COMPANIES ACT 2013 IS THE LANDMARK ACT PASSED BY INDIAN LEGISLATOR
WHICH ENCOMPASSED THE WHOLESOME AND DYNAMIC INTEGRATION OF PROVISIONS,
RULES IN A SKELETON BODY MANNER TO BE SUITABLE WITH THE TIME AND NEED
OF INDUSTRY. COMPANIES ACT IS ONE OF MOST LENGTHY ACT.
COMPANIES ACT IS THE TOOL AND INSTRUMENT BY WHICH ALL THE COMPANIES
ARE REGULATED, CONTROLLED AND PROMOTED. IT PROVIDES THE ESSENCE TO
CORPORATE GOVERNANCE.
QUESTIONS ARE BASED ON THE CHAPTERS AND QUIRES WHICH A STUDENT FINDS
WHILE STUDYING LAW.
1. Section 2(49) defines the term 'interested directors' whereas at
various sections reference to section 184 is drawn to mean/define
interested director. Section 2(49) is wider than Section 184 leading
to confusion – which definition should be applied? Ans. Section 2(49)
of the Companies Act, 2013 defines interested director as a director
who is in any way, whether by himself or through any of his relatives
or firm, body corporate or other association of individuals in which
he or any of his relatives is a partner, director or a member,
interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into by or on behalf of a
company; Section 184 (2) provides that every director of a company who
is in any way, whether directly or indirectly, concerned or interested
in a contract or arrangement or proposed contract or arrangement
entered into or to be entered into— (a) with a body corporate in which
such director or such director in association with any other director,
holds more than two per cent. shareholding of that body corporate, or
is a promoter, manager, Chief Executive Officer of that body
corporate; or (b) with a firm or other entity in which, such director
is a partner, owner or member, as the case may be, shall disclose the
nature of his concern or interest at the meeting of the Board in which
the contract or arrangement is discussed and shall not participate in
such meeting. Wherever the term 'interested director' appears in the
Act and the Rules thereon, read sections 2(49) and 184 together.
2. Whether a private Company having paid-up share capital 45 Lakhs and
turnover of Rs. 20 Crores as per last audited balance sheet will be
treated as small company or not? ANS: It is not a small company.
Section 2(85) define a small company as 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 2 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 . This means that a company shall not be small company if
it has a paid up share capital of Rs. 50 lakhs or more OR if its
turnover exceed Rs. 2 crores. Since the turnover of this company is
more than Rs 2 crores i.e. Rs. 20 Crores it will not be a small
company.
3. Whether every company is required to alter its Articles of
Association as per the new format under the Companies Act, 2013? Ans.
Sub-section (6) of Section 5 provides that the articles of a company
shall be in respective forms specified in Tables, F, G, H, I and J in
Schedule I as may be applicable to such company. Sub-section (9) of
section 5 provides that nothing in this section shall apply to the
articles of a company registered under any previous law unless amended
under the Act. It is not necessary but suggested that whenever a
company amends its articles, it should ensure that subsequent to the
amendment, the AOA is as per the format specified under the Companies
Act, 2013. Since certain provisions of Companies Act, 2013 require
specific clauses in the Articles to carry out operations of any
organization, such as for issuance of bonus shares, it is advisable
Articles should be altered in line with the new requirements as
various provisions themselves require specific clauses to be
incorporated in the Articles.
4. Is section 42 applicable for Right Issue of shares under section
62(1)(a)? Are PAS 4 (Letter of Offer) and PAS 5 (Record of Offer)
applicable for Rights Issue of shares? Ans: As per section 23 of the
Companies Act, 2013 a public company can issue securities:- To
public through prospectus; Through private placement by complying
with the provisions of part II of chapter III; or Through a right
issue or bonus issue. In case of a private company it can issue
securities by any method as mentioned above other than to public
through prospectus. Thus, there is no need to comply with the
provisions of section 42 in case of right issue and accordingly PAS-4
and PAS-5 shall not be applicable in case of right issue.
5. Section 46 read with the Companies (Share Capital and Debentures)
Rules, 2014 requires passing of Board Resolution for issuance of share
certificates. Under the Companies Act, 1956 such power could be
delegated to Committee of the Board. Companies Act, 2013 is silent on
this issue. Ans. Section 179 which deals with powers of Board lists
items which are required to be approved by Board at its duly convened
meeting. These items are such which require deliberation and
discussion at the meeting and of important nature. One such item is
‗issue of securities'. This matter has already been examined by the
MCA and it has, vide its General Circular 19/2014 dated June 12, 2014,
clarified with regard to issue of duplicate share certificates, that a
committee of Directors may exercise such powers subject to any
restrictions imposed by the Board in this regard [in the light of the
provisions of section 179, 180 and regulation 71 of table ―F‖ of
Schedule I to the Companies Act, 2013].
6. On further issue of shares to existing shareholders under section
62(1)(a): What would be the intimation form viz return of allotment
form as form PAS-3 doesn't mention section 62. It mentions only
section 39 which is for public issue and section 42 which is private
placement? Whether shareholder's approval is required for the said
issue? ANS: For every issue, return of allotment (refer section 39)
Form PAS 3 will be filed with the ROC irrespective of whether the
share is allotted through private, ESOP, Right Issue or Bonus issue.
No, shareholder approval is not for a rights issue.
7. In terms of Section 73 of Companies Act, 2013 read with Rule
2(1)(c)(vii) of Companies (Terms and conditions of acceptance of
Deposit) Rules, 2014, deposits do not include receipt of money from
Director of the Company, but money received from a member is treated
as deposit. In case deposit is taken from a person who is both a
director and a member of the Company, will such receipt of money be
treated as deposit or not? ANS: Any amount received from a person who,
at the time of the receipt of the amount, was a director of the
company furnishes to the company at the time of giving the money, a
declaration in writing to the effect that the amount is not being
given out of funds acquired by him by borrowing or accepting loans or
deposits from others is not considered as deposit. Although, there is
no specific provision which clarifies the question above but a deposit
from a member who is also a director should be treated as deposit from
a member.
8. By what time are companies are required to switch over to the new
format of Register of Members, Register of Directors and Key
Managerial Personnel and their Shareholding? ANS: As per Rule 3 of the
Companies (Management & Administration) Rules, 2014 all the existing
companies, registered under the Companies Act, 1956, shall prepare its
registers of members as per the provisions of section 88 of the
Companies Act, 2013 within a period of 6 months from the date of
commencement of Companies (Management & Administration) Rules, 2014.
Further after 1st April 2014 all the registers of Directors & KMP
shall be prepared as per the provisions of the section 170 of the
Companies Act, 2013. The register of directors & director's
shareholding maintained before 1 April, 2014 as per the provisions of
the companies Act, 1956 needs not to be converted as per the
provisions of the section 170 of Companies Act, 2013.
9. Are companies required to file compliance certificate required in
terms of Companies Act, 1956 for the financial year ended March 31,
2014? Ans. For the financial year ending March 31, 2014, specified
companies would be required to file the Compliance certificate as per
the provisions of proviso to Sub-section (1) of Section 383A of the
Companies Act, 1956. MCA has vide General Circular 08/2014 dated
04.04.2014 clarified that the financial statements (and documents
required to be attached thereto), auditors report and Board's report
in respect of financial years that commenced earlier than 1st April,
2014 shall be governed by the relevant provisions/ Schedules/ rules of
the Companies Act, 1956 and that in respect of financial years
commencing on or after 1st April, 2014, the provisions of the new Act
shall apply. As the compliance certificate forms part of the Board's
Report it shall be filed and attached with the Board's Report for the
year financial year 2013-14. 10. The Annual Return for the financial
year ended 31st March 2014 is to be filed in which form? Ans. MCA vide
General Circular dated 25th June, 2014 clarified that Form MGT-7 shall
not apply to annual returns in respect of companies whose financial
year ended on or before 1st April, 2014 and for annual returns
pertaining to earlier years. These companies may file their returns in
the relevant Form applicable under the Companies Act, 1956.
Accordingly, the annual return in terms of section 92 of the Companies
Act, 2013 in form MGT. 7 as covered in this guidance note will be
applicable for the financial years commencing on or after 1st April,
2014.
11. According to section 103 of Companies Act, 2013, in case of a
Private Limited Company, 2 members personally present shall be the
Quorum. If Quorum is not present within half an hour from the time
appointed for holding a meeting, then the meeting shall stand
adjourned, and if at the adjourned meeting also, Quorum is not
present, the members present shall be the Quorum. In case, there are
only 2 shareholders. Out of these, one cannot attend AGM, according to
above, whether one person attending the AGM, would be taken as quorum
in case of adjourned meeting? ANS: No, one person can not form quorum
of an adjourned meeting. Please refer to Department of Company
Affairs' (now Ministry of Company Affairs) Letter No. 8/16(1)/61-PR
dated May 19, 1961 wherein the views of the Department on this issue
are also that a single person cannot by himself constitute a quorum at
the adjourned AGM.
12. Whether show of hands under section 107 is possible in case of
companies which are covered under Rule 20 of Companies (Management and
administration) Rules, 2014 relating to voting through electronic
means? Ans. According to Rule 20(1) every listed company or a company
having not less than one thousand shareholders, shall provide to its
members facility to exercise their right to vote at general meetings
by electronic means. For all the transactions put to vote by
electronic means by such companies, impliedly the provisions of
section 107 become ineffective. The same has been clarified by the MCA
ATHARMUDATHTHIR@WORDPRESS.COMvide General Circular 20/2014 dated 17th June, 2014 wherein it is
stated that voting by show of hands under section 107 would not be
allowable in cases where rule 20 of Companies (Management and
Administration) Rules, 2014 is applicable. Note: Referring to General
Circular 20/2014 dated 17th June, 2014 the MCA while considering the
some practical difficulties in respect of voting through electronic
means and conduct general meetings, decided not to treat the relevant
provisions of Section 108 of the Companies Act, 2013 read with rule 20
of the Companies (Management and Administration) Rules, 2Ol4 dealing
with the exercise of right to vote by members by electronic means
(e-means as mandatory till 31st December, 2O14
13. Whether concept of demand for poll u/s 109 of the Companies Act,
2013 is relevant for companies covered under Rule 20 of Companies
(Management and administration) Rules, 2014 relating to voting through
electronic means. Ans. The Ministry of Corporate Affairs vide General
Circular 20/2014 dated 17th June, 2014 clarified that companies which
are covered under section 108 read with rule 20 of Companies
(Management and Administration) Rules, the provisions relating to
demand for poll would not be relevant.
14. Whether a person who has voted through e-voting facility provided
by the company, can participate in general meeting? Further, can he
change his vote? Ans. A member of the company who has voted through
electronic means may attend the general meeting and participate in the
deliberations, though in accordance with the section 108 and Rule 20
of Companies (Management and administration) Rules, 2014, the member
is not allowed to change his vote once casted. It has been clarified
by MCA vide General Circular 20/2014 dated 17th June, 2014 that a
person who has voted through e-voting mechanism in accordance with
rule 20 shall not be debarred from participation in the general
meeting physically. But he shall not be able to vote in the meeting
again, and his earlier vote (cast through e-means) shall be treated as
final.
15. Whether concept of proxy is relevant for a person who has voted
electronically? Ans. Proxy is a facility given to the members to
exercise his voting rights in case the member is unable to attend and
vote himself. The provision for electronic voting is a platform
facilitating the members to vote on their own. Hence if a member
himself votes electronically, the concept of appointment and voting by
proxy becomes irrelevant.
16. With regard to resolution requiring special notice, Section 115 of
the Companies Act, 2013 who can move such resolution- whether such
number of members holding shares on which aggregate sum not exceeding
five lakhs has been paid up or by such number of members holding
shares on which aggregate sum not less than five lakh rupees has been
paid up? Ans. Section 115 of the Companies Act, 2013 provides notice
of the intention to move a resolution can be given to the company by
such number of members holding shares on which such aggregate sum not
exceeding five lakh rupees, as may be prescribed, has been paid-up.
Accordingly, Rule 23 of the Companies (Management and Administration)
Rules, 2014 prescribes such number of members holding shares on which
– not less than five lakh rupees has been paid up. Therefore,
resolution requiring special notice may be moved by such number of
members holding shares on which such aggregate sum of not less than
five lakh rupees has been paid up.
17. Is it mandatory for a company to keep its documents records,
registers and minutes in electronic form? Ans. According to Section
120 the documents, records, registers, minutes may be kept and
inspected in electronic form. As per Rule 27 of Companies (Management
and Administration) Rules, 2014, it is mandatory for every listed
company or a company having not less than one thousand share holders,
debenture holders and other security holders, to maintain its records,
as required to be maintained under the Act or rules made there under,
in electronic form.
18. Whether all statutory registers maintained under the provisions of
the Companies Act, 1956 need to be converted to electronic mode within
the stipulated period of six months pursuant to the provisions of
Companies Act, 2013? Ans: As per Rule 27 of the Companies (Management
and Administration) Rules, 2014 every listed company or a company
having not less than 1000 shareholders, debenture holders and other
security holders, shall maintain its records in electronic form. In
case of existing companies, data shall be converted from physical mode
to electronic mode within six months from the date of
notification(w.e.f 1-4-2014 therefore by 30-09-2014).
19. As per section 124(6) all the shares in respect of which unpaid or
unclaimed dividend has been transferred to Investor Education and
Protection Fund shall also be transferred by the company to Investor
Education and protection Fund. Whether a shareholder can claim back
the shares and whether he can attend general meeting and give vote
thereat. Ans. As per proviso to section 124(6) claimant of shares
shall be entitled to claim the transferred shares from IEPF and the
procedure for that would be specified in the IEPF Rules. The Rules are
yet to be notified.
20. What is the relevant financial year, with effect from which such
provisions of the new Act relating to maintenance of books of account,
preparation, adoption and filing of financial statements (and
attachments thereto), auditors report and Board's report will be
applicable. Ans. As per MCA Circular No.08/2014 dated 4th April, 2014,
the financial statements (and documents required to be attached
thereto), auditors report and Board report in respect of financial
years that commenced earlier than 1st April, 2014 shall be governed by
the relevant provisions/ Schedules/ rules of the Companies Act, 1956
and that in respect of financial years commencing on or after 1st
April, 2014, the provisions of the new Act shall apply. This means
that the financial statements etc for the year ending 31st March 2014
shall be prepared as per Companies Act, 1956 and for the year ending
31st March 2015 and thereafter shall be prepared as per the Companies
Act, 2013.
21. What are the provisions with respect to signing of financial
statements under the Companies Act, 2013 Ans. As per section 134(1),
Financial Statement is required to be signed by: - the chairperson of
the company where he is authorised by the Board or by two directors
out of which one shall be managing director; - the Chief Executive
Officer, if he is a director in the company, - the Chief Financial
Officer; and - the company secretary of the company, wherever they are
appointed, In the case of a One Person Company, the Financial
Statement is required to be signed only by one director.
22. Whether the activity a company is required to do as per statutory
obligation under any law, would be termed as CSR activity? Ans. No,
the activity undertaken in pursuance of any law would not be
considered as CSR activity. In this regard, please refer to the
Ministry of Corporate Affairs Circular No. 21/2014 dated June 18, 2014
where it is clarified that expenses incurred by companies for the
fulfilment of any Act/ Statute of regulations (such as Labour Laws,
Land Acquisition Act etc.) would not count as CSR expenditure under
the Companies Act, 2013.
23. There are certain corporate groups who run hospitals and
educational institutions, will this be considered as CSR? Ans. If the
hospitals and educational institutions are part of the business
activity of the company they would not be considered as CSR activity.
However, if some charity is done by these hospitals or educational
institutions, without any statutory obligation to do so, then it can
be considered as CSR activity.
24. What are the consequences for non-compliance of CSR provisions?
Ans. The concept of CSR is based on the principle ‗comply or explain'.
Section 135 of the Act does not lay down any penal provisions in case
a company fails to spend the desired amount. However, sub-section 8 of
section 134 provides that in case the company fails to spend such
amount, the Board shall in its report specify the reasons for not
spending the amount. In case the company does not disclose the reasons
in the Board's report, the company shall be punishable with fine which
shall not be less than fifty thousand rupees but which may extend to
twenty- five lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for a term which may
extend to three years or with fine which shall not be less than fifty
thousand rupees but which may extend to five lakh rupees, or with
both. (Section 134(8).
25. Whether section 135 is required to be complied by the company
including its holding or subsidiary company? Ans. Rule 3(1) of
Companies (CSR Policy) Rules, 2014, every company including its
holding or subsidiary which fulfils the criteria specified in
sub-section (l) of section 135 of the Act with regard to networth/
turnover or net profit shall comply with the provisions of section 135
of the Act and these rules. As per section 135(1), every company
having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore
or more during any financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more
directors, out of which at least one director shall be an independent
director. The criterion needs to be fulfilled by individual company.
Therefore, if the holding company or the subsidiary company fulfils
the criteria specified in Section 135, all the provisions mentioned
therein becomes applicable to such company.
26. For compliance under section 135 i.e. Corporate Social
Responsibility, from which Financial Year CSR Expenditure & Reporting
Begins? Ans. Since section 135 relating to Corporate Social
Responsibility and schedule VII has become effective from April 01,
2014, every company which meets the criteria specified under
sub-section (1) of section 135 is required to comply the same from
April 01, 2014. Companies have to spend the amount on CSR activities
as required by section 135 during the F.Y. 2014-15 and Reporting of
the same would be in 2015 Board's Report or otherwise state the
justification for the same in Board Report. Accordingly, amongst other
things, the constitution of CSR Committee, preparation of CSR Policy,
the spending of amount on CSR activities needs to be during the
financial year 2014-15.
27.Whether the provisions of CSR are applicable to section 8
companies? Ans. Since section 8 companies are supposed to apply their
profits in promoting the objects such as commerce, art, science,
sports, education etc., these companies are perhaps not, required to
follow CSR provisions. Rather, under Rule 4 of Companies (CSR Policy)
Rules, 2014 companies may route their CSR activities through a section
8 company (Rule 4 of Companies (CSR Policy) Rules, 2014).
28. In case of companies having multi-locational operations, which
local area of operations should the company choose for spending the
amount earmarked for CSR operations? Ans. Proviso to Section 135(5) of
the Companies Act 2013 provides that a company shall give preference
to the local area and the areas around it where it operates for
spending the amount earmarked for CSR activities. In case of
multi-locational operations, the company could exercise discretion in
choosing the area for which it wants to give preference.
29. In case the company has appointed personnel exclusively for
implementing the CSR activities of the company, can the expenditure
incurred towards such personnel in terms of staff cost etc. be
included in the expenditure earmarked for CSR activities? Ans. The
Ministry of Corporate Affairs vide General Circular No. 21/2014 dated
18th June, 2014 clarifies that Salaries paid by the companies to
regular CSR staff as well as to volunteers of the companies (in
proportion to company's time/hours spent specifically on CSR) can be
factored into CSR project cost as part of the CSR expenditure.
30. Are the provisions with regard to CSR applicable to foreign
companies? Ans. In terms of Rule 3(1) of the Companies (Corporate
Social Responsibility Policy) Rules, 2013, a foreign company having
its office or project office in India which fulfils the criteria
specified in Section 135(1) is required to comply with the provisions
of Section 135 of the Act and the Rules thereunder. The networth,
turnover or net profit of a foreign company is to be computed in
accordance with the balance sheet and profit and loss account of the
foreign company prepared with respect to its Indian business
operations in accordance with schedule III or as near thereto as may
be possible for each financial year. Therefore foreign company having
its branch office or project office in India which fulfils the
criteria specified under section 135(1) is required to constitute a
CSR Committee and comply with the spending of 2% of average net
profits as per financial statement of its Indian business operations
in CSR activities in India.
31. Where CSR activities lead to profits then what about such surplus?
Ans. Rule 6(2) of the Companies (CSR Policy) Rules, 2014 provides that
the CSR policy of the Company shall specify that the surplus arising
out of the CSR projects or programs or activities shall not form part
of the business profit of a company. This impliedly means that the
surplus arising out of CSR projects or programs or activities of the
company shall not form part of the business profit of a company.
Ideally, the surplus should be rolled over to CSR Corpus.
32. If a company having turnover of more than Rs. 1000 crores or more
but has incurred loss any of the preceding three financial years then
whether such company is required to comply with the provisions of the
section 135 Companies Act, 2013? Ans. As per the provisions of section
135 of the Act, one of the three criteria has to be satisfied to
attract Section 135. Therefore, if a company satisfies the criterion
of turnover although it does not satisfy the criterion of net profit,
it wil have to comply with the provisions of Section 135 and the
Companies (CSR Policy) Rules, 2014.
33. In case the appointment of an auditor is not ratified by the
shareholders at annual general meeting as required under proviso to
Section 139(1), what recourse does the company have? Ans. Explanation
to Rule 3(7) of the Companies (Audit and Auditors) Rule 2014 explains
that in case the appointment is not ratified by the members of the
company, the Board of Directors shall appoint another individual or
firm as its auditor or auditors after following the procedure laid
down in this behalf under the Act.
34.For the purpose of rotation of auditors, whether the period for
which the individual or the firm has held office as auditor prior to
the commencement of the Act shall be taken into consideration for
calculating the period of five consecutive years, in case of
individual; or ten consecutive years for firm. Ans. Yes, as per rule
6(3) of Companies (Audit and Auditors) Rules, 2014, the period for
which the individual or the firm has held office as auditor prior to
the commencement of the Act shall be taken into consideration for the
purpose of rotation of auditors. For example, in case of listed and
prescribed companies, if an individual has completed four years as an
auditor on April 01, 2014, he can continue for one more year in the
same company and not more than that. Further, if he wishes to again
get appointed there, he may do so after the cooling period of five
years from the completion of his term of five years.
35. Please Clarify whether the appointment of Cost auditor shall be
for a period of 5/ 10 years like that of the Statutory Auditor as
prescribed under Section 139. ANS: The Concepts of Cost auditor and
statutory auditor are completely different from each other. No Order
has been issued by the Central Government till date. Hence, old
Orders, guidelines rules and regulation regarding the cost audit
issued under Companies Act, 1956 will continue to be applicable to the
Company for 2014-15.
36. What is the time limit within which the Board has to appoint an
Independent Director and at which meeting whether Board Meeting or
General Meeting? Ans: Section 149(5) of the Companies Act, 2013 inter
alia provides that company existing on before the commencement of this
Act, which are falling within the ambit of section 149(4), shall have
to appoint Independent Directors within one year from the commencement
of Companies Act, 2013 or rules made in this behalf, as may be
applicable. Further, Schedule IV to the Companies Act, 2013, inter
alia provides that, the appointment of the Independent Director shall
be approved by the Company in its meeting of shareholders.
37. As per provision of Section 149(5) appointment of independent
directors is being given one year transition period but there is no
such transition time for remuneration or nomination committee. Under
Section 178 Nomination & Remuneration committee is to have min. 2
independent directors. If a company does not have Independent
directors as of now, how can the committee be constituted as one year
transition time given for appointment of Independent Directors? Can
remuneration and nomination committee constitution be also assumed to
be formed in one year transition time? Ans: Ministry has, vide its
Notification dated June 12, 2014, clarified that the public companies
required to constitute Nomination and Remuneration committee can
constitute the same within one year from the commencement of the
relevant rule or appointment of Independent Directors by them,
whichever is earlier.
38. Can existing independent directors continue up to the their
original tenure as if the Companies Act, 1956 had been in force and be
reappointed for a period of 5 years under the Companies Act 2013 on
the completion of original tenure? Ans. In terms of the explanation
provided for the purpose of Sub-section (5) and (10) & (11) of Section
149, any tenure of an independent director on the date of commencement
of this Act shall not be counted as a term under subsections (10) and
(11) of Section 149. Further Section 149(5) provides a transitionary
period of one year to comply with the requirement of independent
directors, referring to General Circular No. 14/2014 dated 9th June,
2014 it has been clarified by the Ministry that if it is intended to
appoint existing independent directors under the new Act, such
appointment shall be made in accordance with Section 149(10) and (11)
read with Schedule IV of the Act within one year from April 1, 2014
i.e. by March 31, 2015. Further the appointment of existing directors
also needs to be formalized through a letter of appointment.
39.Can an Independent Director of a Company be appointed as
Independent Director of its holding, subsidiary or associate company?
Ans. Yes, an Independent Director of a Company can be appointed as
Independent Director of its Associate/sister concern. Also, as per
clause 49 III. (i) of the listing agreement, at least one independent
director on the Board of Directors of the holding company shall be a
director on the Board of Directors of a material non listed Indian
subsidiary company.
40. Whether the directors appointed by entity/ies which have the
interest in the Company in the nature of Equity, shall be treated as
nominee directors? Ans:As per explanation to section 149(7) ―nominee
director‖ means a director:- nominated by any financial institution
in pursuance of the provisions of any law for the time being in force;
or of any agreement; appointed by any Government; or any other
person to represent its interests. Thus, the directors appointed by
any private equity investor may be covered in the above third
category.
41. As per Section 149(10) Independent Director shall hold office for
a term up to five consecutive Years and as per Section 149(11) No
Independent Director shall hold office for more than two consecutive
terms. Independent Director is appointed in the AGM of 2014 for less
than Five Years (Say Three Years). – FIRST TERM He is again appointed
in the AGM of 2017 for Five Years. – SECOND TERM. In 2022 he will
complete two consecutive terms but he will not complete total term of
ten years. Whether he can be appointed in the AGM of 2022 for another
2 years to complete his total term of 10 years? Ans: Ministry has,
vide its General Circular 14/ 2014 dated June 09, 2014, clarified that
the appointment of an Independent Director (the ID) for a term less
than five years would be permissible, appointment for any term
(whether for five year or less) is to be treated as a one term under
section 149(10) of the COMPANIES ACT, 2013. Further, section 149(11)
provides that no person can hold office of ID for more than ‗two
consecutive terms'. Such a person shall have to demit office after two
consecutive terms even if the total number of years of his appointment
in such two consecutive terms is less than 10 years. Thus, in view of
the above, in the above query ID cannot be appointed in the AGM of
2022 for another 2 years to complete his total term of 10 years.
42.Whether independent directors shall be included in the total number
of directors for the purpose of sub-section (6) and (7) of section 152
of the Companies Act, 2013 Ans. Section 152(6) of the Companies Act,
2013 provides that unless the Articles of Association provide for
retirement by rotation of all directors at every annual general
meeting, at least two-thirds of the total number of directors of a
public company shall be persons whose office is liable to retirement
by rotation and sub-section (7) provides that one-third of such
directors shall retire by rotation at each annual general meeting of
the company after the first annual general meeting. Independent
directors shall not be included in the total number of directors for
the purpose of subsections (6) and (7). Pursuant to section 149 (13),
the requirement of retirement by rotation pursuant to sub-section (6)
and (7) of Section 152 is also not applicable to independent
directors.
43.In case a public company has three directors. Out of three
directors 1 director is an independent director whose office is not
liable to retire by rotation, 1 director is a managing director
appointed for a fixed term and 1 is the promoter director/ director
appointed pursuant to share purchase agreement/ nominee director etc.
whose office also is not liable to retirement by rotation. How can
such a company ensure the compliance of section 152 (6) and (7)? Ans.
In such situations it is advised that companies appoint such number of
nonexecutive directors whose office is liable to retire by rotation
and thereby ensure compliance of Section 152(6) and (7).
44. Whether alternate director vacates office when the original
director joins video conference at a Board meeting even though he does
not return to India. Ans. The office of Alternate Director is nowhere
related to the attendance of the Original Director in the Board
Meeting [also refer MCA Letter No. 6/16/(313)/68-PR, dated 5-2-1963].
The office of Alternate Director shall be terminated if and when the
director in whose place he has been appointed returns to India.
Therefore, joining meeting by video conferencing by the original
director will not vacate the office of the alternate director.
45. If a private company has failed to file its financial statements
for the F.Y. 2008-09 and onwards and such default was not covered
under section 274(1)(g) of the COMPANIES ACT, 1956 and now it is a
default under section 164(2) of the COMPANIES ACT, 2013: Whether the
Director shall be disqualified on and from April 01, 2014; and He
shall also vacate the all directorships in all other Companies? Ans:
This issue is not completely clear and a clarification is expected on
this issue. However, Section 164(2) provides that any person who is or
has been a director of a company which— has not filed financial
statements or annual returns for any continuous period of three
financial years; or has failed to repay the deposits etc. on the due
date or pay interest due thereon or pay any dividend declared and such
failure to pay or redeem continues for one year or more, shall not be
eligible to be re-appointed as a director of that company or appointed
in other company for a period of five years from the date on which the
said company fails to do so. From the above, it can infer that any
person is falling under the purview of above said section, then such
person shall be not be eligible to be appointed as a director in the
same company as well as shall not be appointed as a director in any
other company for a period of five years; and in view of section
167(1)(a) his office of director shall also be vacated in the company
in which the default has committed.
46. A public limited company incorporated received certificate of
commencement of business (CCOB) in March, 2014. As per the provisions
of section 165 of the Companies Act, 1956, every company limited by
shares shall within a period of not less than one month nor more than
six months from the date at which the company is entitled to commence
business hold a general meeting of the members of the Company which
shall be called the statutory meeting. ANS: The Company is required to
hold its statutory meeting as per the provisions of the companies Act,
1956. This is because that public company was incorporated under the
act, 1956 and as it has received COB in March 2014, at that time the
provisions of the section 165 were in force. Further, the e-form 22 is
also available on the MCA portal.
47. When a foreign director joins the meeting by audio/video
conference, (where he is counted for the purpose of quorum u/s 174),
is it sufficient to say that foreign director was not absent u/s
167(1) (b) even if he does not physically attend even a single Board
meeting in a period of 12 months? Ans.The requirement of section
167(1)(b) is only for attendance of a Director in the Board Meeting
himself; however this section doesn't deal or regulate the manner of
attending the Board Meeting. Therefore, the Board Meeting attended by
any Director, whether in person or through video conferencing or other
audio visual means, shall be sufficient attendance for the purpose of
section 167(1)(b).
48. Please clarify whether vacation of office of director on account
of not attending board meetings under Section 167(1)(b) has
prospective or retrospective effect? ANS: The said section is
applicable from 1st April 2014, it means that a director absent
himself from the entire board meeting held during a period of twelve
months with or without obtaining leave of absence, his office as
director shall vacate.
49. Are notices of disclosure of interest received from directors in
terms of Section 184 of the Companies Act, 2013 required to be filed
with the ROC? If yes in what form? ANS: In terms of section 117(3)(g)
resolutions passed as per section 179(3) the Company is required to
file e-form MGT-14 within 30 days of passing the resolution. 179(3)
deals with the powers of the boards which may be exercised at board
meetings only and as per section 179(3)(k) the rules may prescribe
additional matters and rule 8 of Companies (Meeting of Board & its
Power) Rules, 2014 requires that the disclosure of directors' interest
and shareholding should be taken note of only by means of a resolution
passed at board meeting. Therefore a company is required to file
resolution for taking note of disclosure of director's interest and
shareholding in Form MGT-14.
50. With reference to Section 117 read with Section 179(3) of the
Companies Act, 2013 it states that the financial statements approved
by the Board has to be filed with ROC in MGT-14. However, the Circular
no.08/2014 states that the financial statements has to be prepared as
per the Companies Act, 1956 and all the relevant provisions of 1956
Act will apply. Considering this circular there was no obligation on
the part of the Company under 1956 Act to file the resolution for
approving the financial statement. So is there any need to file the
resolution with ROC in MGT-14 this year? Or it will be applicable from
this year only. ANS: It is clarified by the ministry that the
financial statements are to be prepared under the provisions of
Companies Act, 1956. Section117 says that every resolution passed
under the section 179(3) of the companies act, 2013 is required to be
filed by the company with ROC in MGT-14. Here the board is not
preparing the financial statement, the board is approving it and
approval of audited financial statement whether quarterly, half yearly
or annual by the board falls under the purview of section 179(3) of
the Companies Act, 2013 and accordingly form MGT-14 is required to be
filed.
51. In case the board delegates its powers to borrow to one of its
committee, is the company required to file Form MGT 14 for delegation
its power to Committee and also each time the committee exercises the
power which is delegated to it? ANS: The Company is required to file
e-form MGT 14 with the ROC only when the board delegates its power to
its committee to borrow and no MGT - 14 is required to be filed each
time the committee exercise its power to borrow money within the
limits authorized by the board.
52. After filling form for Disclosure of interest of Directors, if any
changes have been made, whether disclosure from Directors is required
again? Ans: As per section 184, whenever there is any change occurred
in the disclosures already made then at first Board Meeting held after
such change, shall be disclosed.
53. In context of Section 185 & 186 of Companies Act 2013, if any
group private limited company gives/provides corporate guarantee and
equitable mortgage of its property in favour of its group public
limited company, is it possible to give the same. What if both the
companies are private limited companies? ANS: As per the provisions of
section 185 no company shall, directly or indirectly, 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 is interested or
give any guarantee or provide any security in connection with any loan
taken by him or such other person. However 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 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.
54. If a Company has granted stock options prior to the promulgation
of the Companies Act, 2013, then whether such stock options can be
exercisable by the Independent Directors? Ans: As section 197(7),
section 62(1)(b) and Rule 12 of the Companies (Share Capital and
Debentures) Rule, 2014, an Independent Director has been disentitled
to any stock option but nowhere the Independent Directors has been
prohibited to exercise the stock options which has been granted to
them before Companies Act, 2013. Therefore, they can exercise the
stock options prior to the commencement of the Companies Act, 2013;
however, they shall not be entitled to have any stock option after the
commencement of Companies Act, 2013.
55. Is it compulsory for Company Secretary to attend the All Board,
Committee and General Meeting? ANS : Yes, it is compulsory for a
company secretary to attend all Board, committee and general meeting
of the Company as it is the one of the duties of the company secretary
as mentioned in section 205 of the Companies Act, 2013.
56. Is it mandatory to file the return of appointment of KMPs
appointed in terms of Section 203? Ans. Yes – it is mandatory for a
company to file a return of appointment of a managing director, whole
time director or manager, chief executive officer, company secretary
and Chief Financial officer in Form no. MR.1 as prescribed in Rule 3
of the Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014. Further, particulars of appointment of KMP and
any change among them are also required to be filed in Form DIR-12.
57. Can the KMP of Holding Co. be appointed in only one subsidiary or
in all subsidiaries of holding company at the same time? Ans: As per
section 203(3) of the Companies Act, 2013,a Whole-time KMP of a
company shall not hold office in more than one company except in its
subsidiary company. This section restricts a person to hold office in
more than one company, while at the same time enables a person to hold
office in its subsidiary company and ideally he may be appointed in
only one subsidiary.
58. Can a company have two Managing Directors? Ans: As per third
proviso to section 203 of the COMPANIES ACT, 2013 a company may
appoint or employ a person as its MD, if he is the MD or Manager of
one and not more than one other company with the consent of all
directors present at meeting. 59. Whether provisions related to the
Managerial Remuneration are applicable on all KMPs? Ans: Section 203
of the COMPANIES ACT, 2013 provides that certain class of companies
[refer rule 8 and 8A of the Companies (Appointment and Remuneration of
Managerial) Rules, 2014] are required to appoint following whole time
KMP:- Managing Director or Chief Executive Officer or Manager and in
their absence whole-time director; Company Secretary; and Chief
Financial Officer. Section 197 and Schedule V to the COMPANIES ACT,
2013. Section 197 prescribes certain caps and compliance only in
regard to the remunerations of Directors including MD, WTD and
Manager. Therefore, the provisions related to the managerial
remuneration are not applicable on all KMPs but they are applicable
only on such managerial personnel as mentioned in Section 197 and
Schedule V to the COMPANIES ACT, 2013. Therefore, CS and CFO not being
managerial personnel as mentioned in Section 197, the provisions of
Section 197 will not apply on them.
ATHARMUDATHTHIR@GMAIL.COM
Companies Act, 2013 Key highlights and analysis
Contents
04 | Introduction 06 | Key definitions and concepts 10 | Setting up of
a company 16 | Management and administration 18 | Directors 24 |
Accounts and audit 30 | Dividend 32 | Compromises, arrangements and
amalgamations 34 | Revival and rehabilitation of sick companies 36 |
Corporate social responsibility 38 | Implications on private companies
40 | Other areas 44 | Sections notified till date and circulars or
orders issued
1. Companies 1.1 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 a 'one-person company' (OPC). An OPC means a company with
only one person as its member [section 3(1) of 2013 Act]. 1.2.
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 2013
Act]. 1.3. 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 2013
Act] 1.4. 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 2013
Act]
2. Roles and responsibilities 2.1 Officer: The definition of officer
has been extended to include promoters and key managerial personnel
[section 2(59) of 2013 Act]. 2.2 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 2013 Act]. 2.3. 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 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 2013 Act] 2.4: 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 2013 Act].
3. Investments 3.1 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 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 2013 Act].
4. Financial statements 4.1. 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 2013 Act]. While there are certain
exceptions included, this section mandates a uniform accounting year
for all companies and may create significant implementation issues.
4.2. 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. 4.3. 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.
5. Audit and auditors 5.1 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. 5.2 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. 5.3. 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. 5.4
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 2013 Act] 5.5. 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 2013
Act] 5.6. 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 2013 Act], which were hitherto not given
cognizance under the 1956 Act. 5.7. 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.
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 5.8. 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
2013 Act]. It is pertinent to note that similar requirements have
recently been notified by the central government.
6. Regulators 6.1. National Company Law Tribunal (Tribunal or NCLT):
In accordance with the Supreme Court's (SC) judgement, 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. 6.2. 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. 6.3. Serious Fraud Investigation Office (SFIO): The
2013 Act has bestowed legal status to SFIO.
7. Mergers and acquisitions 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.
8. Corporate social responsibility 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.
9. Class action suits The 2013 Act introduces a new concept of class
action suits which can be initiated by shareholders against the
company and auditors.
10. Prohibition of association or partnership of persons exceeding
certain number 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 2013 Act]
11. Power to remove difficulties 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 2013 Act].
12. Insider trading and prohibition on forward dealings 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
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 2013 Act].
Incorporation of a 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
Act.
3. Articles of association The 2013 Act introduces the entrenchment
provisions in respect of the articles of association of a company. An
entrenchment provision enables a company to follow a more restrictive
procedure than passing a special resolution for altering a specific
clause of articles of association. A private company can include
entrenchment provisions only if agreed by all its members or, in case
of a public company, if a special resolution is passed[section 5 of
2013 Act].
4. Incorporation of company 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 2013 Act [section 7(4) of 2013 Act; Also refer the
chapter on other areas]
5. Formation of a company with charitable objects An OPC with
charitable objects may be incorporated in accordance with the
provisions of the 2013 Act. New objects like environment protection,
education, research, social welfare etc., have been added to the
existing object for which a charitable company could be incorporated.
As against the existing provisions 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 2013 Act]
6. Commencement of business, etc The existing 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 2013 Act].
7. 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 2013 Act].
8. 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 2013 Act].
9. Subsidiary company not to hold shares in its holding company The
existing provision of section 42 of the 1956 Act which prohibits a
subsidiary company to hold shares in its holding company continues to
get acknowledged in the 2013 Act. Thus, the earlier concern that if a
subsidiary is a body corporate, it may hold shares in another body
corporate which is the subsidiary's holding company continues to
apply[section 19 of 2013 Act].
Prospectus and 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 reports to be
included in the prospectus are specified in parts I and II of Schedule
II of the 1956 Act. In the 2013 Act, the information to be included in
the prospectus is specified in section 26 of 2013 Act. The 2013 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 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 2013 Act]. The
1956 Act currently requires that the report will not be earlier than
120 days before the issue of the prospectus.
2. 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 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
2013 Act].
3. Offer of sale of shares by certain members of the company The 2013
Act includes a new section under which 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 2013 Act].
4. 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 currently limits the
facility of shelf prospectus to public financial institutions, public
sector banks or scheduled banks [section 31 (1) of 2013 Act].
6. Global depository receipts (GDRs) The 2013 Act includes a new
section to enable the issue of depository receipts in any foreign
country subject to prescribed conditions [section 41 of 2013 Act].
Currently, the provisions of section 81 of the 1956 Act relating to
further issue of shares are being used in conjunction with the
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 incorporating requirements already
mandated by SEBI.
7. 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].
Share capital and debentures
The chapter on share capital and debentures introduces some key
changes in the 2013 Act. To illustrate, the 2013 Act does not give any
cognisance to the existing requirement of section 90 of the 1956 Act
that provided some saving grace to private companies. Therefore, the
applicability of following sections of the 2013 Act is no longer
restricted to public companies and private companies which are
subsidiaries of a public company and are now applicable to private
companies also. • Two kinds of shares capital • New issue of shares
capital to be only of two kinds • Voting rights
1. Voting rights The provisions of 2013 Act regarding voting rights
are similar to the existing section 87 of the 1956 Act. The only
change noted in the 2013 Act is the 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
preference share holders [section 47 of 2013 Act] The provisions
regarding private placement and additional disclosures in prospectus
will also help to strengthen the capital markets. The 2013 Act
proposes to re-instate the existing concept of shares with
differential voting rights. Pursuant to this section the company may
face hardship with regards to computation of proportionate voting
rights.
2. Variation of shareholder's rights 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 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.
3. Application of premiums received on issue of shares The 2013 Act
lays down a similar requirement in section 52 as that of the section
78 of the 1956 Act in respect of application of premiums received on
issue of 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. 4.
Prohibition on issue of shares at a discount Companies would no longer
be permitted to issue shares at a discount. The only shares that could
be issued at a discount are sweat equity wherein shares are issued to
employees in lieu of their services[section 53 and Section 54 of 2013
Act]. Further, explanations I and II to the existing section 79A of
the 1956 Act that prescribe the provisions in respect of sweat equity
have not been included in the 2013 Act. Explanation I defined company
for the purpose of this section and explanation II defined sweat
equity.
5. Issue and redemption of preference shares The existing requirement
of sections 80 and 80A of the 1956 Act with respect to the issue and
redemption of preference shares continues to be acknowledged by the
2013 Act. The 2013 Act reiterates the existing requirement that a
company cannot issue preference shares with a redemption date of
beyond 20 years. However, it gives an exemption for cases where
preference shares have been issued in respect of infrastructure
projects. Infrastructure projects have been defined in Schedule VI of
the 2013 Act and these shares would be subject to redemption at such
percentage as prescribed on an annual basis at the option of such
preference shareholders. Further, the 2013 Act adds another
administrative requirement of obtaining special resolution with
respect to the preference shares which could not be redeemed by a
company. The 2013 Act states that where a company is not in a position
to redeem any preference shares or to pay dividend, if any, on such
shares in accordance with the terms of issue, it may, with the consent
of the holders 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. The 2013 Act does not envisage
any penalty in respect of non-compliance with the provision of this
section, as was prescribed in subsection (6) and (3) of section 80 and
80A of the 1956 Act respectively [section 55 of 2013 Act].
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 corresponds 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].
10. Reduction of share capital 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. 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.
1. Annual return 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 2013 Act and the
1956 Act requires certification only for listed companies). The
information that needs to be included in the annual return has been
increased. The additional information required, includes 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].
2. 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.
3. General meetings The 2013 Act states that the first annual general
meeting should be held within nine months from the date of closing of
the first financial year of the company [section 96(1) of 2013 Act],
whereas the 1956 Act requires the first annual general meeting to be
held within 18 months from the date of incorporation. Currently, the
1956 Act does not define business hours, which the 2013 Act now
defines 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 2013 Act]. In order to call an annual general meeting at shorter
notice, the 2013 Act requires consent of 95% of the members as against
the current requirement in the 1956 Act which requires consent of all
the members [section 101(1) of 2013 Act]. The 2013 Act states that
besides director and manager, the nature of concern or interest of
every director, manager, any other key managerial personnel and
relatives of such director, manager or any other key managerial
personnel in each item of special business will also need to be
mentioned in the notice of the meeting [section 102 (1) of 2013 Act].
Also, the threshold of disclosure of share holding interest in the
company to which the business relates of every promoter, director,
manager and key managerial personnel has been reduced from 20% to 2%
[section 102 (2) 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, which is
prescribed as 50 members and also sets 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.
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] (i) Every listed company,
within one year from the commencement of second proviso to sub-section
(1) of section 149 (ii) 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.
4. 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. 4.1
Conflicting requirements While there have been attempts to harmonise
the requirements of SEBI and the 2013 Act was made, there are several
aspects relating to independent directors where the requirements of
the 2013 Act differ from that of clause 49 of the equity listing
agreement. The requirements of the 2013 Act and the manner in which
they differ from those under the clause 49 of the equity listing
agreement include the definition itself. The other main differences
are as follows: • 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 of 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. 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. Stock options: As per the 2013 Act,
an independent director will not be eligible to get stock options but
may get payment of fees and profit linked commission subject to limits
specified or to be specified in the rules [section 149 (9) of 2013
Act]. This again, is in contradiction with SEBI's requirements,
whereby for the purpose of granting stock options, the term employee
includes independent directors also. 4.2 Databank of independent
directors The 2013 Act makes the appointment process of the
independent directors, independent of the company's management by
constituting a panel or a data bank to be maintained by the MCA, out
of which companies may choose their independent directors. 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]. A drawback of constituting a panel of
independent directors is that it may discourage people from
registering with the panel and in that sense limit the options
available to a company for appointment of independent directors. 4.3
Code for independent director 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. 4.4 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 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.
5. Appointment of an additional director It is pertinent to note that,
in order to discourage inappropriate practices, the 2013 Act states
that any person who fails to get elected as a director in the general
meeting can no longer be appointed as an additional director by the
board of directors [section 161 of 2013 Act].
6. Additional compliance requirements for 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.
Meetings of the board and its powers There have been significant
inroads made by the MCA in the recent past with respect to giving
cognisance to use of electronic media in day-to-day operations of
corporates. The 2013 Act takes this further by allowing use of
electronic mode for sending notice of meetings [section 173(3) of 2013
Act], passing of resolution by circulation [section 175 of 2013 Act]
and other areas. Some of the other significant changes in relation to
the board and its functioning include:
1. Audit committee The requirements relating to audit committees was
first introduced by the Companies (Amendment) Act, 2000. Audit
committees are a measure of ensuring self discipline, constituted with
the object to strengthen and oversee management in public companies
and to ensure that the board of directors discharge their functions
effectively. The 2013 Act acknowledges the importance of an audit
committee and entrusts it with additional roles and responsibilities
[section 177 of 2013 Act]. However, the fact that the 2013 Act is not
entirely in harmony with the requirements of clause 49 of the equity
listing agreement, cannot be ignored. While most of the requirements
including establishment of a 'vigil mechanism' for directors and
employees to report genuine concerns, that are similar to the
requirements of clause49 of the equity listing agreement have been
incorporated in the 2013 Act, the differences are as follows: • As per
the 2013 Act, the audit committee should have majority of independent
directors. • Chairman of the audit committee need not be an
independent director. • A majority of the members of the audit
committee should be financially literate, i,e. should have the ability
to read and understand the financial statements. • Every listed
company and the following 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
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.
4. Disclosure of interest by director 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. Loans and investments by a company 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.
6. Related party transactions Most of the provisions under Section 188
of 2013 Act are quite similar to the requirements under sections 297
and 314 of the 1956 Act. Some of key changes envisaged in the 2013 Act
include the following: • Need for central government approval has been
done away with. • The 2013 Act has widened the ambit of transactions
such as leasing of property of any kind, appointment of any agent for
purchase and sale of goods, material, services or property. • Cash at
prevailing market price has now been substituted with 'arm's length
transaction' which has been defined in the section. • Transactions
entered into with related parties now to be included in the board's
report along with justification for entering into such contracts and
arrangements. • Penalty for contravention of the provisions of section
297 was covered in general provisions in the 1956 Act. However, this
is now covered specifically in the section itself which now extends to
imprisonment. • Central government may prescribe additional
conditions.
Appointment and remuneration of managerial personnel The 2013 Act
brings significant changes to the existing requirement of the 1956 Act
with respect to appointment and remuneration of managerial personnel.
One of the major changes that could be identified is in respect of the
applicability of these provisions. The provisions for appointment of
managing director, whole time director or manager are no longer
restricted to the public companies and the private companies which are
subsidiaries of public companies and now applicable to all companies.
The overall ceiling in respect of payment of managerial remuneration
by a public company remains at 11% of the profit for the financial
year computed in the manner laid down in the 2013 Act.
1. Appointment of managing director, whole time director or manager
[section 196 of 2013 Act]. • The re-appointment of a managerial person
cannot be made earlier than one year before the expiry of the term
instead of two years as per the existing provision of section 317 of
the 1956 Act, however, the term for which managerial personnel can be
appointed remains as five years. • The eligibility criteria for the
age limit has been revised to 21 years as against the existing
requirement of 25 years. Further, the 2013 Act lifts the upper bar for
age limit and thus an individual above the age of 70 years can be
appointed as key managerial personnel by passing a special resolution.
• Provisions in respect of appointment of the managerial personnel has
been specified in section 196 and Schedule V to the 2013 Act. 2.
Overall maximum managerial remuneration and managerial remuneration in
case of absence or inadequacy of profits [section 197 of 2013 Act].
• 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*. • The existing 1956 Act
under section 309 provides that a managing director or a whole time
director of a subsidiary company who is in receipt of commission from
the holding company cannot receive any commission or remuneration from
the subsidiary company. The said restriction has been removed by the
2013 Act, however, such receipt has to be disclosed in the Board's
report [section 197(14) of 2013 Act]. • The provisions of existing
Schedule XIII of the 1956 Act have been incorporated in Schedule V of
the 2013 Act and the requirements have been structured around the same
rules, with revised remuneration limits and certain additional
requirements, for example, the managerial personnel should not have
been convicted of an offence under the Prevention of Money Laundering
Act, 2002. • The 2013 Act has liberalised the administrative
procedures by relaxing the requirement of obtaining the central
government approval provided the company complies with certain
requirements including seeking approval by way of special resolution
for payment of managerial remuneration. Similar relaxation norms as
envisaged in the 2013 Act had been incorporated in Schedule XIII of
the 1956 Act by virtue of the recent circulars issued by MCA.
• Definition of remuneration has undergone few changes in the 2013
Act. The 2013 Act in section 2(78), defines remuneration as any money
or its equivalent given or passed to any person for services rendered
by him and includes perquisites as defined under the incometax Act,
1961. The remuneration thus defined includes reimbursement of any
direct taxes to managerial personnel. The 1956 Act defined
remuneration under section 198 by way of an explanation and provided
for the certain specific inclusions that would be construed as
remuneration. Section 200 of the 1956 Act specifically prohibited tax
free payments. The 2013 Act has indirectly incorporated the same
requirement by clarifying that the term remuneration includes any
reimbursement of direct taxes. • The 2013 Act clarifies that premium
paid by a company for any insurance taken by a company on behalf of
its managing director, whole time director, manager, chief executive
officer, chief financial officer or company secretary for indemnifying
any of them against any liability in respect of any negligence,
default, misfeasance, breach of duty or breach of trust for which they
may be guilty in relation to the company would not be treated as part
of remuneration except for the cases where person is proved to be
guilty. The provisions cited above are similar to that of the existing
provisions of section 201 of the 1956 Act.
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
noncompliance 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.
4. 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.
Accounts The 2013 Act has introduced certain significant amendments in
this chapter. It has also introduced several additional requirements
such as preparation of consolidated financial statements, additional
reporting requirements for the directors in their report such as the
development and implementation of the risk management policy,
disclosures in respect of voting rights not exercised directly by the
employees in respect of shares to which the scheme relates, etc., in
comparison with the requirements of the 1956 Act.
1. Books of accounts Every company, similar to the requirement of the
existing 1956 Act, is required to maintain books of accounts at its
registered office. [section 128(1) of the 2013 Act]. 'Books of
accounts' are required to show (a) all money received and spent and
details thereof, (b) sales and purchases of goods, (c) assets and
liabilities and (d) items of cost as may be prescribed. The books of
accounts of a company essentially provide the complete financial
information of a company. Further, with respect to branches, while the
existing 1956 Act provides that where company has a branch office(s)
proper summarized returns, made up to date at interval of not more
than three months was supposed to be sent by branch to the company at
its registered office or another place etc., such a requirement has
now been done away with and only returns are to be periodically sent
by the branch to the registered office [section 128(2) of 2013 Act].
Also, in keeping with the times, books of accounts and relevant papers
can now be maintained in electronic mode [section 128(1) of 2013 Act].
2. 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 • 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,1956, 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.
3. Consolidated financial statements The 2013 Act now mandates CFS for
any company having a subsidiary, associate or a joint venture
[section 129(3)]. The manner of consolidation is required to be in
line with the requirements of AS 21 as per the draft rules.* Further,
the 2013 Act requires adoption and audit of CFS in the same manner as
standalone financial statements of the holding company [section
129(4)]. Apart from CFS, the 2013 Act also requires a separate
statement, containing the salient features of financial statements of
its subsidiary (ies) in a form as prescribed in the draft rules*
[First proviso to section 129 (3)]. Further, section 137(1), also
requires an entity to file accounts of subsidiaries outside of India,
along with the financial statements (including CFS). While section 129
of the 2013 Act, requires all companies to file a statement containing
salient features of the subsidiaries financial statements, in addition
to the CFS, section 137 of the 2013 Act further requires entities with
foreign subsidiaries to submit individual financial statements of
such foreign subsidiaries along with its own standalone and
consolidated financial statements. There seems to be significant
amount of overlap and additional burden on companies with respect to
these compliances. To illustrate this point, in order to comply with
these requirements, a company which has a global presence, with
subsidiaries both within as well as outside India will need to comply
to the following: • Prepare its standalone financial statements
[section 129(1) of the 2013 Act] • Prepare a CFS, including all
subsidiaries, associates and joint ventures (whether in India or
outside) [section 129(3) of the 2013 Act] • Prepare a summary
statement for all its subsidiaries, associates and joint ventures of
the salient features of their respective financial statements [Proviso
to section 129(3) of the 2013 Act] • Submit the standalone financial
statements of subsidiary(ies) outside India to the Registrar of
Companies (RoC) [section 137(1) of the 2013 Act]. This situation
clearly indicates the extent of duplication and additional costs which
will be incurred by entities in order to provide the same information
in multiple forms or formats.
Differing compliance requirements imposed by multiple regulators will
lead to hardship as well increased cost of compliance for companies.
Also, the requirement for unlisted entities to prepare a CFS, would
substantially increase the cost of compliance. Further, it does not
serve a similar purpose as in the case of a listed entity.
Since there is already a requirement to attach a statement containing
salient features of the financial statements of the subsidiary,
associate and joint venture, preparation of a CFS will would lead to
duplication of preparing and presenting the same information in
different forms.
4. Re-opening of accounts and voluntary revision of financial
statements or the board's report A company would be able to re-open
its books of accounts and recast its financial statements after making
an application in this regard to the central government, the income
tax authorities, the SEBI, or any other statutory regulatory body or
authority or any other person concerned, and an order is made by a
court of competent jurisdiction or the Tribunal under the following
circumstances (section 130 of the 2013 Act): • Relevant earlier
accounts were prepared in a fraudulent manner The affairs of the
company were mismanaged during the relevant period, casting a doubt on
the reliability of the financial statements Further, a company would
be able to undertake voluntary revision of financial statements or
Board's report if it appears to the director of a company that the
financial statement of the company or the board report does not comply
with the provisions of section 129(financial statement) and section
134 of the 2013 Act (financial statements and board reports) in
respect of any of three preceding financial years, after obtaining
approval from the Tribunal. The Tribunal shall give notice to the
central government and the income tax authorities and shall take into
consideration the representations, if any, made by the government or
the authorities before passing any such order. To prevent misuse of
these specific provisions, the section contains a proviso which states
that such a revised financial statement or report shall not be
prepared or filed more than once within a financial year and the
detailed reasons for revision of such financial statement or report
shall also be disclosed in the board's report in the relevant
financial year in which such a revision is being made (section 131 of
2013 Act). The provisions envisaged by the 2013 Act in respect of
re-opening and voluntary revision of the financial statements and
board report is yet to be acknowledged by SEBI in the equity listing
agreement and thus, pending similar amendment in the equity listing
agreement, listed companies may face unnecessary hardships.
5. Financial year The 2013 Act has introduced a significant difference
in the definition of the term, 'financial year', which has been
defined in section 2(41) of the 2013 Act to mean April to March. There
are several reasons for a company to use a year-end which is different
from April to March. These include companies which are subsidiaries of
foreign companies which follow a different year-end or entities which
have significant subsidiaries outside India which need to follow a
different year-end, etc. Accordingly, it would not be appropriate to
mandate a single year-end for all companies. Since the 2013 Act does
not mandate any specific rules or requirements on the basis of a
specific year, as in the case of tax laws, the reason for requiring a
uniform year-end under the 2013 Act, seems to be unclear. Further,
recent notifications or circulars of the Ministry seem to indicate
relaxation in the norms for requiring approvals from the Tribunal or
the central government, etc for matters which are administrative or
procedural in nature. Accordingly, the option available with
companies to seek an exemption from the Tribunal will create
additional administrative and procedural roadblocks, with no benefits
to the companies. Rather, they will need to expend additional costs as
well as time either by way of seeking an exemption or preparing
multiple sets of financial statements.
Audit and auditors The 2013 Act features extensive changes within the
area of audit and auditors with a view to enhance audit effectiveness
and accountability of the auditors. These changes undoubtedly, have a
considerable impact on the audit profession. However, it needs to be
noted that these changes will also have a considerable impact on the
company in terms of time, efforts and expectations involved. Apart
from introducing new concepts such as rotation of audit firms and
class action suits, the 2013 Act also increases the auditor's
liability substantially in comparison with the 1956 Act.
1. Appointment of auditors Unlike the appointment process at each
annual general meeting under the 1956 Act, the auditor will now be
appointed for a period of five years, with a requirement to ratify
such an appointment at each annual general meeting [section 139(1) of
2013 Act]. Further, the 2013 Act provides that in respect of
appointment of a firm as the auditor of a company, the firm shall
include a limited liability partnership incorporated under the Limited
Liability Partnership Act, 2008 [Explanation to section 139(4) of 2013
Act]. Also, the 2013 Act specifies that where a firm, including a
limited liability partnership is appointed as an auditor of a company,
only those partners who are chartered accountants shall be authorised
to act and sign on behalf of the firm [section 141 of 2013 Act].
Section 141 of the 2013 Act further prescribes an additional list of
disqualifications, and extends the disqualification to also include
relatives. The Section of the 2013 Act states that a person who, or
his relative or partner is holding any security of or interest in the
company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company of face value exceeding one
thousand rupees or such sum as may be prescribed; is indebted to the
company, or its subsidiary, or its holding or associate company or a
subsidiary of such holding company, in excess of Rs.1,00,000* ; or has
given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or
its holding or associate company or a subsidiary of such holding
company, for Rs.1,00,000*, will not be eligible to be appointed as an
auditor. Additionally, a person or a firm who, whether directly or
indirectly, has business relationship with the company, or its
subsidiary, or its holding or associate company or subsidiary of such
holding company or associate company of such nature as may be
prescribed, will be disqualified from being appointed as an auditor.
It would be relevant to note that the draft rules include 15
relationships in the list of relatives including step son/daughter and
step brother/sister. The ineligibility also extends to person or a
partner of a firm who holds appointment as an auditor in more than
twenty companies as well as a person who is in full time employment
elsewhere. [section 141 (3)(g) of the 2013 Act]. The definition of a
relative does not give cognisance to the Code of Ethics prescribed by
the Institute of Chartered Accountants( ICAI) and thus, there are
likely to be interpretational issues. Also, the 2013 Act does not
specify as to what would constitute as indirect interest and thus in
absence of guidance it would be difficult to assess the extent of
implication on the audit profession.
2. Mandatory firm rotation 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.
3. Non-audit services to audit clients 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. Additionally, the auditor
is restricted from providing specific services, which include the
following: • 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 any other service which may be prescribed
(no other service has been prescribed*) 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.4. Joint audits 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].
5. 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, debaring of the auditor
and the firm, and in case of frauds, can even be subject to class
action suits.
6. Additional responsibilities of the auditor The 2013 Act requires
certain new aspects which need to be covered in an auditors' report.
These include the following: • The observations or comments of the
auditors on financial transactions or matters which have any adverse
effect on the functioning of the company [section 143(3)(f) of the
2013 Act] • Any qualification, reservation or adverse remark relating
to the maintenance of accounts and other matters connected therewith
[section 143(3)(h) of the 2013 Act] • Whether the company has
adequate internal financial controls system in place and the operating
effectiveness of such controls [section 143(3)(i) of the 2013 Act]
There are other reporting requirements specified in the draft rules
which include reporting on pending litigations, etc which are already
covered either by the accounting standards or guidance from the ICAI,
and thus result in duplication*. The 2013 Act requires an auditor to
report to the central government within 30 days in a format prescribed
within the draft rules, if he or she has any reasons to believe that
any offence involving fraud is being committed or has been committed
against the company by its officers or employees * [section 143(12) of
the 2013 Act]. Further, where any auditor does not comply with the
above requirements, he or she shall be punishable with a fine which
shall not be less than 1 lakh INR, but which may extend to 25 lakh
INR [section 143(15) of the 2013 Act]. The above requirements are in
addition to the existing requirements under the 1956 Act.
The existing provisions of the 1956 Act in relation to the transfer
of a specified percentage of profit to reserve is no longer applicable
and thus, companies will be free to transfer any or no amount to
its reserves.
Schedule II of the 2013 Act, relating to depreciation defines the
useful life of assets as against the depreciation rates specified in
the 1956 Act.
1. Declaration of dividend • The existing requirement of the 1956 Act
with regard to the transfer of a specified percentage of profits not
exceeding 10% to reserve [that is, Companies (Transfer of Profits to
Reserve) Rules, 1975] has not been acknowledged in the 2013 Act and
thus companies are free to transfer any or no amount of profits to
reserves [section 123 (1) of the 2013 Act]. • Similar to the existing
provisions of the 1956 Act, the 2013 Act also provides that no
dividend shall be declared or paid in case of inadequate profits by a
company subject to the Rules yet to be notified. The company also
cannot declare or pay dividend from its reserves other than free
reserves [section 123(1) of the 2013 Act]. This could mean that the
requirements provided in Companies (Declaration of Dividend out of
Reserves) Rules, 1975 have been retained. • As per the existing
provisions of the 1956 Act, dividend includes interim dividend and all
provisions of the 1956 Act which applies to the final dividend equally
apply to interim dividend. The 2013 Act, however, imposes a further
restriction on the declaration of interim dividend. The 2013 Act
specifically provides that in case a company has incurred loss during
the current financial year, up to the end of the quarter immediately
preceding the date of declaration of the interim dividend, then the
interim dividend cannot be declared at a rate higher than the average
dividends declared by the company during the immediately preceding
three financial years [section 123(3) of the 2013 Act]. • The 2013
Act states that if a company fails to comply with the provisions of
acceptance of deposits and repayment of deposits accepted prior to the
commencement of this 1956 Act, it will not be able to declare any
dividend on equity shares, as against the non-compliance of section
80A of the 1956 Act regarding redemption of irredeemable preference
shares, etc [section 123(6) of the 2013 Act]. • The provisions of the
existing Schedule XIV of the 1956 Act has been acknowledged under
Schedule II of the 2013 Act. Important highlights from the Schedule
II are as follows: -- The useful life or residual value of an asset
have been specified in Part C of the Schedule. Companies will be
required to give disclosure for cases where the useful life or
residual value is different from the useful life or residual value as
specified in Part C of the Schedule. -- It is clarified in the 2013
Act that the requirements of Part C will not be applicable for
companies in respect of which the useful life or residual value is
notified by a regulatory authority. • The 2013 Act does not give
cognisance to the existing requirements of section 208 of the 1956 Act
that deals with the power of a company to pay interest out of capital
in certain cases.
2. Transfer of shares to the investor education and protection fund
(IEPF) As against the existing requirement of section 205C of the 1956
Act, the 2013 Act proposes that all shares in respect of which unpaid
or unclaimed dividend has been transferred to the IEPF shall also be
transferred by the company in name of the fund along with a statement
with certain specified details [section 124 of the 2013 Act]. In
addition to above, following amounts also need to be transferred by
the company to the IEPF [section 125 (2) of the 2013 Act]: • Gain
through the seizure and disposal of securities in possession of a
person who fictitiously acquires or subscribes for a company's
securities • Sale proceeds of fractional shares arising out of
issuance of bonus shares, merger and amalgamation for seven or more
years • Redemption amount of preference shares remaining unpaid or
unclaimed for seven or more years Additionally, the 2013 Act
specifies the following modes of utilisation of amounts available in
the IEPF: • The refund of unclaimed dividends, matured deposits,
matured debentures, application money due for refund and interest
thereon • Distribution of any disgorged amount among investors who
have suffered losses due to wrong actions by any person in accordance
with the order of the Court that had decided for such disgorgement. In
order to prevent misuse of underlying securities, investors can
claim them back from the IEPF through the provisions in the rules.
• Reimbursement of legal expenses incurred in pursuing class action
suits under sections 37 (misleading prospectus) and 245 of the 2013
Act (management or conduct of affairs of the company being overseen
in a manner prejudicial to the interests of the company or its members
or depositors) by members, debenture holders or depositors as
sanctioned by the Tribunal • Any other purpose incidental thereto, in
accordance with such rules as prescribed
The 2013 Act features some new provisions in the area of mergers and
acquisitions, apart from making certain changes from the existing
provisions. While the changes are aimed at simplifying and
rationalising the procedures involved, the new provisions are also
aimed at ensuring higher accountability for the company and majority
shareholders and increasing flexibility for corporates. The changes
proposed would require companies to consider the scale and extent of
compliance requirements while formulating their restructuring plans
once the 2013 Act is enacted. These 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.
1. Streamlining requirements The section dealing with 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. Another
positive inclusion within this section 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.
2. 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
3. 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.
4. Simplifying procedures 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.
5. 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.
6. 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).
Chapter XIX of the 2013 Act lays down the provisions for the revival
and rehabilitation of sick companies. The chapter describes the
circumstances which determine the declaration of a company as a sick
company, and also includes the rehabilitation process of the same.
Although it aims to provide comprehensive provisions for the revival
and rehabilitation of sick companies, the fact that several provisions
such as particulars, documents as well as content of the draft scheme
in respect of application for revival and rehabilitation, etc. have
been left to substantive enactment, leaves scope for interpretation.
The coverage of this chapter is no longer restricted to industrial
companies, and the determination of the net worth would not be
relevant for assessing whether a company is a sick company.
The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited
to only industrial companies, while the 2013 Act covers the revival
and rehabilitation of all companies, irrespective of their sector. The
determination of whether a company is sick, would no longer be based
on a situation where accumulated losses exceed the net worth. Rather
it would be determined on the basis whether the company is able to pay
its debts. In other words, the determining factor of a sick company
has now been shifted to the secured creditors or banks and financial
institutions with regard to the assessment of a company as a sick
company. The 2013 Act does not recognise the role of all stakeholders
in the revival and rehabilitation of a sick company, and provisions
predominantly revolve around secured creditors. The fact that the
2013 Act recognises the presence of unsecured creditors, is felt only
at the time of the approval of the scheme of revival and
rehabilitation. In accordance with the requirement of section 253 of
the 2013 Act, a company is assessed to be sick on a demand by the
secured creditors of a company representing 50% or more of its
outstanding amount of debt under the following circumstances: • The
company has failed to pay the debt within a period of 30 days of the
service of the notice of demand • The company has failed to secure or
compound the debt to the reasonable satisfaction of the creditors To
speed up the revival and rehabilitation process, the 2013 Act provides
a one year time period for the finalisation of the rehabilitation
plan.
Overview of the process • In response to the application made by
either the secured creditor or by the company itself, if the Tribunal
is satisfied that a company has become a sick company, it shall give
time to the company to settle its outstanding debts if Tribunal
believes that it is practical for the company to make the repayment
of its debts within a reasonable period of time. • Once a company is
assessed to be a sick company , an application could be made to the
Tribunal under section 254 of the 2013 Act for the determination of
the measures that may be adopted with respect to the revival and
rehabilitation of the identified sick company either by a secured
creditor of that company or by the company itself. The application
thus made must be accompanied by audited financial statements of the
company relating to the immediately preceding financial year, a draft
scheme of revival and rehabilitation of the company, and with such
other document as may be prescribed.
Subsequent to the receipt of the application, for the purpose of
revival and rehabilitation, the Tribunal, not later than seven would
be required to fix a date for hearing and would be appointing an
interim administrator under Section 256 of 2013 Act to convene a
meeting of creditors of the company in accordance with the provisions
of section 257 of the 2013 Act. In certain circumstances, the Tribunal
may appoint an interim administrator as the company administrator to
perform such functions as the Tribunal may direct. • The administrator
thus appointed would be required to prepare a report specifying the
measures for revival and rehabilitation of the identified sick
industry. The measures that have been identified under the section
261 of the 2013 Act for the purpose of revival and rehabilitation of a
sick company provides for the following options: -- Financial
reconstruction -- Change in or takeover of the management --
Amalgamation of the sick company with any other company, or another
company's amalgamation with the sick company • The scheme thus
prepared, will need to be approved by the secured and unsecured
creditors representing three-fourth and one-fourth of the total
representation in amounts outstanding respectively, before submission
to the Tribunal for sanctioning the scheme pursuant to the requirement
of section 262 of the 2013 Act. The Tribunal, after examining the
scheme will give its approval with or without any modification. The
scheme, thus approved will be communicated to the sick company and
the company administrator, and in the case of amalgamation, also to
any other company concerned. • The sanction accorded by the Tribunal
will be construed as conclusive evidence that all the requirements of
the scheme relating to the reconstruction or amalgamation or any other
measure specified therein have been complied with. A copy of the
sanctioned scheme will be filed with the ROC by the sick company
within a period of 30 days from the date of its receipt. • However,
if the scheme is not approved by the creditors, the company
administrator shall submit a report to the Tribunal within 15 days,
and the Tribunal shall order for the winding up of the sick company.
On passing of an order, the Tribunal shall conduct the proceedings for
winding up of the sick company in accordance with the provisions of
Chapter XX,.
CORPORATE SOCIAL RESPONIBILITY
The Ministry of Corporate Affairs (MCA) had introduced the Corporate
Social Responsibility Voluntary Guidelines in 2009. These guidelines
have now been incorporated within the 2013 Act and have obtained
legal sanctity. Section 135 of the 2013 Act, seeks to provide that
every company having a net worth of 500 crore INR, or more or a
turnover of 1000 crore INR or more, or a net profit of five crore
INR or more, during any financial year shall constitute the corporate
social responsibility committee of the board. This committee needs to
comprise of three or more directors, out of which, at least one
director should be an independent director. The composition of the
committee shall be included in the board's report. The committee shall
formulate the policy, including activities specified in Schedule VII,
which are as follows: • Eradicating extreme hunger and poverty
• Promotion of education • Promoting gender equality and empowering
women • Reducing child mortality and improving maternal health
• Combating human immunodeficiency virus, acquired immune deficiency
syndrome, malaria and other diseases • Ensuring environmental
sustainability • Employment enhancing vocational skills • Social
business projects • Contribution to the Prime Minister's National
Relief Fund or any other fund set-up by the central government or the
state governments for socio-economic development and relief, and funds
for the welfare of the scheduled castes and Tribes, other backward
classes, minorities and women • Such other matters as may be
prescribed There have been mixed reactions to the introduction of the
'spend or explain' approach taken by the MCA with respect to CSR. It
may take a while before all of Corporate India imbibes CSR as a
culture.
However, activities specified in the Schedule are not elaborate or
detailed enough to indicate the kind of projects that could be
undertaken, for example, environment sustainability or social business
projects could encompass a wide range of activities. The committee
will also need to recommend the amount of expenditure to be incurred
and monitor the policy from a time-to-time. The board shall disclose
the contents of the policy in its report, and place it on the website,
if any, of the company. The 2013 Act mandates that these companies
would be required to spend at least 2% of the average net-profits of
the immediately preceding three years on CSR activities, and if not
spent, explanation for the reasons thereof would need to be given in
the director's report(section 135 of the 2013 Act).
The main change in the definition of a private company is in the
increase in the limit of the number of members from 50 to 200 .
Secondly, the definition does not state that a company inviting or
accepting deposits from persons other than its members, directors or
their relatives cannot be a private company. (section 2(68) of the
2013 Act). Certain requirements which were till now applicable to
public companies or subsidiaries of public companies have now been
also extended to private companies . Some such requirements include
the following: • Section 90 of the 1956 Act, which was a saving
section for private companies, has not been incorporated in the 2013
Act, thus making the provisions relating to the various kind of share
capital and voting rights applicable to private companies. Also refer
Chapter: Setting up of a Company (share capital and debentures) •
Provisions for the appointment of managerial personnel, in section 196
of the 2013 Act, are also applicable to private companies.
Therefore, the following requirements are now applicable to private
companies: -- The re-appointment of a managerial person cannot be made
earlier than one year before the expiry of the term. However, the
term for which the managerial personnel can be appointed is five
years -- The eligibility criteria for the age limit has been set
between 21 to 70 years. An individual above the age of 70 years can
also be appointed as the key managerial personnel by passing a special
resolution. -- In addition, private companies have the option to adopt
principle of proportional representation for appointment of directors
(section 163 of the 2013 Act). • The 2013 Act restricts certain powers
of the board of private companies, which can be exercised only with
the company's consent by a special resolution. Some powers thus
restricted are as follows : -- To sell, lease or otherwise dispose
of the whole or substantially the whole of the company's undertaking
-- To borrow money in excess of the aggregate of its paid-up share
capital and free reserves • The requirements relating to corporate
social responsibilities are also applicable to private companies since
the criteria is based on specified levels of the net worth, turnover
and net profit. However, it is of relevance to note, that while
private companies are not required to appoint independent directors as
per section 149 of the 2013 Act, the section on CSR, requires
companies within the specified thresholds to constitute a corporate
social responsibility committee consisting of three or more directors,
out of which at least one director must be an independent director.
This requirement appears to be contradictory to the extent that the
section applies to private companies. Also refer Chapter: Corporate
Social Responsibilities • Private companies would now be required to
comply with the requirements for inter-corporate loans as well as
investments, which were hitherto not applicable. Also refer Chapter :
Directors (Meetings of the Board and its Powers - Loans and
investments by a company) • The provisions relating to the appointment
of the managing director, whole-time director or manager are also
applicable to private companies. Refer Chapter : Directors
(Appointment and remuneration of managerial personnel - Introduction)
• For certain other compliance requirements, refer to Chapter:
Directors (General - Additional compliance requirements for private
companies) There is a marked increase in the compliance requirements
mandated for private companies under the 2013 Act. While some of these
will go a long way in increasing the accountability of private
companies, there are also concerns as to the need for increasing the
complexities in private companies in which the public at large is not
interested.
Acceptance of deposits
It is pertinent to note that the requirements relating to acceptance
of deposits are already quite stringent under the 1956 Act and the
Rules made thereunder. The 2013 Act further strengthens these
provisions. A significant impact of the 2013 Act is that only those
public companies which meet the prescribed net worth or turnover
criteria may accept deposits from persons other than its members.
Other companies can accept deposits only from its members.
The proposed provisions will enhance the protection of the deposit holders.
Companies will have to incur additional costs due to requirements
related to credit rating, maintenance of additional liquid funds,
deposit insurance, etc.
1. Acceptance of deposits The 2013 Act states, that only those
companies which meet such net worth or turnover criteria as may be
prescribed will be eligible to accept deposits from individuals other
than its members. Such companies will also be required to obtain the
rating (including its net worth, liquidity and ability to pay its
deposits on due date) from a recognised credit rating agency which
ensures adequate safety [section 76(1) of the 2013 Act]. Companies
which do not meet the net worth or turnover criteria will only be able
to accept deposits from its members [section 73(2) of the 2013 Act].
All companies will be required to comply with the prescribed
conditions which includes issuance of a circular to its members,
obtaining credit rating, providing deposit insurance, maintaining
deposit repayment reserve account, etc. [section 73(2) of the 2013
Act].
2. Outstanding deposits The 2013 Act states that deposits accepted
before the 2013 Act comes into force will need to be repaid within one
year from the commencement of the 2013 Act or when such payments are
due, whichever is earlier [section 74(1) of the 2013 Act]. This is
likely to create significant financial impact on companies which have
currently accepted deposits and will not meet the eligibility criteria
under the 2013 Act.
3. Protection of depositors An amount equivalent to a minimum 15% of
deposits maturing during the financial year as well as the following
financial year will need to be kept in a separate bank account with a
scheduled bank. The Companies (Acceptance of Deposits) Rules, 1975
currently requires that 15% of deposits maturing during the financial
year needs to be kept in bank or invested in specified securities
[section 73(2) of the 2013 Act]. Additionally, the 2013 Act also
states that the deposit insurance as prescribed will also be required
to be provided [section 73(2) of the 2013 Act]. Registered valuers
The 2013 Act has introduced a new concept of registered valuers who
are required for providing valuation reports mandated under various
sections. These include the following: • Further issue of
share-capital (section 62 of the 2013 Act) • Restriction on non-cash
transactions involving directors (section 192 of the 2013 Act)
• Compromises, arrangements and amalgamations [section 230 of the
2013 Act] • Purchase of minority share holding (section 236 of the
2013 Act) • Submission of a report by the company liquidator (section
281 of the 2013 Act) • Declaration of solvency in case of proposal to
wind up voluntarily (section 305 of the 2013 Act) • Power of the
company liquidator to accept shares, etc., as consideration for the
sale of property of the company (section 319 of the 2013 Act]) • The
qualification, experience as well as the process of registration as a
valuer have been prescribed in the draft rules* (section 247 of the
2013 Act).
Winding-up • Chapter XX of the 2013 Act consisting of sections 270 to
365, deals with the provisions of winding-up of companies. The 1956
Act prescribes three modes of winding-up. This includes the following:
-- By the court -- Under the supervision of the court -- Voluntary As
against the existing modes of winding-up as prescribed by the 1956
Act, the 2013 Act prescribes the following two modes: -- By the
Tribunal -- Voluntary • The 2013 Act does not acknowledge the
distinction between members voluntarily winding-up and creditors
voluntarily windingup. Additionally, the new grounds for winding-up
by Tribunal are as follows: -- In a situation when the company has
acted against the interests of sovereignty and integrity of India, the
security of the state, friendly relations with foreign states, public
order, decency or morality -- Order has been made under Chapter XIX
(Revival and Rehabilitation of Sick Companies). -- An application has
been made by the ROC or any other person authorised by the central
government by a notification under the 2013 Act. -- The tribunal is of
the opinion that the affairs of the company have been conducted in a
fraudulent manner or the company was formed for fraudulent and
unlawful purposes or the persons concerned in the formation or
management of its affairs have been found guilty of fraud, misfeasance
or misconduct in connection therewith, and that it is proper that the
company be wound up -- The company has made a default in filing with
the ROC, its financial statements or annual returns for immediately
preceding five consecutive financial years Dealing with fraud • The
2013 Act deals extensively on the issue of fraud (section 447 of the
2013 Act) and has for the first time defined fraud specifically as:
"Fraud in relation to affairs of a company or any body corporate,
includes any act, omission, concealment of any fact or abuse of
position committed by any person or any other person with the
connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss" The term, 'wrongful
gain' means gain by unlawful means of property to which the person
gaining is not legally entitled and 'wrongful loss' means the loss by
unlawful means of property to which the person losing is legally
entitled [Explanation to section 447 of the 2013 Act]. • Further, the
penalties as prescribed under this section are as follows: --
Imprisonment for a term of not less than six months, but which may
extend to 10 years -- Fine not less than the amount involved in the
fraud, but which may extend to three times the amount involved in the
fraud -- Also, where the fraud in question involves public interest,
the term of imprisonment shall not be less than three years • The
provisions of this section have a significant impact and there are
various areas across the 2013 Act, which will lead a person to be
liable under this section. Some of these areas are as follows: --
Where a person furnishes any false or incorrect particulars of any
information or suppresses any material information in relation to
incorporation of a company filed with the ROC [section 7(5) and (6) of
the 2013 Act] -- In case of the formation of the company with
charitable purpose, where it is proved that the affairs of the company
were conducted fraudulently - every officer in default [section 8(11)
of the 2013 Act] -- Where a prospectus, issued, circulated or
distributed includes any statement which is untrue or misleading in
form or context in which it is included or where any inclusion or
omission of any matter is likely to mislead, every person who
authorises the issue of such prospectus [section 34 of the 2013 Act]
-- Fraudulently inducing persons to invest money (section 36 of 2013
Act) -- Personation for acquisition, etc. of securities (section 38 of
the 2013 Act) -- Where any depository or depository participant, has
transferred shares with an intention to defraud a person (section
46(6) of the 2013 Act) -- Failure to repay the deposit or a part
thereof or any interest thereon, within the time limits as applicable,
and where it is proved that such deposits were accepted with intent to
defraud the depositors or for any fraudulent purpose (section 75 of
the 2013 Act).Where the Tribunal is satisfied that the auditor of a
company has, whether directly or indirectly, acted in a fraudulent
manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers [section 140(5) of the 2013 Act]
-- Where it is proved that the partner or partners of the audit firm
has or have acted in a fraudulent manner or abetted or colluded in any
fraud by, or in relation to or by, the company or its directors or
officers [section 147(4) of the 2013 Act] -- Penalty for furnishing
false statement, mutilation, destruction of documents (section 229 of
the 2013 Act) Shareholder democracy Acknowledging the concept of
shareholder democracy, various provisions have been incorporated in
the 2013 Act. These provisions can be broadly classified as under:
• Shareholder rights or protection • Special consideration to small
shareholders
1. Shareholder rights or protection Class action suits: A class action
is a legal form of lawsuit where a large group of individuals
collectively bring a claim to court or in which a particular class of
defendants is being sued. The concept of collective lawsuit finds its
roots in the US , where it is still widely prevalent. In several
European countries, changes have been made recently in their civil
law, to allow consumer organisations to bring claims on behalf of
large groups of consumers. Acknowledging the need to be at par with
global standards, for class action lawsuit, the 2013 Act has empowered
shareholders associations or group of shareholders to take legal
action in case of any fraudulent action on the part of company and to
take part in investor protection activities and class action
suits(section 245 of the 2013 Act). Additionally, in response to the
Standing Committee's recommendation in its Twenty First Report for
ensuring protection of interests of minority shareholders and small
investors, the MCA suggested that during adjudication on class action
suits, the Tribunal will ensure that the interests of shareholders
are protected and wrongdoers, including auditors and audit firms, are
required to compensate the victims on suitable orders by Tribunal.
Also, as stated in the 2013 Act, the central government will have
power to prescribe class or classes of companies which shall not be
permitted to allow use of proxies. The 2013 Act also to have
provisions to provide that a person shall have proxies for such number
of members or such shares as may be prescribed.
2. Special consideration to small shareholders The 2013 Act
acknowledges the existing rights of small shareholders envisaged in
section 252A of the 1956 Act under the following sections: • A listed
company may have one director elected by such small shareholders in
the manner and with the terms and conditions as may be prescribed.
Here the term, 'small shareholders' means a shareholder holding shares
of nominal value of not more than 20, 000 INR or such other sum as
may be prescribed (section 166 of 2013 Act). Also refer to
shareholder democracy, chapter on 'Other Areas' • The board of
directors of a company which consists of more than 1,000
shareholders, debenture-holders, deposit-holders and any other
security holders at any time during a financial year shall constitute
a stakeholders relationship committee consisting of a chairperson who
shall be a non-executive director and such other members as may be
decided by the board. Further, the section under sub-section six,
recognises the concept of the stakeholders relationship committee
which is required to consider and resolve the grievances of security
holders of the company(section 178 of the 2013 Act). • Specific
disclosure under the scheme of mergers or amalgamation regarding the
effect of merger on minority shareholders is to be provided. • Under
various sections in the 2013 Act, for example, variation in terms of
contract or object in prospectus, the dissenting shareholders have
been provided with an option to exit which act as a protection of the
interests of small shareholders. The concept of class action suits,
considering the best interests of the shareholders, is a welcome
provision. However, the fact that there are always possibilities of
misuse cannot be ignored
Additionally, it is important to note that India, being a developing
economy, may find it difficult to appreciate the concept of 'class
action suits' and implement it successfully.
WITH BEST REGARDS
NOTE; THE PUBLISHER IS NOT RESPONSIBLE FOR ANY ERRORS AND REPRESENTATIONAL FORM AS THE WORK IS JUST COMPILED AND ABSTRACT IN FORM. IT IS NOT COMMERCIAL BUT URGE TO SPREAD KNOWLEDGE IN STUDENT FRIENDLY MANNER.
