Act, only listed companies may appoint a small shareholder's director. Accordingly, shareholders holding shares of nominal value of not more than Rs 20,000 or such other sum as may be prescribed in a listed company, may appoint 1 director from amongst them.69 C Maximum number of directorships70: ■ Maximum number of directorships a person can hold in a company is increased from 15 to 20. The limit of 20 will include any alternate directorship. However, the maximum number of public companies including private companies that are either holding or subsidiary of a public company) in which a person can be appointed as a director cannot exceed 10. This requirement is to be complied within 1 year from the commencement of the 2013 Act. ■ The members of a company are authorized by special resolution to specify any lesser number of companies in which a director of the company may act as a director. This may restrict ability of professional managers to accept directorship in other companies. D Duties of directors: Keeping in view the fiduciary capacity of the directors, 2013 Act defines the duties of the directors which inter alia include; ■ to act in accordance with the AOA, ■ to act in good faith to promote the objects of the company and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment, ■ exercise of duties with due and reasonable care, skill and diligence and exercise of independent judgment ■ not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company etc. E Disqualification of a director: In order to restrict corporate delinquency committed by directors of a company, 2013 Act entails greater responsibility on the BOD and shareholders for selection and appointment of director in a company and provides for additional grounds for disqualification of a director in a company as under: ■ A person who has been convicted of an offence dealing with related party transactions at any time during the preceding 5 years. ■ Directors in a company (including a private company) are disqualified if such company fails to file its financial statements or annual return for any continuous 3 years with ROC or fails to repay deposits accepted by it or redeem debentures on due date or pay interest due thereon or fails to pay any dividend declared and such failure continues for 1 year or more. Unlike 1956 Act, these disqualifications would get attracted even if the default is made by a private company. F Vacation of office of director71 2013 Act provides for additional grounds for vacation of a director in a company as under: ■ Director to vacate office as director if he remains absent from all the meetings of the BOD held during 12 months whether with or without seeking leave of absence of the BOD. This measure will ensure that the directors participate in the meetings and are accountable for decisions made therein. G Resignation of directors72: Sec 151 Read with rule 7 of Chapter11_Appointment and Qualification of Directors 70 Sec 165 71 Sec167 68 69 33 | P a g e ■ 2013 Act, provides that the resigning director to file his resignation letter with the ROC within 30 days, in prescribed manner, giving detailed reasons for resignation and the resignation will take effect from the date on which notice of resignation is received by the company, or the date, if any, specified by director in the notice, whichever is later. ■ Where all directors of a company resign or vacate office, the promoter or in his absence, the CG will have to appoint the required number of directors till new directors are appointed in a general meeting. H Liability of independent directors The 2013 Act makes an attempt to distinguish between the liability of an independent director and non-executive director from the rest of the board and has accordingly inserted a provision to provide immunity from any civil or criminal action against the independent directors. The intention and effort to limit liability of independent directors is demonstrated from the section 149(12) of the 2013 Act which inter-alia provides that liability for independent directors would be as under: "Only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, with his consent or connivance or where he had not acted diligently." The section seeks to provide immunity from civil or criminal action against independent directors in certain cases. Further, in accordance with the requirement of section 166 (2) of the 2013 Act, whole of the board is required to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of the environment. By virtue of this section the duty of independent directors actually goes beyond its normal definition and is not restricted to executive directors only. It is amply clear that independent directors have little or no defence and their obligations continues to remain a debatable topic since they would still be treated equivalent to the other directors by holding them responsible for decisions made through board processes. I Meetings of BOD i) Time for holding board meetings73: ■ The first meeting of the BOD of a company is to be held within 30 days of its incorporation. ■ Minimum 4 meetings of BOD are to be held every year and the time gap between 2 board meetings cannot exceed 120 days. CG may provide different requirement or modify the requirement for specific class or description of companies ■ OPC, small companies and dormant companies shall be deemed to have complied with the holding of board meeting requirement if minimum 1 board meeting is held in each half of the calendar year and the gap between 2 meetings is at least 90 days ii) Participation in board meeting through electronic mode: means as may be prescribed74. CG may provide a list of businesses where meeting by means of VC will not be recognized. iii) Notice of board meeting75: At least 7 days' notice for board meeting is to be given in writing to every director by hand delivery or by post or by electronic means. A board meeting may be called at a shorter notice to transact urgent business, if at least 1 ID, if any, is present at such meeting. Decision taken at such meeting in absence of an ID is final only on ratification thereof by at least 1 ID, if any. iv) Quorum for board meeting76: ■ The quorum for BOD meeting is 1/3rd of its total strength or 2 directors, whichever is higher, and the participation of the directors by VC or by other audio visual means is also to be counted for the purposes of quorum. Sec 168 Sec 173 74 Chapter12_Meetings of Board and its Powers Rule 3. Meetings of Board through video conferencing or other audio visual means. Rule 4. Matters not to be dealt with in a meeting through video conferencing or other audio visual means 72 73 75 76 Sec 173(3) Sec 174 34 | P a g e ■ Where at any time the number of interested directors is 2/3rd or more of the total strength of the BOD, the number of directors who are not interested directors and present at the meeting, being not less than 2, shall be the quorum. v) Resolution by circulation77: A resolution of the BOD or its committee can also be passed by circulation, provided the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or members of the committee, as the case may be, at their addresses registered with the company in India, by hand delivery or by post or by courier, or through such electronic means as may be prescribed and has been approved by a majority of the directors or members, who are entitled to vote on the resolution 2013 Act, provides that where at least 1/3rd of the total number of directors of the company require that any resolution under circulation must be decided at meeting of BOD, the chairperson shall put the resolution to be decided at a meeting of BOD A circular resolution is required to be noted at a subsequent meeting of the BOD or the committee thereof, as the case may be, and made part of the minutes of such meeting. J Committees of BOD 2013 Act provides for mandatory setting up of the following committees of the BOD for certain companies: ■ Audit committee78 ■ Stakeholder relationship committee79 ■ Nomination and Remuneration committee80 ■ Corporate Social Responsibility committee81 The below summarizes the key requirements of the various committees: K Powers of BOD82 ■ In addition to the existing powers (i.e. borrowing, investment, loan etc.) to be exercisable by BOD under 1956 Act at the Board meeting, the following powers are to be mandatorily exercised by the BOD at its meeting83: -to approve financial statement and the Board's report; to take over a company or acquire a controlling or substantial stake in another company; -to approve related party transactions; -to fill-up the casual vacancy of KMP; -any other matter which may be prescribed. This is for ensuring that matters which are considered important for the business of the company are approved after due deliberation between board members and consideration of all relevant factors. This measure will enable board members especially ID and NED to seek necessary information, documents and clarification from KMP before taking individual and collective decision at the Board meeting. ■ 2013 Act provides that the rule applicable to public companies that requires obtaining prior approval of its members by way of special resolution for exercise of certain powers by BOD is extended to private companies also. In all below cases approval of shareholders is to be obtained by a special resolution84: Sec175 Sec 177 79 Sec178 80 Sec178 81 Sec135 82 Sec179 83Chapter12_Meetings of Board and its Powers Rule 8. Powers of Board.- In addition to the powers specified under sub-section (3) of section 179 of the Act, the following powers shall also be exercised by the Board of Directors only by means of resolutions passed at meetings of the Board.(1) to make political contributions; (2) to appoint or remove key managerial personnel (KMP); (3) to take note of appointment(s) or removal(s) of one level below the Key Management Personnel; (4) to appoint internal auditors and secretarial auditor; (5) to take note of the disclosure of director’s interest and shareholding; (6) to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company; (7) to invite or accept or renew public deposits and related matters; (8) to review or change the terms and conditions of public deposit; (9) to approve quarterly, half yearly and annual financial statements or financial results as the case may be. 77 78 35 | P a g e -to sell, lease or otherwise disposal of one or more undertaking or the whole or substantially the whole of undertaking. Quantitative tests are provided for determination of what constitute 'undertaking' and 'substantially the whole of the undertaking', -to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation, -to borrow money in excess of aggregate of the paid-up share capital and free reserves of company, apart from temporary loans obtained from the company's bankers in the ordinary course of business, -to remit, or give time for the repayment of, any debt due from a director. Director's Report L One of the measures adopted in 2013 Act is self-regulation, corporate democracy and enhance disclosure requirements which provides for greater transparency. Accordingly, 2013 Act has made the Director's Report more informative and includes disclosures amongst others: ■ extract of the Annual Return, number of meetings of BOD, development and implementation of a risk management policy and CSR, related party contracts, certain loan / guarantees / investments and in case of listed and prescribed public companies to also provide for policy on directors appointment, remuneration and annual evaluation of the performance of the BOD. ■ the Directors' Responsibility Statement shall also include the statement that the directors [Sec134 (5)] -had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. -had laid down internal financial controls to be followed and that such internal financial controls are adequate and were operating effectively -applicable to listed companies. E-Governance M In order protect the interest of investors and other stakeholders in a transparent manner and facilitate easy and timely availability of information to the stakeholders for taking informed decision, 2013 Act provides for adopting various e-governance measures like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company's website, holding of board meetings through video conferencing/other electronic mode and voting by shareholders through electronic means. Prohibition on insider trading of securities [Sec 195 of the 2013 Act] No person including any director or KMP of a company should enter into act which amounts to insider trading (as defined in 2013 Act). As an exception, if any communication is required to be made in the ordinary course of business or profession or employment or under any law, the same will not fall under the ambit of insider trading. 84 Sec180 36 | P a g e XI. Appointment and remuneration of Managerial Personnel (CHAPTER XIII of the 2013 Act) A Key Managerial Personnel (KMP): In relation to a company, KMP means85(i) CEO or MD or Manager; (ii) Company Secretary; (iii) WTD; (iv) CFO; and (v) such other officer as may be prescribed Appointment of KMP86 2013 Act provides that prescribed class of companies to have following whole-time KMP (i) MD, or CEO or Manager and in their absence, the WTD; (ii) CS; and (iii) CFO. B Key requirements in relation to KMP87 ■ Every whole-time KMP is to be appointed by a resolution of the BOD containing the terms and conditions of the appointment including the remuneration.88 ■ A Chairperson can be an MD or CEO at the same time, if the AOA of the company permits or if the company does not have multiple businesses or where the company has multiple businesses and has appointed 1 or more CEOs for each such business as may be notified by CG.89 ■ A whole-time KMP cannot hold office in more than 1 company except in its subsidiary company at the same time and can be appointed as director in other companies with the permission of BOD ■ If the office of any whole-time KMP is vacated, the same shall be filled up at the Board Meeting within 6 months ■ KMP of a company shall not buy in the company, its holding, subsidiary or associate company -a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or -a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures. breach of duty etc. of such specified KMPs shall not be treated as part of remuneration of such KMPs. ■ MD or WTD of the company who is in receipt of any commission from the company will not be disqualified from receiving any remuneration / commission from its holding company or subsidiary company subject to necessary disclosures in the Director's report. ■ KMP is considered as part of 'officer' and 'officer who is in default' for the purpose of the 2013 Act and shall along with the Company be held liable for any penalty or punishment by way of imprisonment, fine or otherwise imposed for the non-compliance or default of the provisions of the 2013 Act. i) Role of CFO: 2013 Act has enhanced the role of CFO which would entail greater responsibilities on the CFO of a company. ■ CFO made responsible and liable for penalty and / or prosecution for compliance with various provisions such as maintenance of books of accounts, preparation & filing of annual accounts, disclosure of financial information in offer document, risk management, internal control etc.90 ■ CFO mandatorily required to sign audited accounts. [Sec 134 of the 2013 Act] Sec 2(51) Sec203 87 Sec203 88 Sec 203(2) 89 Sec 203 proviso 90 Sec129(7) 85 86 37 | P a g e C Managerial Remuneration [Sec135 r/w Schdl V of the 2013 Act]: ■ The provisions relating to limits on managerial remuneration provided in the 1956 Act are retained. The maximum managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any FY cannot exceed 11% of the net profits of that company for that FY computed in the manner prescribed91. ■ In case of companies with no profits or inadequate profits, managerial remuneration can be paid as per Schedule V (Schedule V of the 2013 Act is similar to existing Schedule XIII to 1956 Act) and if the conditions of such Schedule V are not complied with, payment of managerial remuneration will require approval of CG. ■ CG may prescribe different sitting fees for different classes of companies and fees in respect of IDs for attending meeting of BOD or committee thereof. ■ NRC to recommend BOD policy relating to remuneration of directors, KMP and other employees keeping in mind appropriate performance bench marks striking a balance between fixed and incentive pay etc. 91Chapter13_Appointment and Remuneration of Managerial Personnel Rule 4. Sitting fees.- A company may pay a sitting fee to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed one lakh rupees per meeting of the Board or committee thereof: Provided that for Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors. 38 | P a g e XII. Company Secretary, its functions and secretarial audit Appointment of CS: A CS being a whole-time KMP92 is to be appointed by a resolution of the BOD which will also contain the terms and conditions of appointment including the remuneration. The functions of CS [Sec 205] will include: ■ report to BOD about compliance with the provisions of the 2013 Act, the rules made thereunder and other laws applicable to the company; ■ ensure compliance with the applicable secretarial standards as may be approved by CG; and ■ discharge such other prescribed duties. Secretarial Audit: B 2013 Act has made mandatory Secretarial Audit by CS in practice for listed and prescribed class of companies [Sec 204. (1) of the 2013 Act]. The report of such Secretarial Audit has to be annexed to the Director's report [sec 134 of the 2013 Act]. 92 Sec 203 39 | P a g e XIII. Dividend: Key highlights •Mandatory transfer of profits to reserves before declaration of dividend done away with. Companies may voluntarily transfer a portion of its profits to reserves. •Mandatory transfer of profits to reserves for dividend declaration dispensed with. ------------------------------------------------------------------------------------------------------------------------------■ Dividend to be paid out of; -profits of the company for the year after providing for depreciation; or -profits of the previous years arrived at after providing for depreciation and remaining undistributed; or -both of the above [Sec123 of the 2013 Act]. ■ [Sec123(3) of the 2013 Act] Interim dividend may be declared only out of surplus in Profit & Loss Account and out of profits of the FY in which dividend is sought to be declared. In case a company has incurred losses up to the preceding quarter of the current FY then interim dividend shall not be declared at a rate higher than the average dividend declared by the company during the immediately preceding 3 FYs. ■ Failure to comply with provisions relating to acceptance and repayment of deposits will prevent a company to declare any dividend during the period of such non-compliances ■ Dividend to be distributed within 30 days of its declaration in cash only. Dividend cannot be distributed in kind. ■ Where unpaid / unclaimed dividend has been transferred to IEPF, the corresponding shares on which such dividend was unpaid / unclaimed shall also be transferred by the company to IEPF ■ Amounts that can be credited to IEPF widened to include -amount received on disgorgement; -redemption amount of preference shares remaining unpaid / unclaimed for 7 years or more; -sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for 7 years or more. The provisions for declaration and payment of dividend are simplified Subject to Rules to be prescribed, dividend can be paid out of accumulated reserves without restrictions as to rate of dividend Rules: Chapter8_Declaration and Payment of Dividend Rule 3. Declaration of dividend out of reserves.-In the event of adequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfillment of the following conditions, namely:(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year: Provided that this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year. (2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paidup share capital and free reserves as appearing in the latest audited financial statement. (3) The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. (4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement. (5) No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid. 40 | P a g e XIV. Accounts and Audit Key highlights •Companies to have a uniform financial year - ending on 31 March each year. •1956 Act allowed companies to have financial period of upto 15 months and 18 months with special permission of ROC. This flexibility is removed. •The definition of FY of the 2013 Act has been aligned with the Tax laws. •Consolidation of financials for a company having a subsidiary, associate or a joint venture made mandatory. •National Financial Reporting Authority (NFRA) to be constituted by Central Government to provide for dealing with matters relating to accounting and auditing policies and standards to be followed by companies and their auditors. •Mandatory audit rotation for listed and prescribed classes of companies. •Restriction placed on provision of specified non-audit services by an auditor to ensure independence and accountability of the auditor. •Mandatory internal audit for prescribed classes of companies. •Mandatory firm rotation. •The provisions relating to appointment of auditor, period of appointment, disqualifications of auditors and services that an auditor cannot provide have been substantially modified in 2013 Act. A ------------------------------------------------------------------------------------------------------------------------------Financial Year ■ "Financial year", in relation to any company or body corporate, means the period ending on the 31st day of March every year.[Sec 2(41) of the 2013 Act] -This requirement in case of a company or body corporate, existing on the commencement of the 2013 Act, is to be complied within a period of 2 years from commencement of the 2013 Act. -Where a company has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. ■ A company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different FY for consolidation of its accounts outside India, the NCLT may allow any period as its FY, whether or not that period is a year. ■ A subsidiary in India of a foreign company may, with the approval of NCLT follow a different period as its FY. The question for consideration is whether an application will be entertained by NCLT for following a different period as FY by company in India which is an associate company or joint venture company of a foreign entity. B Financial statements ■ 1956 Act does not define the term "Financial Statement". 2013 Act defines the term "financial statement"[Sec 2(40) of the 2013 Act] in relation to a company to include: i. a balance sheet as at the end of the FY; ii. a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the FY; iii. cash flow statement for the FY; iv. a statement of changes in equity, if applicable; and v. any explanatory note annexed to, or forming part of, any document referred to above. The financial statement, with respect to OPC, small company and dormant company, may not include the cash flow statement ■ The books of account and other relevant papers are to be kept at the registered office or such other place in India as BoD may decide and such books can also be kept in electronic mode in the manner to be prescribed [Sec 128 of the 2013 Act] ■ As per 1956 Act, balance sheet and statement of profit and loss are required to be signed by manager or secretary and by 2 Directors including MD where there is one. 2013 Act [Sec 134(1) of the 2013 Act requires Financial Statements to be signed at least by -chairperson of the company, if authorized by BOD or -2 directors including MD, where there is one and -CEO if he is a Director, -CFO and CS, wherever they are appointed. In case of OPC balance sheet and statement of profit and loss are required to be signed by one director only. 41 | P a g e ■ Consolidation of financial statements is made mandatory for all companies where a company has one or more subsidiaries whether Indian or foreign ■ The mandatory consolidation applies to all companies whether such company is: -listed or unlisted; -private or public. ■ For the purposes of consolidation of financial statements, the expression subsidiary includes associate company and joint venture [Sec129 (3) of the 2013 Act] -'Associate company'[Sec 2(6) of the 2013 Act], in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. -'Significant influence' means control of at least twenty per cent of total share capital, or of business decisions under an agreement. [Sec 2(6) of the 2013 Act]. -'Control', [Sec 2(27) of the 2013 Act] shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner . the salient features of the financial statement of its subsidiary(s) in form to be prescribed by Rules ■ CG may direct maintaining of books of accounts of a company for a period more than 8 years where any investigation has been ordered. ■ CFO made responsible and liable for penalty and / or prosecution for non-compliance with various provisions such as maintenance of books of accounts, preparation & filing of annual accounts, disclosure of financial information in offer document, risk management, internal control etc. ■ Consolidation of financial statements of subsidiaries (whether in India or abroad) is applicable to all the companies. C Re-Opening of accounts and voluntary revision to Financial Statements or Board Report [Sec 130 of the 2013 Act] ■ Under 2013 Act, on an application made by CG, IT authorities, SEBI or any other statutory regulatory body or authority or any person concerned and on an order being made by a Court or NCLT, a company can re-open its books of accounts or re-cast its financial statements on the below grounds: -that the relevant earlier accounts were prepared in a fraudulent manner; or -affairs of the company were mismanaged during the relevant period casting a doubt on the reliability of the financial statements. ■ The company may voluntarily revise the financial statement or Directors' report in respect of any of the 3 preceding FYs after obtaining approval of NCLT, if the BOD believes that the financial statements or Directors' report do not comply with the relevant provisions of the 2013 Act. A detailed explanation would be required to be given in Director's report for the relevant FY for which such revision is made [Sec 131 of the 2013 Act] D Cognisance of Accounting Standards In several instances across the 2013 Act, there are provisions which are also covered within the accounting standards currently notified under section 211(3C) of the 1956 Act and the Companies (accounting standards) Rules, 2006 there under. There are certain differences in the manner in which a few terms have been defined under the 1956 Act. While the differences in some of these terms may not have any adverse impact, in certain cases, these differences may create implementation issues. Differences in definitions exist in the following cases: ■ Associate company ■ Control ■ Subsidiary company ■ Related party Associate company: The definition of an associate company poses certain challenges since: ■ It includes joint ventures ■ Significant influence is defined to mean 'control ... of business decisions under an agreement' ■ It differs from the definition of an associate as per the Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements. 42 | P a g e ■ The status of an associate and a joint venture cannot be equated since, the degree of control that a company can exercise in such entities, varies significantly. While 'joint control' is the driving factor in case of joint ventures, a company can at the most only 'participate' in the operating or financing decisions in case of an associate company. ■ With regard to the explanation to the section in the 2013 Act, which defines the term 'significant influence, it is to be noted that if a company has 'control' [control has been defined in section 2(27) of the 2013 Act] with respect to business decisions of another company, such other company will in fact be tantamount to a subsidiary and not an associate company. Hence, the use of the term 'control' within the definition of significant influence leads to a conflict between the two definitions (associate company and subsidiary company). We believe that the terms which have been defined in the accounting standards, which also form a part of the Companies Act, 1956, must not been defined again in the case of an associate, control and subsidiary company, in order to eliminate contradictions and ambiguity in compliance requirements. The concept of definitions of the accounting standards having primary significance has already been given cognizance in the Revised Schedule VI to the Companies 1956 Act, as well. Further, the definitions of the terms 'associate' and 'significant influence' are also not consistent with the definitions provided within the Accounting Standard 18: Related Party Transactions, and Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements (AS 23). Subsidiaries: The term 'control', which is relevant with respect to identifying subsidiaries, has been defined in section 2(27) of the 2013 Act. While this definition mandates consideration of 'share holding' as one of the factors, the corresponding definition in AS 21: Consolidated Financial Statements (AS 21) refers to 'voting power'. This issue is an existing one since a similar difference exists between the definition of 'subsidiary', where the term 'control' is relevant under the existing 1956 Act [section 4(1) of the 1956 Act]. Accordingly, while for consideration of an entity as a subsidiary for the purpose of consolidated financial statements (CFS), reference is made to AS 21, for the purpose of any compliance with the 1956 Act, reference is made to section 4(1) of 1956 Act. Now that the requirement of preparing consolidated financial statements has been included within the 2013 Act itself, a conflict arises as to whether the definition as per the 2013 Act should be considered for identifying a subsidiary or the definition as per the AS 21. In any case, the company will be non-compliant with the requirement of either the 2013 Act or the AS. With regard to related party, while there is a substantial difference between the definition under the 2013 Act and AS 18, the difference does not impact the financial statements, since the disclosures in the financial statements will be continued to be made as per AS 18. E National Financial Reporting Authority [Sec 132 of the 2013 Act] ■ NFRA to be constituted by Central Government to provide for dealing with matters relating to accounting and auditing policies and standards to be followed by companies and their auditors ■ 2013 Act provides functions of NFRA, which shall include: -Make recommendations to CG on the formulation of accounting and auditing policies and standards; -Monitor and enforce compliance with accounting and auditing standards; -Oversee the quality of service of the professions and suggest measures required for improvement in quality of services and such other related matters as may be prescribed; -Perform other prescribed functions in relation to above as may be prescribed. ■ CG may prescribe standards of accounting or any addendum thereto, as recommended by the ICAI in consultation with and after examination of the recommendations made by NFRA. ■ NFRA to consist of Chairperson and other part time and the full time members not exceeding 15. ■ The Chairperson and full time members of NFRA shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and 2 years thereafter ■ 2013 Act provides powers to NFRA, which includes: -Investigate into the matters of professional or other misconduct committed by member or firm of CA. -Powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit. -Where professional or other misconduct is proved, NFRA have the power to make order for imposing monetary penalty or debarring the member or the firm from engaging himself or itself from practice as member of the institute for a minimum period of 6 months or for such higher period not exceeding 10 years. ■ Any person aggrieved by the order of NFRA can prefer an appeal to NFRAA. 43 | P a g e XV. Auditor Appointment of first auditor - on incorporation [Sec 139(6) of the 2013 Act]93 The first auditor is to be appointed by the BOD within 30 days of incorporation of a company. If the first auditor is not appointed by the BOD within 30 days from the date of incorporation, then the members shall appoint the first auditor within 90 days at the EGM. The tenure of the first auditor shall be upto the conclusion of first AGM. Appointment of auditor other than the first auditor [Sec 139 of the 2013 Act & Rules]94: The manner and procedure for selection of an auditor shall be as per the Rules to be prescribed. The basic provisions are as summarized under: Appointment of auditor in listed and prescribed class or classes of companies: Appointment Maximum period of appointment Of an individual as an auditor 1 term of 5 consecutive years Of an audit firm as an auditor 2 terms of 5 consecutive years Cooling off period of 5 years before next appointment Common conditions for appointment of auditor in listed and classes of companies to be prescribed: ■ Incoming audit firm should not have any common partners who were the partners of the outgoing audit firm i.e. the audit firm whose tenure expired in the immediately preceding FY by virtue of mandatory rotation requirement ■ Rules to be prescribed to state the manner in which the companies shall rotate their auditors ■ Audit committee of listed and other classes of companies to be prescribed to recommend appointment of an auditor ■ Transition period of 3 years provided to the companies to comply with the mandatory rotation of auditor requirement Appointment of auditor in other companies i.e. other than listed and prescribed class or classes of companies: Appointment / Period of appointment At first AGM to hold office till conclusion of 6th AGM subject to ratification by members at every AGM Subsequent to hold office till conclusion of 6th meeting, subject to ratification by members at every AGM Mandatory firm rotation A The 2013 Act has introduced the concept of rotation of auditors as well as audit firms. It states that in case of listed companies (and other class (es) of companies as may be prescribed) it would be mandatory to rotate auditors every five years in case of the appointment of an individual as an auditor and every 10 years in case of the appointment of an audit firm with a uniform cooling off period of five years in both the cases. Further, firms with common partners in the outgoing audit firm will also be ineligible for appointment as auditor during the cooling off period. The 2013 Act has allowed a transition period of three years for complying with the requirements of the rotation of auditors [section 139(2) of the 2013 Act]. Further, the 2013 Act also grants an option to shareholders to further require rotation of the audit partner and staff at such intervals as they may choose [section 139(3) of the 2013 Act]. Currently, while the 1956 Act does not have any requirements relating to the auditor or audit firm rotation, the Code of Ethics issued by the ICAI has a requirement to rotate audit partners, in case of listed companies, after every seven years with a cooling-off period of two years. Joint audits B The 2013 Act provides that members of the company may require the audit process to be conducted by more than one auditor [section 139(3) of the 2013 Act]. Non-audit services to audit clients C The 2013 Act states that any service to be rendered by the auditor needs to be approved by the board of directors or the audit committee. Read with rules under Chapter10_Audit and Auditors Read with Rules - Chapter10_Audit and Auditors Rule 6. Manner of rotation of auditors by the companies on expiry of their term.- 93 94 44 | P a g e Auditor cannot provide following services "directly or indirectly" to the company or its holding company or subsidiary company, namely: - accounting and book keeping services; -internal audit; -design and implementation of any financial information system; -actuarial services; -investment advisory services; -investment banking services; -rendering of outsourced financial services; -management services; and -other services to be prescribed under the Rules. An auditor or audit firm who or which has been performing any non-audit services on or before the commencement of the 2013 Act shall comply with the above before the closure of the 1st FY after the date of such commencement. "Directly or indirectly" shall include rendering of services by the auditor,— -Where auditor is an individual - Either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual -Where auditor is a firm - Either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners. Further, the 2013 Act provides that such services cannot be rendered by the audit firm either directly or indirectly through itself or any of its partners, its parent or subsidiary or through any other entity whatsoever, in which the firm or any other partner from the firm has significant influence or control or whose name or trademark or brand is being used by the firm or any of its partners [section 144 of the 2013 Act]. The 1956 Act currently does not specify any requirements relating to non-audit services. These restrictions are aimed at achieving auditor independence. Auditor independence is fundamental to public confidence on the reliability of the auditors' reports. This concept adds credibility to the published financial information and value to investors, creditors, companies, employees as well as other stakeholders. Independence is the audit profession's primary means of demonstrating to the public as well as the regulators that auditors and audit firms are performing in line with established principles of integrity and objectivity. To comply with these independence norms, the 2013 Act provides for a transitional period of one year, that is, an auditor or an audit firm who or which has been performing any non-audit services on or before the commencement of the 1956 Act shall comply with these provisions before closure of the first financial year after the date of commencement. D Auditors liability The scope and extent of the auditor's liability, has been substantially enhanced under the 2013 Act. Now, the auditor is not only exposed to various new forms of liabilities, however, these liabilities prescribed in the existing 1956 Act have been made more stringent. The auditor is now subject to oversight by multiple regulators apart from the ICAI such as The National Financial Reporting Authority (NFRA, and the body replacing the NACAS) is now authorised to investigate matters involving professional or other misconduct of the auditors. The penalty provisions and other repercussions that an auditor may now be subject to as per the 2013 Act includes monetary penalties, imprisonment, debarring of the auditor and the firm, and in case of frauds, can even be subject to class action suits. E Internal audit ■ Classes of companies to be prescribed to appoint an internal auditor who shall be CA or cost accountant or such other professional as may be decided by the BOD. Following provisions relating to auditors are applicable to all companies: ■ The members at every subsequent AGM will be required to ratify the appointment of auditor, in case a fresh appointment is not made ■ The company may resolve: ■ If Audit firm is appointed, the audit partner and his team shall rotate at such intervals as may be resolved by members. 45 | P a g e -Audit shall be conducted by more than 1 auditor (i.e. joint auditor). ■ The 1956 Act requires all the partners of the firm to be a qualified CA and practicing in India. 2013 Act provides that: -Majority of partners practicing in India should be qualified CA; -If LLP is appointed as auditor, only partners who are CA shall be authorized to sign ■ Procedure and manner of selection of auditor to be prescribed by the Rules ■ Additional grounds for disqualifications for appointment as auditor provided 46 | P a g e XVI. Loan to Directors [Sec185 of the 2013 Act] Key highlights •No company shall directly or indirectly advance any loan (including loan represented by a book debt) or give guarantee or provide security in connection with such loan to any director / related persons. - An exception to the above rule is made for MD or a whole time director (WTD) if such loan is in accordance with the terms of services extended to all employees or is approved by shareholders by special resolution. •The 1956 Act exempted private companies and allowed public companies to give loans etc. with prior approval of CG, restrictions on giving loans etc. to directors have been extended in 2013 Act even to private companies viz Provisions for loan to directors applicable to private companies. ------------------------------------------------------------------------------------------------------------------------------2013 Act provides that a company cannot, directly or indirectly, -advance any loan, including any loan represented by a book debt to any director or any other person in whom the director is interested (as specified); or -give any guarantee or provide any security in connection with any loan taken by its director or such other person ■ The above restriction is not applicable to -Loan to a MD / WTD which is as a part of contract of services extended to all its employees or pursuant to any scheme approved by members by special resolution. -A company which in the ordinary course of its business provides loan, guarantee or security (for due repayment of any loan) and charges interest which is not less than Bank Rate declared by RBI. ■ Ability of a company, whether public or private, to give loan etc. to directors is substantially curtailed ■ Even if a loan etc. obtained in contravention of the above provisions is repaid, the contravener would still be exposed to punishment by way of imprisonment. ■ These provisions should be considered applicable prospectively and should not affect existing loans etc. which are given in compliance with the 1956 Act but which are not in conformity with 2013 Act. After the enactment of the 2013 Act, any renewal of loan etc. needs to be in conformity with 2013 Act. These read with rules under Chapter12_Meetings of Board and its Powers viz Rule 1095. Rule 10. Loans to Director etc. under section 185.(1) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company is exempted from the requirements under this section; and 9 (2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company is exempted from the requirements under this section: Provided that such loans made under sub-rule (1) and (2) are utilised by the subsidiary company for its principle business activities. 95 47 | P a g e XVII. Investment, loan, guarantee, security by company: Key highlights •Loans, guarantee and security made to any person (the 1956 Act dealt only with body corporate) will attract compliance requirements. •Rate of interest on loan granted cannot be lower than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security closest to the tenure of the loan. •The list of exemptions has been curtailed. ------------------------------------------------------------------------------------------------------------------------------A Loan and investment by company [Sec 186 of the 2013 Act] ■ Company may give a loan to any person or other body corporate or give any guarantee or provide security in connection with a loan to any other body corporate or person or acquire by way of subscription, purchase or otherwise, securities of any other body corporate not exceeding the higher of: -60% of paid up share capital, free reserves and securities premium; or -100% of free reserves and securities premium. Where the amount of investment, loan, guarantee or security, as the case may be, exceeds the above limits, prior approval by special resolution is to be obtained. These read with rules under Chapter12_Meetings of Board and its Powers viz Rule 1196. ■ Free reserves are reserves which are available for distribution as dividend as per latest audited balance sheet but exclude unrealized / notional gains, revaluation reserve, any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value. ■ 2013 Act covers within its ambit giving loans, guarantee and security not only to a body corporate but also to any other person. ■ Rate of interest on the loan granted shall not be lower than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security closest to the tenure of the loan. 1956 Act benchmarked the minimum interest to the Bank Rate as made public by RBI. ■ Company will have to disclose in the financial statements the full particulars of loans, investments, guarantee or security and the purpose for which loans, guarantee or security are proposed to be utilized by the recipient of it ■ 2013 Act contains following exemptions: -Loan given or guarantee or security provided by ■ banking company or insurance company or housing finance company in ordinary course of business; ■ company engaged in the business of financing of companies or of providing infrastructural facilities as specified. -Investment and lending by NBFC, registered with RBI, whose principal business is acquisition of securities -Acquisition by companies having principal business of acquisition of securities -Acquisition of shares pursuant to a 'rights issue' ■ Classes of companies to be prescribed and companies registered with SEBI cannot take intercorporate loan or deposit exceeding the limit to be prescribed under the Rules 1. Companies will have to ensure that their exposure is within the ceiling in view of the provisions having been expanded to include investment / loan / guarantee / security made to 'any other person'- e.g. if a loan is given to a partnership firm, it would require compliance of the above provisions 2. The following exemptions available under the 1956 Act are no longer available: 96 Rule 11. Loan and investment by a company under section 186 of the Act.(1) Where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of sub-section (3) of section 186 shall not apply: Provided that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4) of section 186. (2) For the purposes of clause (a) of sub-section (11) of section 186, the expression “business of financing of companies” shall include, with regard to a Non-Banking Financial Company registered with Reserve Bank of India, “business of giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business”. (3) No company registered under section 12 of the Securities and Exchange Board of India Act, 1992 and also covered under such class or classes of companies which may be notified by the Central Government in consultation with the Securities and Exchange Board, shall take any inter-corporate loan or deposits, in excess of the limits specified under the regulations applicable to such company, pursuant to which it has obtained certificate of registration from the Securities and Exchange Board of India. 48 | P a g e ■ Investment by banking company or insurance company or housing finance company in the ordinary course of its business, or a company engaged in the business of providing infrastructural facilities ■ Loan / investment / guarantee / security by a private company ■ Loan / investment / guarantee / security by a holding company to its WOS ■ Loan / guarantee / security by a company whose principal business is acquisition of securities 3. After the enactment of the 2013 Act, any renewal of loan etc. needs to be in conformity with 2013 Act 4. These provisions should be considered applicable prospectively and should not affect existing investments, loans etc. which are given in compliance with the 1956 Act but which are not in conformity with 2013 Act. 5. One would have to examine the Rules to be notified in this regard. 49 | P a g e XVIII. Related party transactions: Key highlights •Requirement of obtaining Central Government approval for related party transactions not required. •Approval of related party transactions by Audit Committee / Board of Directors at Board meeting made mandatory. •Related party transactions to also require prior shareholder's approval by special resolution for companies having prescribed paid up capital or transactions exceeding prescribed amounts. •Related party transactions to be disclosed in the Director's Report along with justification thereof. ------------------------------------------------------------------------------------------------------------------------------Related party and relative are defined as: Sec 2(76) of the 2013 Act "related party", with reference to a company, means— (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private company in which a director or manager is a member or director; (v) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent of its paid-up share capital; (vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any company which is— (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix) such other person as may be prescribed; Further under - Companies (Specification of definitions details) Rules, 2014. Rule 3. Related party: - For the purposes of sub-clause (ix) of clause (76) of section 2 of the Act, a director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party. Sec 2(77) of the 2013 Act "relative", with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed; Rule 4. List of relatives in terms of clause (77) of section 297. - A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:(1) Father: Provided that the term “Father” includes step-father. (2) Mother: Provided that the term “Mother” includes the step-mother. (3) Son: Provided that the term “Son” includes the step-son. (4) Son’s wife. (5) Daughter. (6) Daughter’s husband. (7) Brother: Provided that the term “Brother” includes the step-brother; (8) Sister: Provided that the term “Sister” includes the step-sister. Whereas Related party transactions provisions are under sec 188 wherein: 97 Companies (Specification of definitions details) Rules, 2014. 50 | P a g e ■ Any transaction can be entered into by a company in the ordinary course of its business with a related party on an arm's length basis. Arm's length transaction means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest. ■ Where a transaction with a related party is (i) not in the ordinary course of business or (ii) is in the ordinary course of business but not on an arm's length basis, the consent of the BOD by a resolution at a board meeting and compliance with the conditions to be prescribed is necessary before a company can enter into a transaction with a related party i.e. any contract or arrangement with a related party with respect to: a) sale, purchase or supply of any goods or material; b) buying, selling or disposing of property of any kind; c) leasing of any kind of property; d) availing or rendering of any services; e) appointment of agent for purchase or sale of goods, material, services or property; f) related party's appointment to any office or place of profit in the company, its subsidiary company associate company; or g) underwriting the subscription of any shares in or derivatives thereof; 1956 Act, subject to certain exemptions, regulated related party transactions relating to a), d) and g) only. The concept of arm's length transaction was not enacted in the 1956 Act ■ Related party transactions by a company having paid-up capital or exceeding value of transaction, to be prescribed, will require prior approval of members by special resolution if such transaction (i) is not in the ordinary course of business or (ii) is in the ordinary course of business but not on an arm's length basis. Related party who is a member of such a company cannot vote on such a special resolution. ■ Requirement of obtaining CG approval for related party transactions, as provided in 1956 Act, done away with ■ Transaction with a director of the company or its holding, subsidiary or associate company or a person connected for acquisition or sale of assets for consideration other than cash to require prior approval of the members in a general meeting and supported by values determined by RV. If the director or connected person is a director of the holding company, approval of shareholders is required to be obtained by passing a resolution in general meeting of the holding company. ■ If OPC enters into a contract with the sole member of the company who is also its director, the company shall, unless the contract is in writing: -ensure that the terms of the contract or offer are contained in the memorandum or are recorded in the minutes of the first Board meeting held after entering into the contract. -inform ROC about such contract within 15 days of entering into the contract. ■ Related party transactions to be disclosed in Director's report along with the justification for entering in to such transactions. ■ Removal of taking CG approval for related party will remove the uncertainty in timeline and execution of the related party transactions. ■ Related party transactions at arms' length price will call for aligning the benchmarking under transfer pricing norms as per Income Tax Act for both domestic and international transactions. 51 | P a g e XIX. Corporate Social Responsibility: Corporate Social Responsibility (CSR)98 ■ 2% of average net profits of last 3 years to be mandatorily spent on CSR by companies having Provisions applicable to every company having: -net worth of Rs 5 billion or more; or -turnover of Rs 10 billion or more; or -net profit of Rs 50 million or more during any FY ■ BOD of such companies is mandated to spend, in every FY, minimum 2% of the average net profits of the company made during the 3 immediately preceding FYs, in pursuance of its the CSR Policy. ■ Such companies are required to constitute CSR committee of its BOD which is responsible for formulating and recommending to the BOD the CSR Policy of the company. ■ BOD is required to approve the CSR policy and disclose its content in the Director's Report and also place the same on the company's website. ■ The company is required to give preference to local area and areas where it operates for spending the amount earmarked for CSR. ■ If the company fails to spend such amount, BOD is required to specify the reasons for not spending the amount in the Director's report. ■ In view of the mandatory requirement under the 2013 Act, expenditure on CSR may be allowed as deduction under the Income Tax Act depending on the facts. 98 Sec 135 Corporate Social Responsibility 52 | P a g e XX. Compromises, arrangements and amalgamations/ M & A landscape Key highlights •Restriction placed on multi-layer investment subsidiaries. •Merger of Indian company with a foreign company allowed. •Person / group of persons holding 90% or more equity shares by virtue of amalgamation etc. can purchase the remaining equity shares of the company from minority shareholders. •Any valuation of shares / assets etc. required under 2013 Act to be performed by a Registered Valuer. •Fast track mechanism for merger between wholly owned subsidiaries and holding company (or) merger between small companies introduced, will facilitate quicker internal reorganization. •Doing away with approval of shareholders and creditors of 3/4th majority (in numbers) and raising the threshold limit for raising objection by shareholders (10% holding) and creditors (5% of outstanding debt) in a scheme of arrangement will obviate the entire process being jeopardized by small stakeholders. •Parent / promoter will get opportunity to increase their stake in unlisted companies where they hold substantial holding by purchasing stake of minority shareholders at fair value determined by the RV. •The process of giving notice to various regulators like IT, SEBI etc. could delay the process of amalgamation, merger, demerger etc. if there are any pending matters with these regulators. ------------------------------------------------------------------------------------------------------------------------------Changes are quite constructive and could go a long way in streamlining the manner in which mergers and other corporate scheme of arrangements are structured and implemented in India. A Streamlining requirements Provisions for compromises and arrangements, deals comprehensively with all forms of compromises as well as arrangements, and extends to the reduction of share capital, buy-back, takeovers and corporate debt restructuring as well. A positive inclusion within this provision is that objection to any compromise or arrangement can now be made only by persons holding not less than 10% of share holding or having an outstanding debt amounting to not less than 5% of the total outstanding debt as per the latest audited financial statements. [Section 230 of the 2013 Act] Further, currently, under the 1956 Act, an order does not have any effect until the same is filed with the ROC. However, such requirement has been done away with under the 2013 Act. The 2013 Act merely requires filing of the order with the ROC. B Mergers or division of companies There are certain additional documents mandated to be circulated for the meeting to be held of creditors or a class of members [section 232 of the 2013 Act]. These include the following: ■ Draft of the proposed terms of the scheme drawn-up and adopted by the directors of the merging company ■ Confirmation that a copy of the draft scheme has been filed with the ROC ■ Report adopted by the directors of the merging companies explaining the effect of the compromise ■ Report of the expert with regard to valuation ■ Supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purpose of approving the scheme. C Certifying the accounting treatment Currently, under the 1956 Act, , there is no mandate requiring companies to ensure compliance with accounting standards or generally accepted accounting principles while proposing the accounting treatment in a scheme. However, listed companies are required to ensure such compliance as the Equity Listing Agreement mandates such companies to obtain an auditor's certificate regarding appropriateness of the accounting treatment proposed in the scheme of arrangement. The 2013 Act requires all companies undertaking any compromise or arrangement to obtain an auditor's certificate [section 230 and 232 of the 2013 Act]. This requirement will help in streamlining the varied practices as well as ensuring appropriate accounting treatment. However, another aspect that is yet to be addressed is that the applicable notified accounting standards in India, currently, address only amalgamations and not any other form of restructuring arrangements. D Simplifying procedures 53 | P a g e The current procedural requirements in case of a merger and acquisition in any form are quite cumbersome and complex. There are no exemptions even in the case of mergers between a company and its wholly owned subsidiaries. The 2013 Act now introduces simplification of procedures in two areas, firstly, for holding wholly owned subsidiaries and secondly, for arrangements between small companies [section 233 of the 2013 Act]. Small companies is a new category of companies, introduced within the 2013 Act, with defined capital and turnover thresholds, which has been given certain benefits, including simplified procedures. One of the significant restrictions proposed in case of these situations is the restriction on the transferee company to hold any shares either in its own name or in the name of a trust, subsidiary or associate, since all shares will need to be cancelled or extinguished on merger or amalgamation. This requirement will stem the practice followed by several companies which have in the past followed this route. Further, in certain cases, it has also rationalised the requirements, for example in the case of the reduction of the share capital, which is part of compromise or arrangement, the company will need to comply with the provisions of this section only, as against the existing requirement under the 1956 Act, where the company is required to comply with the provision of section 108 in case of reduction of share capital as well those relating compromise. E Cross-border mergers The 1956 Act, allows the merger of a foreign company with an Indian company, but does not allow the reverse situation of merger of an Indian company with a foreign company. The 2013 Act now allows this flexibility, with a rider that any such mergers can be effected only with respect to companies incorporated within specific countries, the names of which will be notified by the central government. With prior approval of the central government, companies are now allowed to pay the consideration for such mergers either in cash or in depository receipts or partly in cash and partly in depository receipts as agreed upon in the scheme of arrangement. [Section 234 of the 2013 Act]. These new provisions can be greatly beneficial to Indian companies which have a global presence by providing them structuring options which do not exist currently. F Squeeze out provisions The 2013 Act has introduced new provisions for enabling the acquirer of a company (holding 90% or more shares) by way of amalgamation, share exchange, etc to acquire shares from the minority holders subject to compliance with certain conditions. This has also introduced the requirement for 'registered valuers', since the price to be offered by majority shareholder needs to be determined on the basis of valuation by a registered valuer [section 236 of the 2013 Act]. G Highlights of the revised process are as under: ■ Fast track merger: 2013 Act contains provisions that would expedite merger process between 2 or more 'small companies' and between a holding company and its WOS. This process can be extended, under the Rules, to class of companies. Such a fast track merger would require approval of ROC, OL, members holding at least 90% of total number of shares and majority of creditors representing 9/10th in value. This will considerably reduce the time that takes in the High Court (NCLT under 2013 Act) process and will facilitate smooth and swift completion of the process. "Small company99" has been defined to mean a company, other than a public company, whose paid-up share capital does not exceed Rs 5 million or such higher amount as may be prescribed which shall not exceed Rs 50 million; or whose Turnover as per its last profit & loss account does not exceed Rs 20 million or such higher amount as may be prescribed which shall not exceed Rs 200 million. ■ Outbound merger: Presently, while foreign company is allowed to merge with Indian company, vice versa is not allowed. 2013 Act permits an Indian company to be merged with a foreign company and vice versa. This will require prior approval of RBI under FEMA to be issued separately. The consideration for such a merger, subject to conditions, can be paid in cash and / or depository receipts. The Cross border merger will pave way for more interest amongst Indian and global players to operate under a single integrated entity. Necessary amendments may be required under the tax laws, to consider the same as a tax neutral merger. ■ Exit by minority shareholders: Acquirer and / or PAC or person or group of persons who holds 90% or more of the issued equity capital of the company by virtue of amalgamation, share exchange, conversion of securities or for any other reason, can notify the company of his intention to purchase the remaining equity shares of the company from minority shareholders. In such case, the exit price is to be determined by RV. The minority shareholders of the company may also offer to sell their equity shares to the majority shareholders at a price determined under the Rules. 99 Sec 2(85) 54 | P a g e ■ Approval threshold: Compromise or arrangement would require approval by a majority representing 3/4th in value of the creditors and members. Presently, it also requires simple majority in terms of number for both creditors and members. Creditors meeting may be dispensed with if at least 90% in value thereof, agree and confirm, by way of an affidavit, to the scheme of compromise or arrangement. ■ Accounting treatment: Accounting treatment in the scheme of compromise and arrangement need to be compliant with the Accounting Standards and Auditor's Certificate to that effect needs to be filed with NCLT. Listed companies were required to follow this in terms of the Listing Agreement, now even unlisted companies are brought at par with this requirement. ■ Valuation report to be given to shareholders / creditors along with notice convening meeting for a compromise or arrangement. ■ Notice to Regulators: The notice for compromise or arrangement would need to be given to CG, Income tax, RBI, SEBI, Stock exchanges, ROC, OL, CCI, if necessary, and other sectoral regulators / authorities, to enable them to make representations. ■ Wider participation through Postal Ballot voting: Resolution for compromise or arrangement can also be passed through Postal ballot. ■ Treasury stock: Holding of shares in its own name or in the name of trust whether through subsidiary or associate companies by the transferee company as a result of the compromise or arrangement will not be allowed and any such shares shall be cancelled / extinguished. ■ Objection by minority: Objection to the compromise or arrangement can be made only by persons holding not less than 10% of the shareholding or having outstanding debt of not less than 5% of total outstanding debt as per the latest audited balance sheet. This will save the companies from being dragged in long drawn court (NCLT under 2013 Act) process by minority holders who is holding even single share. Threshold will ensure that merger / demerger etc. process moves smoothly and swiftly in accordance with the law. ■ Takeover offer under scheme: Takeover Offer may be included as a part of the scheme of compromise and arrangement in the manner as may be prescribed in Rules. In case of listed companies such takeover offer shall be as per the guidelines issued by SEBI. ■ Merger of listed into unlisted company: In case of compromise / arrangement between a listed transferor company and an unlisted transferee company, NCLT may provide that the transferee transferor company who opts to exit be given an exit at a price which should not be less than the price under SEBI Regulations. ■ Dispensation of meeting of creditors: Meeting of creditors can be dispensed only if 90% of the creditors in value agree to the scheme by way of affidavit. ■Combining authorized capital on amalgamation: Normally on amalgamation, based on judicial decisions, the authorised capital of the transferor company is added to the authorized capital of the transferee company. Now it is expressly provided that fees, if any, paid by the transferor company on its authorized capital shall be allowed to be set-off against fees, if any, payable by the transferee company on its authorized capital subsequent to the amalgamation. ■Corporate debt restructuring: Scheme of Corporate Debt Restructuring shall be approved by at least 75% of the value of the secured creditors. ■The proposal of amalgamation, merger or reconstruction can be considered and approved by Board of directors only by passing resolutions at board meeting and not by circular resolution ■The scheme of compromise or arrangement shall clearly indicate only one appointed date from which date the scheme shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date 55 | P a g e XXI. Buy-back of securities/ Power of company to purchase its own securities [Sec 68 of the 2013 Act] Multiple buy-back in financial year: Buy-back of security has often been used to provide to shareholder in a joint venture an exit in a tax efficient manner or to reward shareholders etc. Under 1956 Act, it is possible to carry out more than 1 buy-back in a financial year as long as conditions were complied with. 2013 Act has restricted the ability of a company to do multiple buy-back of securities. Accordingly, no offer for buy-back can be made within a period of 1 year from the date of closure of the preceding offer for buy-back. Utilisation of securities premium for prescribed class of companies: Prescribed class of companies will not be entitled to utilize securities premium for buy-back unless their financial statements comply with Accounting Standards prescribed for such class of companies. Sec 68. (1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of— (a) its free reserves; (b) the securities premium account; or (c) the proceeds of the issue of any shares or other specified securities: Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (2) No company shall purchase its own shares or other specified securities under sub-section (1), unless— (a) the buy-back is authorised by its articles; (b) a special resolution has been passed at a general meeting of the company authorising the buy-back: Provided that nothing contained in this clause shall apply to a case where— (i) the buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company; and (ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting; (c) the buy-back is twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company: Provided that in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent in this clause shall be construed with respect to its total paid-up equity capital in that financial year; (d) the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves: Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies; (e) all the shares or other specified securities for buy-back are fully paid-up; (f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf; and (g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with such rules as may be prescribed: Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any. Longer waiting period for buy-back by defaulter companies: If company has defaulted in repayment of deposits or interest payment or redemption of debentures or preference shares or payment of dividend, or repayment of any term loan or interest thereon to any financial institution or banking company then until the default is remedied and period of 3 years is completed after remedying, company will not be eligible to buy-back its securities. Buy-back under scheme of arrangement or compromise: Buy-back of securities cannot be made under a scheme of compromise or arrangement unless it is in accordance for buy-back provisions. In other words, buy-back under scheme of compromise or arrangement cannot exceed 25% of aggregate of paid-up share capital and free reserves and further buy-back in a financial year cannot exceed 25% of paid-up equity capital. A Capital Reduction [Sec 66 of the 2013 Act] Sec 66. (1) of the 2013 Act; Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in, particular, may— (a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or (b) either with or without extinguishing or reducing liability on any of its shares,— (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly: 56 | P a g e ■ Capital reduction will require approval of NCLT ■ Company will not be allowed to carry out capital reduction if it is in arrears in the repayment of any deposits accepted by it or interest thereon ■ Capital reduction can be sanctioned by NCTL only if the accounting treatment proposed by the company for such reduction is in conformity with the accounting standards and auditors certificate to that effect is obtained 57 | P a g e XXII. National Company Law Tribunal - CHAPTER XXVII [Sec407-434 of the 2013 Act]: Key highlights •2013 Act replaces the High Court with a Tribunal to be known as NCLT, which will consists of Judicial and Technical members, as Central Government may deem necessary, to exercise and discharge the powers and functions conferred including approval of merger, corporate reorganization, capital reduction, extension of financial year etc. ------------------------------------------------------------------------------------------------------------------------------NCLT A ■ 2013 Act envisages establishment of Tribunal to be known as NCLT with principal bench at New Delhi. NCLT will consists of Judicial and Technical members, as CG may deem necessary, to exercise and discharge the powers and functions conferred on it under 2013 Act or any other law ■ NCLT to have such number of other benches as may be notified by CG ■ NCLT to endeavor to dispose of the proceedings within 3 months ■ On the date of the constitution of NCLT -All matters, proceedings or cases pending before CLB will stand transferred to NCLT; -All proceedings under 1956 Act, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending before any District Court or High Court, will stand transferred to NCLT. NCLT may proceed to deal with such proceedings from the stage before their transfer. ■ Appeals against the order of NCLT is to be preferred to NCLAT ■ An appeal arising out of order of NCLAT on any question of law is to be preferred to the Supreme Court ■ A party to any proceeding or appeal before NCLT or NCLAT may either appear in person or authorize CA or CS or CWA or legal practitioners or any other person to present his case B Instances where approval of NCLT is required: 2013 Act lays down various instances where approval of NCLT is required to be obtained. Some of these include: ■ Seeking exemption for having FY of a company which ends on a day other than 31 March ■ Issue of further redeemable preference shares in lieu of arrears of dividend or failure to redeem existing preference shares as per the terms of issue ■ Preparation of revised financial statement or board report for past 3 FYs, where BOD believes that they do not comply with the relevant provisions ■ Conversion of a public limited company to private limited company ■ Capital reduction ■ Filing Class action suits ■ Scheme of compromise, arrangements and reconstruction ■ Winding up of companies ■ To declare a company as a sick company etc. 58 | P a g e XXIII. Revival and rehabilitation of financially distressed companies [Sec 253] Key highlights •Inability to pay debts will be considered as criteria for determining a sick company. •Provisions of revival and rehabilitation of sick companies to apply to all companies and not only to an "industrial company" as defined under SICA. •The criteria of erosion of 50% of net worth for filing application with BIFR have been done away with. Test for determining stress necessitating regulatory intervention is made uniform i.e. inability of a company to pay debts. ------------------------------------------------------------------------------------------------------------------------------Accordingly, if a company fails to pay debts due to its secured creditor representing 50% or more of outstanding amount of debt within 30 days of demand, any secured creditor may file an application to NCLT to declare such company as a "sick company100" The company may also file an application to NCLT to declare it as a sick company on above ground101 Application for revival and rehabilitation by secured creditor [Sec 254(1) of the 2013 Act] Appointment of interim administrator [Sec 256 of the 2013 Act] Appointment of administrator [sec 259 of the 2013 Act] Powers and duties of company administrator. [Sec 260 of the 2013 Act] A Scheme of revival and rehabilitation [Sec 261 of the 2013 Act] Sec 261 (1) of the 2013 Act; The company administrator shall prepare or cause to be prepared a scheme of revival and rehabilitation of the sick company after considering the draft scheme filed along with the application under section 254. (2) A scheme prepared in relation to any sick company under sub-section (1) may provide for any one or more of the following measures, namely:— (a) the financial reconstruction of the sick company; (b) the proper management of the sick company by any change in, or by taking over, the management of such company; (c) the amalgamation of— (i) the sick company with any other company; or (ii) any other company with the sick company; (d) takeover of the sick company by a solvent company; (e) the sale or lease of a part or whole of any asset or business of the sick company; (f) the rationalisation of managerial personnel, supervisory staff and workmen in accordance with law; (g) such other preventive, ameliorative and remedial measures as may be appropriate; (h) repayment or rescheduling or restructuring of the debts or obligations of the sick company to any of its creditors or class of creditors; (i) such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified in clauses (a) to (h). 100 101 Sec 253(1) Sec 254(4) 59 | P a g e XXIV. Protection of minority shareholders interest: Key highlights •Provisions relating to class action suits introduced. •Exit options for minority holders on reorganization. ------------------------------------------------------------------------------------------------------------------------------2013 Act provides for some measures to protect the interest of minority shareholders. It includes the following: ■ Where a company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised and which proposes to change its objects, then the promoter and shareholders having control of a company are required to provide an exit to the dissenting shareholders in accordance with regulations to be specified by SEBI [sec13 (8) of the 2013 Act] ■ Where any benefit accrues to promoter, director, manager, KMP, or their relatives, either directly or indirectly as a result of non-disclosure or insufficient disclosure in the explanatory statement annexed to the notice of general meeting then such persons shall hold such benefit in trust for the company and shall be liable to compensate the company to the extent of the benefit received by him [Sec 102 (4) of the 2013 Act] ■ Class Action Suit [Sec 254 of the 2013 Act]: New concept of Class Action Suit has been introduced. In case of oppression / mismanagement, specified numbers of members or depositors are entitled to file Class Action Suit before NCLT for seeking prescribed reliefs. They may also claim damages / compensation for fraudulent / unlawful / wrongful acts from or against the company / directors / auditors / experts / advisors etc. Some of the actions that can be taken are as under: -Restrain company from any act which is ultra vires the AOA / MOA -Restrain company for breach of provisions of MOA / AOA, Act or any other law -Declare a resolution void if material facts are not provided -Restrain company/ directors from acting on such resolutions -Restrain company from taking action contrary to any resolution passed by shareholders -Claim damages or compensation or demand any other suitable action. -Seek other remedies as Tribunal may deem fit ■ Serious Fraud Investigation Office (SFIO) [Sec 211 of the 2013 Act]: CG to establish SFIO for investigation of frauds relating to a company. Till the time SFIO is not established, SFIO already set up by CG in terms of directions of GOI to be used. CG may under the specified situations including in public interest refer affairs of a company to be investigated by SFIO. ■ Where CG is of the opinion, that it is necessary to investigate into the affairs of a company by the SFIO -on receipt of a report from the ROC or inspector appointed under 2013 Act; -on intimation of a special resolution passed by a company that its affairs are required to be investigated; -in the public interest; or -on request from any Department of the Central Government or a State Government the CG may, by order, assign the investigation into the affairs of the said company to the SFIO. ■ The company and its officers and employees, who are or have been in employment of the company, are responsible to provide all information, explanation, documents and assistance in connection with SFIO inquiry. 60 | P a g e XXV. Conclusion: The 2013 Act has ushered in a new era of corporate democracy making a shift from "government control" to "selfgovernance". It has introduced an innovative process of addressing legislative issues under delegated legislation, The 2013 Act has a number of measures for protection of minority holders like tighter norms on companies from raising public deposits, filing class action suit etc. The introduction of concepts of KMP, independent director and woman director are aimed at ushering quality professionals at management/board level. The provisions relating to transactions with related parties have been simplified; at the same time scope of it being misused to the detriment of minority shareholders have been prevented. The 2013 Act contains several welcome measures to boost M&A activities by allowing merger of Indian companies with foreign companies, putting in place a fast track mechanism for merger between wholly owned subsidiaries and holding company/merger between small companies and exit to minority shareholders at price determined by the valuer. The Rules as presented and notified seems needs ironing out of its creases and keeping it within the realm of delegated powers. The nodal body ministry of corporate affairs ought to encompass all and not professionals within its regulatory purview in abrogation of the legislative mandate. 61 | P a g e XXVI. Glossary 1956 Act: Companies Act, 1956 2013 Act: Companies Act, 2013 AGM: Annual General Meeting AOA: Articles of Association BOD: Board of Directors CA: Chartered Accountant CCI: Competition Commission of India CEO: Chief Executive Officer CFO: Chief Finance Officer CG: Central Government CMA: Cost and Management Accountant CRA: Credit Rating Agency CS: Company Secretary CSR: Corporate Social Responsibility DRR: Debenture Redemption Reserve EGM: Extra-Ordinary General Meeting FY: Financial Year GOI: Government of India HUF: Hindu Undivided Family ID: Independent Director IEPF: Investor Education and Protection Fund KMP: Key Managerial Personnel LLP: Limited Liability Partnership MCA: Ministry of Corporate Affairs MD: Managing Director MOA: Memorandum of Association NBFC: Non-Banking Finance Companies NCLT: National Company Law Tribunal NCLAT: National Company Law Appellate Tribunal NED: Non-Executive Director NFRA: National Financial Reporting Authority OL: Official Liquidator OPC: One Person Company PAC: Persons Acting in Concert RIF: Rehabilitation and Insolvency Fund RBI: Reserve Bank of India RSE: Recognised Stock Exchange ROC: Registrar of Companies SEBI: Securities and Exchange Board of India RV: Registered Valuer SRC: Stakeholders Relationship Committee SFIO: Serious Fraud Investigation Office VC: Video Conferencing WTD: Whole Time Director WOS: Wholly Owned Subsidiary 62 | P a g e XXVII. Arrangement of Chapters and Sections in the Companies Act 2013 Chapter I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI XVII XVIII XIX XX XXI XXII XXIII XXIV XXV XXVI XXVII XXVIII XXIX 102Heading Chapter Heading Preliminary Incorporation of company and matters incidental thereto Prospectus and allotment of securities Part I - Public offer Part II – Private placement Share capital and debentures Acceptance of deposits by companies Registration of charges Management and administration Declaration and payment of dividend Accounts of companies Audit and auditors Appointment & qualifications of directors Meetings of Board and its powers Appointment & remuneration of managerial personnel Inspection, inquiry and investigation Compromises, arrangements and amalgamations Prevention of oppression and mismanagement Registered valuers Removal of names of companies from the register of companies Revival and rehabilitation of sick companies Winding up Part I – Winding up by the Tribunal Part II – Voluntary winding up Part III – Provisions applicable to every mode of winding up Part IV – Official liquidators Companies authorised to register under this Act102 Part I – Companies authorised to register under this Act Part II – Winding up of unregistered companies Companies incorporated outside India Government companies Registration offices and fees Companies to furnish information or statistics Nidhis National Company Law Tribunal and Appellate Tribunal Special courts Miscellaneous not provided in the Act 63 | P a g e Sections 1 to 2 3 to 22 23 to 41 42 43 to 72 73 to 76 77 to 87 88 to 122 123 to 127 128 to 138 139 to 148 149 to 172 173 to 195 196 to 205 206 to 229 230 to 240 241 to 246 247 248 to 252 253 to 269 270 271 to 303 304 to 323 324 to 358 359 to 365 366 to 374 375 to 378 379 to 393 394 to 395 396 to 404 405 406 407 to 434 435 to 446 447 to 470