1

New Companies Act,

2013
Summary

• Key Highlights

• Analysis

CA Pankaj Chhabra
Associate-Audit & Assurance
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CONTENTS
• Introduction
• Key Definitions & Concepts
• Setting up of a company
• Management & Administration
• Directors
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• The long awaited New Companies Bill 2013 is finally

passed in Lok Sabha on 18 December 2012 & in Rajya
Sabha on 8 August 2013. After having obtained the
assent from President on 29 August 2013, it has now
become much awaited Companies Act 2013 (2013 Act)
which has replaced the old Companies Act 1956.
• In this presentation much matter has been left, just
only the key points are noted down. All attempt has
been made to made this presentation clear and
significant.
• This presentation is open for the your valuable
comments and suggestions.
• I hope this presentation clearly explains the significant
and potential points.
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INTRODUCTION
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Key Definitions & Concepts

The New companies act introduced several new concepts some of them are discussed
here in brief. And several more are discussed in detail in further chapters in detail.
Chapter 1 : Definitions
• One man Company: The Companies Act 2013, has introduced new
concept of “one person company”(OPC),apart from forming public or
private company, which requires only a member.
• Dormant Company: The Act 2013, has inserted a new concept of
dormant company, the company which is established only to hold
assets or intellectual property or for project office, having no other
accounting transaction. Such company or inactive one may apply to the
ROC for such status of the dormant company.
• Small company: Small company means company which is other than
public company. The following provision doesn’t apply to the following
companies:
 Holding & Subsidiary company.
 Company registered under section 8.
 Company registered under special act.
• Private company: The Act 2013, has introduce little change in the
definition, just increase the limit of members from 50 to 200.
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Chapter 2 : Roles & Responsibilities

• Officer: The definition of officer has been extended to include the

promoters & key managerial personnel.
• Key Managerial Personnel: The term has been defined under the Act
2013, and is used in the act many where.
• Promoter: The term “promoter” has been defined in the Act 2013 in
the following ways:
▫ The person who is named as such in the prospectus or
▫ Is identified by the company having regards to the annual return or
 who has control over the affairs of the company being a director, shareholder
or otherwise.
 The person with who's instruction or direction or advice the Board is
accustomed to act.
• Independent director: The term has been defined under section
149(6) of the Act 2013, and some new requirements has been added
regarding there appointment and role & responsibility.
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Chapter 3: Investments
• Subsidiary: The definition under the Act 2013
states that certain class or classes of the
holding companies shall not have the layers of
the subsidiaries beyond the limit in numbers
specified. (refer act for the specified limit)
This restrictive definition states that holding
companies from now will not be able to hold
subsidiaries beyond the number specified
under the act.
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Chapter 4: Financial Statements

4.1 Financial Year: It has been defined under the Act 2013 as the
period ending on the date 31st March of the respective year or
where the company is incorporated on or after the first day of
January then the 31st March of the following year.
However there are certain exceptions included in the definition &
it mandates the Uniform accounting year for the all the companies.
It may create some implementation issues as well.
4.2 Consolidated Financial Statements: The Act 2013 has
mandated the consolidation of financial statements for all the
companies having subsidiaries, associate or joint ventures.
4.3 Conflicting Definitions: There are some conflicting definitions
are instated under the Act 2013 which are divergent from those
used in the notified Accounting Standards such as associates or
Joint Venture etc. which may lead to hardships in compliances.
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Chapter 5: Audit & Auditors

5.1 Mandatory rotation & Joint Audit: The Act 2013 has made the
rotation of auditor after the specified time period (refer Act)as mandatory
requirement and apply the enabling provisions on to the joint audit as
well.
5.2 Non Audit Services: The Act 2013 has stated that the services
rendered by an auditor should be approved by the BOD or Audit
Committee. The Auditor also can't provide certain specific services. (refer
Act)
5.3 Standards On Auditing: Standards have accorded the sanctity of the
Act 2013 and are subjected to the notification of NFRA. Further auditors
are bound to follow these standards on Auditing.
5.4 Secretarial Audit for Big Companies: The 2013 Act has made it
mandatory for the listed Companies or public having paid up share capital
> 100 Crores. It requires all such companies to annexed the Secretarial
audit report by the practicing Company Secretary to the Board.
5.5 Secretarial Standards: The Act 2013, requires that all companies to
follow and apply the standards as given the ICSI. But the same standards
has not given any cognizance under the Companies Act 1956.
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5.6 Internal Audit: The Act 2013 has widen the scope of the Internal Audit. The importance of the
internal audit is well acknowledged in CARO 2003, pursuant to which it requires the internal auditor
to comment upon the fact that the internal audit system of the company is commensurate with the
size and nature of the business of the company.
How ever order didn’t mandate that the internal audit should be conducted by the Internal auditor of
the company. Company can appoint any other person to be the internal auditor of the company.

Act 2013 has take a step forward it has mandate the appointment of an internal auditor being a
Chartered accountant or Cost accountant or any other professional as the Board may appoint to
conduct internal Audit.

There are certain class or classes of the companies who are required to conduct internal audit:
 Every Listed Companies.
 Every Public companies having the Paid up share capital of more than INR 10 Crore.
 Any other Public companies having the borrowings of more than INR 25 Core from any Banks
or Public Financial Institutions or has accepted the Deposit of more than INR 25 Core from
public at any day of the previous Financial Year.
5.7 Audit of items of cost:
 The CG by its order states that such class of companies which are engaged in the
production of such goods or services related to such goods, direct that such companies
shall include in their financial report utilization of material or labor or any other item
as may be prescribed.
 The Act 2013 has mandate the audit of item of costs by virtue of section 148. It is
important to note that similar requirements has been recently notified by the CG.
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The New Companies Act 2013

Chapter 6: REGULATORS
6.1 National Company Law Tribunal:
 In accordance with SC judgment on 11th May 2010, on the composition and constitution of
Tribunal, modifications relating to the qualifications and experience of the members has
been made.
 Appeals from the tribunal shall lie with the NCLT.
 Chapter XVII of the Act 2013, contains the provision under section 407 to434 deals with
the same.
6.2 National Financial Reporting Authority:
 The Act 2013 requires the constitution of the National Financial Reporting Authority,
which has been bestowed with the significant powers
 NFRA will issue authoritative pronouncements as wells as regulate the Audit Profession.
6.3 Serious Fraud Investigation office:
 The Act 2013 has also given the legal status to the SFIO, to investigate about the frauds in
the corporate.
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The New Companies Act 2103

Chapter 7: Mergers & Acquisition Chapter 9: Class Action Suits

Chapter 8: Corporate Social
Responsibility Chapter 10: Power to remove Difficulties

7.1The Act 2013, has streamlined as well as 9.1 The Act 2013, has introduce the new
introduced the new concepts of reverse concept of class action suits, now
merger (merger of foreign companies with shareholders can initiate suit against
the Indian Companies) & Squeeze out company & auditors.
provisions, which are significant.
The act 2013 has also introduced the
valuation in several cases including merger
and acquisition, by the registered value.

10.1 CG with its order shall have the power to

8.1The Act 2013, has made a genuine effort to exempt or notify the provisions of the act for
introduce the culture of corporate social such class or classes of the companies as
responsibility(CSR) in the Indian Corporate deem fit in public interest.
by requiring the companies to formulate the
Relevant notification shall be laid in the draft
CSR policy.
form in the parliament for 30days.
Further it requires the companies to set aside
The Act 2013, has stated that no such order
the minimum expenditure for the CSR.
shall be passed after the expiry of 5 years
from the date of commencement of the
section 1 of the Act 2013.
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The New Companies Act 2103

Chapter 11: Prohibition on Association or Partnership of persons

Exceeding certain numbers
Chapter 12: Insider Trading and prohibition on forward dealings

11.1 The Act 2013, has put restrictions on 12.1 The Act 2013, has first time
number of partners that can be admitted to defines the Insider Trading and
are 100. Forward dealings.

• To be specific Act 2013, also states that no

association or partnership can be formed
having the members or partners more than • The Act put prohibition on any person
the prescribed unless it is formed as the including director or key managerial
company under the Act 2013 or any other law person to enter into any such kind of
for the time being in force. activity.
• As an exception the following provision shall
not apply to the followings:
▫ An HUF carrying on any business.
▫ AOP or Partnership formed by the professionals • Further the Act 2013, also put
under the special acts like The Chartered restrictions on the director or Key
Accountants Act 1949.
managerial person to enter into any
kind of forward dealings.
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The New Companies Act 2103

Setting up of a company
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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.

INCORPORATION OF THE COMPANY

1. 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 ‘one-person company’ (OPC). An OPC
means a company with only one person as its member [section 3(1) of 2013 Act].The draft rules state that
only a natural person who is an Indian citizen and resident in India can incorporate an OPC or be a nominee
for the sole member of an OPC.
2. Memorandum of association
 Content: The 2013 Act specifies the mandatory content for the memorandum of association
which is similar to the existing provisions of the 1956 Act and refers inter-alia to the
following:
 Name of the company with last word as limited or private limited as the case may be.
 State in which registered office of the company will be situated.
 Liability of the members of the company.

 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 2013 Act]
 The basic purpose in the 1956 Act for such a classification as set out in section 149 of the 1956 Act, is
to restrict a company from commencing any business to pursue ‘other objects of the company’ not
incidental or ancillary to the main objects except on satisfaction of certain requirements as
prescribed in the 1956 Act like passing a special resolution, filing of declaration with the ROC to the
effect of resolution.
 Reservation of name: The 2013 Act incorporates the procedural aspects for applying for the
availability of a name for a new company or an existing company in sections 4(4) and 4(5) of 2013
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The New Companies Act 2103

Articles of association
Incorporation of company
3.)Article of Association: 4.)Incorporation of Company:
• The 2013 Act introduces the entrenchment • The 2013 Act mandates inclusion of declaration
provisions in respect of the articles of association to the effect that all provisions of the 1956 Act
of a company. An entrenchment provision have been complied with, which is in line with
enables a company to follow a more restrictive the existing requirement of 1956 Act.
procedure than passing a special resolution for • Additionally, an affidavit from the subscribers to
altering a specific clause of articles of association. the memorandum and from the first directors
has to be filed with the ROC, to the effect that
• A private company can include entrenchment they are not convicted of any offence in
provisions only if agreed by all its members or, in connection with promoting, forming or managing
case of a public company, if a special resolution is a company or have not been found guilty of any
passed[section 5 of 2013 Act]. 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 2013 Act [section 7(4) of 2013 Act; Also refer
the chapter on other areas]
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The New Companies Act 2103

5.Formation of the Company

6.Commencement of Business
Formation of the company: Commencement of Business:
 An OPC with charitable objects may be  The existing provisions of the 1956 Act as set
incorporated in accordance with the out in section 149 which provide for
provisions of the 2013 Act. New objects like requirement with respect to the
environment protection, education, research, commencement of business for public
social welfare etc., have been added to the companies that have a share capital would now
existing object for which a charitable be applicable to all companies.
company could be incorporated.
 The 2013 Act empowers the ROC to initiate
 As against the existing provisions under action for removal of the name of a company in
which a company’s license could be revoked, case the company’s directors have not filed the
the 2013 Act provides that the license can be declaration related to the payment of the value
revoked not only where the company of shares agreed to be taken by the subscribers
contravenes any of the requirements of the to the memorandum and that the paid-up share
section but also where the affairs of the capital of the company is not less than the
company are conducted fraudulently or in a prescribed limits as per the 2013 Act, within
manner violative of the objects of the 180 days of its incorporation and if the ROC has
company or prejudicial to public interest. The reasonable cause to believe that the company is
2013 Act thus provides for more stringent not carrying on business or operations [section
provisions for companies incorporated with 11 of 2013 Act].
charitable objects[section 8 of 2013 Act].
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Registered office of the Company

Alteration of Memorandum
Subsy not to hold shares in the Holding Co.
7.)Registered Office of Company: 8.)Alteration of Memorandum:
 Where a company has changed its name in the  The 2013 Act imposes additional restriction
last two years, the company is required to paint, on the alteration of the object clause of the
affix or print its former names along with the memorandum for a company which had
new name of the company on business letters, raised money from the public for one or more
bill heads, etc. objects mentioned in the prospectus and has
 However, the 2013 Act is silent on the time limit any unutilised money.
for which the former name needs to be kept  The 2013 Act specifies that along with
[section 12 of 2013 Act]. obtaining an approval by way of a special
resolution, a company would be required to
ensure following if it intends to alter its object
9.)Subsy not to hold shares: clause:
 The existing provision of section 42 of the 1956
Act which prohibits a subsidiary company to  Publishing the notice of the aforesaid
hold shares in its holding company continues to resolution stating the justification of
get acknowledged in the 2013 Act. variation in two newspapers
 Thus, the earlier concern that if a subsidiary is a  Exit option can be given to dissenting
body corporate, it may hold shares in another shareholders by the promoters and
body corporate which is the subsidiary’s holding shareholders having control in accordance
company continues to apply[section 19 of 2013 with the regulations to be specified by the
Act]. Securities and Exchange Board of India
(SEBI) [section 13 of 2013 Act]
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The New Companies Act 2103

Prospectus & Public Offer

• The 2013 Act has introduced a new section [section 23] to 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:
▫ To public through prospectus.
▫ Through private placement .
▫ 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 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.

1. Issue of Prospectus:
Currently , the matters and the reports to be included in the prospectus are specified in the parts I & II of the
Schedule of the 1956 Act. In the 2013 Act, the matters are included in the section 26 of the act. The act
mandates certain additional disclosures:
▫ 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.
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The 2013 Act has also relaxed the disclosure requirements in some areas. Examples of certain which
are not included in the 2013 Act are as follows. Particulars regarding the company and other listed
companyies under the same management, which made any capital issues during the last 3 years.
- Export possiblities and export obligations.
- Details regarding collaboration.

 The 2013 act states that report by the auditors on the assets & liabilities of business shall not be
earlier than 180 days before the issue of the prospectus.[section 26 (1) (b) (iii) of 2013 Act ].
 The 1956 currently requires that report will not be 120 days earlier than the issue of the
prospectus.

2. Variation in terms of contracts and obligation:

 The 2013 Act requires Special resolution to be passed to vary the terms of the contract and
obligations reffered to in the prospectus or objects for which the prospectus was issued. [section 27
(1) of 2013 Act] .
 The 1956 Act requires the approval in the general meeting by way of an Ordinary resolution.
 The 2013 Act also requires the dissenting shareholders to be given exit offer by promoters or
controlling shareholders.
3. Offer of sale of shares by certain members of the company:
• The Act 2013 includes a new section under which members of a company, in consultation with
the BOD, may offer a part of their holdings to the public.
• The document by which the offer for sale shall be made to the public shall be considered as the
prospectus. The members shall reimburse all the expenses to the company incurred by it.
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4. Shelf Prospectus:
The 2013 Act has extends the facility of the shelf prospectus by enabling SEBI to prescribe the classes of companies
that may file a shlef prospectus.
The Act 1956 currently limits the facility of shelf prospectus to the Public financial institutions, public sector banks
or scheduled banks. [section 31 (1) of 2013 Act].

5. GDRs:
 The 2013 Act includes a new section to enable the issue of depository reciepts in any foreign country subject to
the prescribed conditions [section 41 of 2013 Act].
 Currently the provision of section 81 of the 1956 Act relating to the further issue of shares are being used in
conjunction with requirements mandated by SEBI for the issuance of depository receipts.
 In several aspects across the 2013 Act , it appears that the 2013 act supplements the powers of SEBI by
incoporating requirements already mandated by the SEBI.
6. 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 existing 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 2013 Act].
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SHARE CAPITAL & DEBENTURES

• The 2013 Act introduce some key changes on shares and debentures. In other words, the 2013 act doesn’t
give any cognisance to the existing requirements of 1956 act , that is currently giving some relaxation to the
private companies. There fore the provisions of the 2013act are no longer applicable only to the public
companies and private companies which are subsy of the public companies and now are applicable to the
private companies also.
 Two kind of shares capital.
 New issues of share capital to be only of two kinds.
 Voting rights.

1. Voting Rights:
 The provisions of the 2013 act regarding voting rights are similar to the existing provisions of section 87 of
the 1956 Act.
 The only change noted in the 2013 Act is removal of distinction provided by the 1956 Act with respect to
the entitlement to vote in case the company fails to pay dividend to its cumulative and non cumulative
prefrence share holders [ section 47 of the Act 1956].
 The provisions regarding private placements and additional disclosures in prospectus will
also help to strngthn the capital markets.
 The 2013 Act proposes to reinstate the existing concept of shares with diffrential voting
rights. Pursuant to this section the company may face hardships with regards to computation
of proportionate voting rights.
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2. Variation of shareholder’s right:

Similar to the other provisions of the 1956 Act, the 2013 Act acknowledges the requirements of
section 106 of the 1956 Act with an additional requirement in respect of those classes of share
holders whose rights are affected pursuant to any variation.
The proviso to section 48 (1) of the 2013 Act, states that rights attached to the different classes of
the shares may be varied by written consent of 3/4th shareholders or by way of special resolution in
the separate meeting of the issued shareholders of that class.
3. Application of premiums received on issue of shares:
• The 2013 Act has laid down the similar requirements in section 52 as that of section78 of the 1956
Act, in respect of the premiums on applications received on the issue of the shares.
• However, the section of 2013 Act has a non-obstante provision in respect of certain class of
companies which would be prescribed at a later date. The 2013 Act states that these classes of
companies would not be able to apply the securities premium towards the below specified
purposes, unless the financial statements are in compliance with the accounting standards
issued under section 133 of 2013 Act:
▫ Paying up unissued equity shares of the company as fully paid bonus shares
▫ Writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the
company
▫ Purchase of its own shares or other securities.
• The 2013 Act restricts the application of securities premium for a certain class of companies if they
fail to comply with the accounting standards. The 2013 Act continues to state that securities
premium amount can be utilised for purpose of writing off preliminary expenses. However, in view
of the requirements of accounting standard 26, intangible asset, the requirement of this sub-section
appears to be superfluous.
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4. Prohibhition on issue of sahres at a discount:

 The 2013 Act states that companies will no longer be allowed to issue the shares at a discount [section 53].
 Notwithstanding anything contained in the section 53, companies can issue sweat equity shares as per the
following conditions prescribed:
• Authorisation through SR.
• SR must specify the details of no.s of shares, current market price, consideration & the class(es) of the employees
or directors to whom issued.
• 1 year must have been elapsed from the date of commencement of business by co.
• SEBI guidelines to be followed in case the shares are listed on a stock exchange.
 In case case of any contravention of provisions some penal provisions are also prescribed [section
53].

5. Issue and redemptionof prefrence shares:

 The 2013 Act continue to acknowledge the existing requirements as per1956 act with respect to the issue
and redemption of prefrence shares.
 The act states the existing provision that a company cannot issue prefrence shares with redemption date of
beyond 20 years except in case of shares are issued related to the infrastructure project, those projects
which specified in schedule VI. These shares would be subject to redemption at such percentage as
prescribed on an annual basis at the option of such preference shareholders.
 The 2013 Act also specify that SR is required in case the company is not in the position to redeem its
prefrence shares.
 The 2013 act gives option to the companies, in case, where the company is not in a position to redeem its
prefrence shares, as per the terms of the issue, it may, with the consent of three-fourths in value of such
preference shares and with the approval of the Tribunal issue further redeemable preference shares equal
to the amount due, including the dividend thereon, with respect to the unredeemed preference shares. On
the issue of such further redeemable preference shares, the unredeemed preference shares shall be
deemed to have been redeemed.
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6. Refusal of registration and appeal against registration:

 The provision relating to refusal of registration of transfer or transmission of securities by private and public
companies has been separately clarified in the 2013 Act. The private and public companies are required to
send notice of refusal within 30 days of the receipt of instrument of transfer, and aggrieved party may appeal
to the Tribunal against the refusal within the specified number of days [section 58(2) of 2013 Act].

7. Further issue of share capital :

 The existing requirement of section 81 of the 1956 Act in regard to further issue of capital would no longer
be restricted to public companies and would be applicable to private companies also, since sub-section 3 of
section 81 of the 1956 Act has not been acknowledged in the 2013 Act.
 Further, the 2013 Act provides that a rights issue can also be made to the employees of the company who are
under a scheme of employees’ stock option, subject to a special resolution and subject to conditions as
prescribed. Further, the price of such shares should be determined using the valuation report of a registered
valuer, which would be subject to conditions as prescribed [section 62 of 2013 Act].

8. Issue of bonus shares :

 The existing 1956 Act does not have any specific provision dealing with issue of bonus shares although it has
referred to the concept of bonus shares at many places. The 2013 Act includes a new section that provides
for issue of fully paid-up bonus shares out of its free reserves or the securities premium account or the
capital redemption reserve account, subject to the compliance with certain conditions such as authorisation
by the articles, approval in the general meeting and so on [section 63 of 2013 Act].

9. Unlimited company to provide for reserve share capital on conversion into limited company :
 This section is similar to section 32 of the 1956 Act and seeks to provide that an unlimited company having a
share capital may be re-registered as a limited company by increasing the nominal amount of each share,
subject to the condition that no part of the increased capital shall be capable of being called up, except in the
event and for the purposes of the company being wound up. The 2013 Act further provides that a specified
portion of its uncalled share capital shall not be capable of being called up except in the event and for the
purposes of the company being wound up[section 65 of 2013 Act].
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10. Reduction of share capital

o The 2013 Act gives cognisance to one of the amendments made in the listing agreement by SEBI. A
new clause 24(i) was inserted to the listing agreement which provided that a scheme of
amalgamation or merger or reconstruction, should comply with the requirements of section 211(3C)
of the 1956 Act. A similar requirement has been introduced in section 66 of 2013 Act, which states
that no an application for reduction of share capital shall be sanctioned by the Tribunal unless the
accounting treatment, proposed by the company for such a reduction is in conformity with the
accounting standards specified in section 133 or any other provision of the 2013 Act and a certificate
to that effect by the company’s auditor has been filed with the Tribunal.
o Further, the 2013 Act clarifies that no such reduction shall be made if the company is in arrears in
repayment of any deposits accepted by it, either before or after the commencement of the 2013 Act,
or the interest payable thereon.

11. Power of the company to purchase its own securities

 The existing provision of section 77A of the 1956 Act has been acknowledged by the 2013 Act. The
only difference is that the option available to company for a buy-back from odd lots is no longer
available [section 68].
 The 2013 Act provides flexibility in management and administration by recognising the electronic
mode for notices and voting, which is in line with the MCA’s efforts to give cognisance to use of
electronic media as evident from a number of green initiatives’ introduced recently, maintenance of
registers and returns at a place other than the registered office.
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The 2013 Act also intends to improve the corporate governance by requiring the dosclosure of nature of
concern or interest of every director, manager, any other key managerial personnel and relatives of such a
director, manager, or any other key managerial personal and reduction in the threshold of disclosure of
20% to 2%.
The term key managerial personnel now has been defined under the 2013 Act and means the CEO, MD,
Manager,CS, WTD,CFO and any such officer as may be prescribed.
• Annual Return:
The 2013 Act states that requirement of the certification by CS in practice of annual return will be extended on to
those companies having the paid up capital of five crores INR or more and the turnover 25 crore INR or more or the
Listed Companies.
Annual return to be filed by the companies will be included more information than before, including particulars of
holding, subsidiary and associate companies, remuneration of directors and key managerial personnel, penalty or
punishment imposed on the company, its directors or officers [section 92(1) of 2013 Act].

• Place of keeping registers and returns

The 2013 Act allows registers of members, debenture-holders, any other security holders or copies of return, to be
kept at any other place in India in which more than one-tenth of members reside [section 94(1) of 2013 Act]. The
flexibility in the 1956 Act is limited to a place within the city, town or village in which the registered office is
situated.

• General Meetings:
Every company other than an OPC shall hold AGM in addition to its other meetings through the notices calling it.
And not more than 15 months shall elapse between the date of current meeting and the next.
The 2013 act requires that first general meeting to be held with in 9 months from the closure of the first financial year
where as 1956 Act requires the first Annual General Meeting to be held within 18 months from the date of
incorporation.
Currently the existing provisions of the 1956 act doesn’t defines the business hours , but the 2013 Act now defines as
9am to 6 pm. The 2013 Act requires that the AGM can’t be held on a national holiday but the current provisions states
that AGM can’t be held on a public holiday as per section 166 of 1956 Act.(Contradiction was also there in section 166
of 1956 Act).
 29

• The 2013 Act states that a 21 days clear notice required to be given for calling an AGM either written or through electronic
mode, however AGM can be call at a shorter notice provided consent of 95% members as against the consent of 100% members
as the existing requirement of 1956 Act.[section 101 of 2013 Act ]
• The 2013 states that besides the director & manager, the nature of the concern or interest of every director,manager, key
managerial personnel and the relative of the persons mentioned respectively in each item of the special business will also be
need to be mentioned in the notice of the AGM.
• The 2013 act has reduced the threshhold limit from 20% to 2% of the the disclosure of share hodling interest in the the
company to which it relates of every promoter, director, manager,key managerial personnel.[section 102 of 2013 Act ]
• The 2013 Act states that in case of a public company, the quorum will depend on number of members as on the date of meeting.
The required quorum is as follows:
▫ Five members if number of members is not more than one thousand.
▫ Fifteen members if number of members is more than one thousand but up to five thousand.
▫ Thirty members if number of members is more than five thousand [section 103 (1) of 2013 Act].
• A limit has been introduced on the number of members which a proxy can represent. The 2013 Act has introduced a dual limit
▫ in terms of number of members, prescribed as 50 members and
▫ a limit in terms of number of shares holding in the aggregate not more than 10 % of the total share capital of the company
carrying voting rights* [section 105 (1) of 2013 Act].
• Further, it is relevant to note that private companies cannot impose restrictions on voting rights of members other than due to
unpaid calls or sums or lien [section 106 (1) of 2013 Act].
• Listed companies will be required to file with the ROC a report in the manner prescribed in the rules on each annual general
meeting including a confirmation that the meeting was convened, held and conducted as per the provisions of the 2013 Act and
the relevant rules [section 121 of 2013 Act].
4. Other matters
• Listed companies will be required to file a return with the ROC with respect to the change in the number of shares held by
promoters and top ten shareholders within 15 days of such a change[section 93 of 2013 Act]. This requirement again
demonstrates the effort made towards synchronising the requirements under the 2013 Act and the requirements under SEBI.
Additionally, on an annual basis, companies are also currently required to make the disclosures with respect to top shareholders
under the Revised Schedule VI the 1956 Act.
• 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 2013 Act], which were hitherto not given cognisance under the 1956 Act.
Additionally, it is also pertinent to note that these standards do not have a mandatory status for the practicing company secretaries.
 30

DIRECTORS
 31

GENERAL
1. Woman director
• The category of companies which need to comply with the requirement of having at least of one woman director are as follows: *
[section 149(1) of 2013 Act]
▫ Every listed company, within one year from the commencement of second proviso to sub-section (1) of section 149
▫ Every other public company that has paid–up share capital of one hundred crore rupees or more, or a turnover of three
hundred crore rupees or more within three years from the commencement of second proviso to sub-section (1) of section
149
• While this new requirement will go a long way in encouraging gender diversity, it has already created quite a stir in the manner
in which companies will ensure compliance.
2. Number of directorship
• The 2013 Act increases the limit for number of directorships that can be held by an individual from 12 to 15 [section 149(1) of
2013 Act].3. One director to be resident in India.
• A new requirement with respect to directors is that at least one director to have stayed in India for at least 182 days in the
previous calendar year [section 149(3) of 2013 Act]. This requirement appears to be a departure from the focus given in the
2013 Act towards use of electronic mode such as use of video conferences for meetings and electronic voting. With the
increasing use of electronic media, the need, for a director to be resident in India for a minimum amount of time, becomes
redundant.
3. Independent directors
• One of the significant aspects of the 2013 Act is the effort made towards incorporating some of the salient requirements
mandated by the SEBI in clause 49 of the listing agreement in the 2013 Act itself. To this effect, the 2013 Act requires every listed
public company to have at least one-third of the total number of directors as independent directors. Further, the central
government in the draft rules has prescribed the minimum number of independent directors in case of the following classes of
public companies* [section 149(4) of 2013 Act].
(i) Public companies having paid up share capital of 100 crore INR or more; or
(ii) Public companies having turnover of 300 crore INR or more
(iii) Public companies which have, in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding 200 crore
INR
• The 2013 Act also states that companies will have a period of one year to ensure compliance with the 2013 Act and the Rules
that are framed.
 32

Conflicting Requirements: While the attempts has been made to harmonise the requirements of
the SEBI & the 2013 act, but still there are several aspects relating to the independent directors where the
requirements of the sebi and the 2013 act differs from the requirements of the clause 49 of equity listing
aggreement.The following are the differences:
• Clause 49 does not require the board to exercise its judgment and opine on whether the independent
director is a person of integrity or has relevant expertise or experience. This requirement poses
difficultly in terms of the manner in which integrity hof an individual can be assessed by the board.

• Clause 49 does not require examination of the independence of the relatives of independent
directors. Extending the disqualification of the independent directors to consider the pecuniary
relationship of the relatives would pose unnecessary hardship for the independent directors.

• The qualification of the independent director has been left to be specified later.

• The 2013 Act brings the constitution of the board in India at par with other international capital
markets i.e., by mandating at least one-third of the board to be independent directors in case of listed
companies. Whereas, the SEBI requirements are where the chairman of the board is a non-executive
director, at least one-third of the board should comprise of independent directors and where the non-
executive chairman is a promoter of the company or is related to any promoter or person occupying
management positions at the board level or at one level below the board, at least one-half of the
board of the company shall consist of independent directors.
 Differing compliance requirements with respect to the appointment of independent
directors, remuneration thereto, imposed by multiple regulators will lead to
hardship as well increased cost of compliance for companies
 33

• The 2013 Act states that subject to the section 197 & 198, an independent director shall not be
entitled to any stock option & may receive remuneration by way of fee, reimbursement of expenses &
other meetings & profit related commissions. [section 149(9) of 2013 Act], which is again in
contradiction with the sebi requirements whereby for granting stock options employees includes the
independent directors also.

• The 2013 act provides that subject to the provisions of section 152 an independent director shall
hold office for a term upto 5 consecutive years on the board of the company, can be reappointed
subject to the passing of special resolution at the board meeting.

• The 2013 Act limits the tenure of office of an independent director to a maximum of two tenures of
five consecutive years, with a cooling-off period of three years between the two tenures. During the
cooling-off period of three years, should not be appointed in or be associated with the company in
any other capacity, either directly or indirectly [proviso to section 149(11) of 2013 Act].

• It is also relevant to note that the MCA had released the corporate governance voluntary guidelines in
2009, which permitted three tenures (with other conditions similar to those discussed above) for an
independent director while as per the clause 49 of the equity listing agreement, an independent
director cannot serve for more than nine consecutive years.
 34

4.2 Data bank of independent directors:

 The 2013 act states that subject to the provisons of section 149(5), the independent directors shall be selected from
the data bank maintained by the body or association, having expertise in that are, prescribed by the CG in this behalf ,
the directors who met the eligiblity criteria and are willing to be the independent directors shall get their name
registered in the the data bank.
 And the data shall be put on the company website from where the names of the independent directors can be selected
to be appointed at the board meeting.
 The proposal has its origins in the report of the 21st Standing Committee on finance, wherein it was acknowledged
that preparation of a databank of independent directors would vest with a regulatory body that may comprise of
representatives of MCA, SEBI, Reserve Bank of India, professional institutions, Chambers of Commerce and Industry
etc [section 150 of 2013 Act].
4.3 Code for Independent directors:
• The 2013 Act includes 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.
• 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.
 35

4.4 Liability of independent director:

• The 2013 act has distinguish the liablity of an independent director & non executive director from the
rest of the board by inserting the separate provisions under the act which describes as follows:
“Both independent director & non executive director not being the promoter & key managerial person
shall be held liable only in respect of those acts or omissions or commissions by a company which had
occurred with his knowledge, attributable thorug the board process 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 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.
 36

5. Appointment of an additional Director:

The 2013 act states that no person can be appointed as an additional or alternate
director if he failed to be electred as an independent director in the borad meeting as
per the provisions of the act.[section 161 of the 2013 act].

6. Additional compliance requirement for the private companies:

• There are certain increased compliance requirements mandated for private
companies which, till now, were mandated only for public companies and private
companies which are subsidiaries of public companies. These include the following:
▫ Appointment of director to be voted individually
▫ Option to adopt principle of proportional representation for appointment of directors
▫ Ineligibility on account of non-compliance with section 274(1) (g) now extended for
appointment or reappointment as a director in a private limited company also.
Meeting of the board and its powers
The 2013 Act has given cognisance to the provisions of the 1956 Act related to the
board meetings and its powers. Some of the other significant changes in relation to the
board and its functioning include:
1. Audit Committee:
The requirements relating to the audit committee was introduced first time by
Companies (amendment) Act, 2000. Audit committee is entrusted with the significant
responsiblities to have an eye on the management of listed companies, view the
financial controls and much more additional responsiblities the 2013 Act recognised.
 37

The following are the major provisions related to the audit

committee:
a.) Audit committee should consist of the minimum 3
independent directors which should form majority.
b.)Majority of the members of the audit committee should be
able to read the financial statement of the company. i.e should
be financially literate.
c.)The existing audit committee prior to the commencemnt of
this act should be reconstituted as per the above mentioned
provisions.
d.)Chairman of the audit committee need not be an independent
director.

e.)Every listed company or such class (es) of companies as

prescribed in the draft rules should establish a vigil mechanism
for directors and employees to report genuine concerns such as :
• - Companies which accept deposits from the public
• - Companies which have borrowed money from banks and
public financial institutions in excess of fifty crore rupees

• Provided that such details of the establishment of such

mechanism shall be disclosed by the company on its website if
any & in the boards report.
 38

2. Nomination and Remuneration Committee and Stakeholders Relationship Committee:

• The 2013 Act includes this new section requiring constituting the nomination and remuneration
committee by every listed company and the following classes of companies as prescribed in the draft
rules:*
(A) Every listed company
(B) Every other public company that has a paid-up capital of 100 crore INR or more or which has, in
aggregate, outstanding loans or borrowings or debentures or deposits exceeding 200 crore INR.
• The Nomination and Remuneration Committee is required to formulate and recommend to the Board
of Directors, the company’s policies, relating to the remuneration for the directors, key managerial
personnel and other employees, criteria for determining qualifications, positive attributes and
independence of a director [section 178(1) of 2013 Act].
• Further, a board of a company that has more than 1000 shareholders, debenture-holders, deposit-
holders and any other security holders at any time during a financial year is required to constitute a
Stakeholders Relationship Committee [section 178(5) of 2013 Act].

3. Contributions to charitable funds and political parties :

• As per the 2013 Act the power of making contribution to ‘bona fide’ charitable and other funds
is proposed to be available to the board subject to certain limits [section 181 of 2013 Act].As
per the existing requirement of section 293 of the 1956 Act, such power could only be
exercised in the general meeting in case of public companies and subsidiaries of public
companies as per the 1956 Act.
• Further, the limits of contribution to political parties is proposed to be increased to 7.5% of
the average net profits during the three immediately preceding financial years [section 182 of
2013 Act] from the existing limit of 5% under the 1956 Act.
 39

4. Disclosure of interest:
The 2013 Act prescribes similar requirements with respect to the disclosure of interest by the
director as contained in the existing section 299 of the 1956 Act. The only change that could be
identified is where a contract or arrangement entered into by the company without disclosure of
interest by director or with participation by a director who is concerned or interested in any way,
directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company
[section 184 of 2013 Act].

5. Loan to directors:
• The 2013 Act states that no company whether directly or indirectly shall advance any
loan, including any loan represented by a book debt, to any of its directors or to any other
person in whom the director has is interested or give any gaurantee or provide any
security in connection with the loan taken by him or such other person.
• Earlier restrictions was only on the public companies but the2013 Act has extended the
restrictions on to the private companies also.
• The 2013 act also provides for the exception to this particular above mentioned
provision:
a.) Loan to the Managing director in order to pursue his duties.
b.) Loan to any director in the ordinary course of the business.
In case of the contraventiion of the provision of the act the 2013 Act has provided for
the penal provisions from INR 5 Lakh to INR 25 lakhs.
 40

6. Loan & Investment by the companies:

• The 2013 Act has specified in details provision regarding the loan and investment by the
companies. Earlier section 372 A of 1956 Act was dealing with the same regarding loan and
investment by the companies.
“Without prejudice to the provisions of the act, no company shall unless otherwise
prescribed, make investment through not more than two companies.”
No company shall directly or indirectlty :
i.) Give loan to any person or any body corporate.
ii.) Give any Gaurantee or provide security to any person or body corporate in
connection with the loan.
iii.) Acquire by way of subscription or purchase the securities of any other body
corporate.
Subject to Limit not exceeding 60 % of its paid up capital, free reserves &
securities premium account OR
100 % of its Free reserves or Securities Premium

• The 2013 Act states that companies can make investments only through two layers of
investment companies subject to exceptions which includes company incorporated
outside India [section 186 of 2013 Act]. There are no such restrictions which are
currently imposed under the 1956 Act.
• Further, the exemption available from the provisions of section 372A of the 1956 Act to
private companies as well as loans or investment given or made by a holding company to
its subsidiary company are no longer available under the 2013 Act.
 41

7. Related party transactions:

The 2013 Act states that no company can enter into any related party transactions
except with the consent of the board by passing a resolution in respect to the same.
The following can be the related party transactions:
a) Sale , purchase or supply of the goods and material.
b) Leasing of any property.
c) Sale of or disposing and buying of property of any kind.
d) Availing or rendering of any services.
e) Penalty for the contravention of the provision of the section is covered under this
section itself.
f) Centeral government may prescribe additional conditions as well.

APPOINTMENT AND REMUNERATION OF THE MANAGERIAL

PERSONNEL
The 2013 Act has made the significant changes as compare to the existing requirement of
the 1956 Act with respect to the appointment and managerial remuneration of the
managerial personnel. One of the major changes that is noteable is that the applicability
of these provisions, as now these are applicable to “all of the companies”.
However the overall ceiling in respect to the payment of managerial remuneration by a
public company remains the same 11% of the profit of the financial year computed as
per the manner laid down in the 2013 Act.
 42

1.)Appointment of MD, WTD or Manager:

• No company shall made an appointment or reappointment of the MD or Manager at the same time.
• The re-appointment of a managerial person cannot be made earlier than 1 year before the expiry of
his term instead of the 2 years as per the existing provisions of the 1956 Act, however the term of a
managerial person cannot exceed more than 5 years.
• The eligibility criteria has been revised as per the 2013 Act, as a person below the age of 21 years
can’nt be appointed as the managerial person as against the existing requirement of 25 years.
• Further the 2013 act has also lifted the upper limit up to 70 years and person of 70 above can be
appointed after passing a SR against the same.
• Provisions of Schedule V and under section 196 is required to be complied with for the appointment
of the Managerial person.
2.) Overall maximum managerial remuneration and managerial remuneration in
case of absence or inadequacy of profits:
• As against the existing requirement of section 198 of the 1956 Act, which specifically provides that
the provisions of managerial remuneration would be applicable to both public companies and private
companies which are subsidiaries of public companies; the 2013 Act states that such provisions
would be applicable only to public limited companies.
• Listed companies have been mandated to disclose in their board report, the ratio of remuneration of
each director to median employee’s remuneration and such other details which are quite extensive as
proposed in the draft rules.
• In case any director withdraws any amount by way of remuneration which has been exceeding the
limit specified under the act, then such amount is refundable to the company and company can not
waive the recovery of such amount untill permitted by the CG.
• The following slide includes a table of a comparative analysis of the provisions of the acts :
 43

Particulars As Per 1956 Act As Per 2013 Act

ManagingDirector Whole Time Director Managing Director Whole time Director

1.)Commission As per section 309 As per section 309 Removes such restriction Removes such restriction
from holding cannot receive from cannot receive from subject to the disclosure subject to the disclosure in
company subsy. Co. subsy. Co. in the Boards report. the Boards report.
2.)Schedule Schedule XIII under the Schedule XIII under the Schedule V under the act. Schedule V under the act.
act. act.
3.)Admin. Comparatively Comparatively More Liberalised . More Liberalised .
Procedures complicated . complicated . CG approval not required CG approval not required
CG approval required. CG approval required. subject to the fullfilment subject to the fullfilment of
of certain conditions. certain conditions.
4.)Insurance Any amount paid by the Any amount paid by the Similar requirements has Similar requirements has
premium company for which they company for which they been enacted. been enacted.
may be guilty not to be may be guilty not to be
included in the included in the
Remuneration except Remuneration except
where found to be where found to be
guilty.(Section201) guilty.(Section201)

5.)Remuneration A s per section 198 there A s per section 198 there But here the section 2(78) But here the section 2(78)
meaning were specific were specific includes the includes the
inclusuions and tax free inclusuions and tax free reimbursements of any reimbursements of any
benefits are strictly benefits are strictly direct taxes to the direct taxes to the
prohibhited(Section prohibhited(Section managerial person. managerial person.
200) 200)
 44

3. Calculation of profits [section 198 of 2013 Act]

• The 2013 Act sets out in detail about the allowances and deductions that a company should include while
computing the profits for the purpose of determining the managerial remuneration. To illustrate, the 2013
Act states that while computing its profits, credit should not be given for any change in the carrying amount
of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on
measurement of the asset or the liability at fair value.

4. Recovery of remuneration in certain cases [section 199 of 2013 Act]

• The 2013 Act contains stringent provisions in case the company is required to restate its financial statements
pursuant to fraud or non-compliance with any requirement under the 2013 Act and the Rules made there
under. As against the existing requirement of section 309 of the 1956 Act which only refers to the fact that
excess remuneration paid to managerial personnel cannot be waived except with the previous approval of
the central government, the 2013 Act moves a step forward and enables the company to recover the excess
remuneration paid (including stock options) from any past or present managing director or whole time
director or manager or chief executive officer who, during the period for which the financial statements have
been restated, has acted in such capacity.

5. Appointment of key managerial personnel [section 203]

• The 2013 Act provides for mandatory appointment of following whole time key managerial personnel for
every listed company and every other company having a paid-up share capital of five crore INR or more*:
(i) Managing director, or chief executive officer or manager and in their absence, a whole-time director
(ii) Company secretary
(iii) Chief financial officer
• Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of
the company, as well as the managing director or chief executive officer of the company at the same time
except where the articles of such a company provide otherwise or the company does not carry multiple
businesses
 45

THANK YOU

To be continued….