NEED TO REPLACE COMPANIES ACT, 1956 WITH ANEW COMPANIES ACT• In view of changes in the national andinternational economic environment andexpansion and growth of economy of our Country.• Consultation with various bodies & J.J. IraniCommittee
Not so lenient stand anymore• The new Bill looks to put more information in thepublic domain, particularly related to unlisted andprivate Companies.• As of now, this set has much more lenientreporting requirements as compared to the listedCompanies, which only constitutes about 1% ofthe 1.06 million Companies registered with theMCA
Companies Act, 1956 Companies Bill, 2012• It was introduced on 1stApril, 1956.• It has 658 Section and 15Schedules.• It extends to the wholeof India (Sikkim has itsown Companies Act).As passed by the Lok-Sabha on 18th December,2012.The Bill has 470 Clauses,29 chapters and 7Schedules.It applies to the whole ofIndia.
SOME QUICK BITES• Financial Year (1stApril to 31stMarch)• Private Limited Company: Number of membersincreased (from 50 to 200)• Concept of small companies, associate companies(definition clause)• Concept of dormant companies (clause 455)• Ambit of ‘Officer in Default’ widened• Merger of Indian Co. with Foreign Co. (suchcountries as may be notified by the Central Govt.)• And Vice-versa
KMP (Key Managerial Personnel)• The MD or CEO or Manager and in their absenceWTD• The Company Secretaryand The CFO• Appointment to be made by the Board• No Escape clause(Every Company belonging to such class(es) as may beprescribed shall have a whole time KMP – Clause203(1))
Contd…A KMP shall not hold office in more than 1 companyexcept in its subsidiary company at the same time.But a Company may appoint as its MD if he is the MDor manager of one other company (other conditionsto be fulfilled)If the office of KMP vacated, the vacancy to be filledup within a period of six monthsA KMP may be a director of any Company with thepermission of the Board
Functions of a CS laid outClause 205Functions shall include:- to report to the Board about compliance with theprovisions of the Companies Act, the rules made thereunder and other laws applicable to the Company- to ensure compliance with applicable secretarialstandards- to discharge such other duties as may be prescribed
Penalty for not appointing KMP• On Company – Rs.1.00 lakh, may extend to Rs.5.00lakh• On every Director & KMP who is in default–Rs.50,000.00• For continuing default– Rs.1000.00……PER DAY
One Person CompanyPromote EntrepreneurshipOther than a public limitedCompanyMOA have to mentionsuccessorMay have one or more directorsLess cumbersomeRestriction on number ofmembers (not exceeding 100)Option to dispense with AGMFinancial Statement may notinclude cash flow statement
OPC…..Contd….• At least one meeting of the Board of Directors to beconducted in each half of a calendar year and the gapbetween the two meetings should not be less than 90days (This also applicable to small and dormantcompanies)• The above requirement shall not apply to OPC inwhich there is only one director on its Board ofDirectors.
MOA and AOAOnly objects for which company is incorporated alongwith matters considered necessary for its furtheranceshall be mentioned. The Company cannot provide forother objects clause.Articles of Association of the Company may containprovisions with respect to entrenchment whereby thespecified provisions of the article can be altered only ifthe more restrictive conditions or procedures ascompared to those applicable in case of specialresolution have been met with.
Registered Office• Only communication address may be given at thetime of incorporation.• Registered office address is required to be intimatedwithin 30 days of its incorporation.• Notice of every change of the situation of theregistered office shall be given to the Registrar within15 days of the change, who shall record the same.
Certificate of Commencement Not Required• A Company having a share capital (whether publicor private) shall not commence any business orexercise any borrowing power unless - declaration isfiled by a director with the Registrar and• A confirmation that the Company has filed with theRegistrar a verification of its registered office, has tobe filed.
Compromise, Amalgamation & Mergers• Simplified for some• Transferee Company may continue as an unlistedentity• Minority ‘squeeze out’ concept• Auditor’s certificate- Compliant with applicableaccounting standards• Objection criteria
Prospectus & Allotment of SecuritiesGoverns the issue of not onlyshares but all types of securitiesProvides that a public Companycan only issue securities byfollowing the provisions relatedto Public Offer or PrivatePlacement or by way of bonus orright issue.Private Company may issuesecurities only through privateplacement.QIB shall not be covered underthe provisions related to PrivatePlacement.
Prospectus & Allotment of SecuritiesNow any person (includinggroup or association) affectedby any misleading statement,inclusion or omission of anymatter in the prospectus - fileany suit or take any actionproviding for civil liability forfraudulently inducing personsto invest money.In addition to shares, return ofallotment is required to befiled for all types of securities.
Shares• Company cannot issue shares at discount other thanas sweat• Company may issue preference shares redeemableafter 20 years for infrastructure projects• No reduction of capital if deposit not repaid
A Bold Step• If a Company, with intent to defraud, issues aDUPLICATE Certificate of shares, the Company shallbe punishable with fine:• Which shall not be less than 5 times the facevalue of the shares involved• But which shall extend to 10 times the facevalue of such shares or Rs.10.00 crores, whichever ishigher.• Stringent penalties have also been imposed fordefaulting officers of the Company.
Share Capital• Redemption of unredeemed preference shares by issue of furtherpreference shares with consent of holders of 75% in value of suchpreference shares and the NCLT.• Unlike section 94(1) (b) of the 1956 Act, alteration of share capital byconsolidation and division of share capital into shares of largeramount than existing shares to require NCLT’s approval.
Accounts of Companies• Permit for the first time maintenance of books of account andother books , paper, minutes in electronic mode.• Compulsory consolidation of accounts of Holding Company andits Subsidiaries including Joint Venture and Associate Companies.• The Bill provides for provisions relating to re-opening or re-casting of book of accounts of the Company.• The Directors responsibility statement in case of listed companyshall also include additional statement related to internal financecontrol and compliance of all applicable laws.
Directors’ Report• The Director’s Report for every Company, inter-alia,except for One Person Company, shall have toprovide various types of additional information:• number of meetings of the Board• company’s policy on directors’ appointment andremuneration• formal annual evaluation of its own performance• risk management policy• explanation by the Board on every qualification etc.made by the CS in its secretarial audit report and inthe auditors report• particulars of loans, guarantees or investments etc.• specify reasons for not spending specified amt in CSR
New provision for D/ReportEvery listed Company shall disclose inthe Board’s Report, the ratio of theremuneration of each director to themedian employee’s remuneration andsuch other details as may beprescribed.
CSR• Provisions related to Corporate Social Responsibility(CSR). Activities that can be undertaken given in ScheduleVII.• For CSR, Net worth criteria >= Rs.500 crore orTurnover criteria >= Rs.1000 crore orNet profit criteria >= Rs.5 crore or more during anyfinancial yr.• In every financial yr, atleast 2% of the average NP madeduring the 3 immediately preceding financial years• Preference to local areas where it operates• Average NP shall be in accordance to clause 198
Secretarial Audit• Every listed Company and Companies belonging toother class of Companies as prescribed will have tomandatorily get the secretarial audit done.• By a Practising Company Secretary• In a prescribed form• Annex the same with Director’s Report• Qualifications, if any to be specifically explained inDirector’s Report• If contravention, the Company, every officer of theCompany or the PCS, who is in default shall be fined :not less than 1,00,000/-, may extend to 5,00,000/-
Certification of Annual ReturnIn case a PCS certifies the Annual Returnotherwise in conformity with the requirements ofthe specified section, such PCS shall bepunishable with fine which shall not be less thanRs.50,000 but which may extend to Rs.5,00,000.Changes in shareholding of promoters and top 10shareholdersA listed company to file a return with the ROCwith respect to changes in the above details (toensure audit trail of ownership)
Report on AGMListed company along with the report oneach AGM, shall also file a confirmationthat the AGM was convened, held andconducted as per lawReport will be in the prescribed mannerTo be filed with the ROC within 30 days ofconclusion of the AGMNon-filing will be a punishable offence
Audit & Auditors• Individual or Audit Firm for a period of 5 years and blockof 5 years thereafter• For Listed Companies and other prescribed class ofcompanies – Compulsory rotation in 5 years (individual)/10 years (firm)• In addition to accounting standards, auditing standardsalso being made compulsory• Not to render certain services
First auditor-interesting provisionShall be appointed by the BOD within 30 daysfrom the date of registration of the CompanyIn case the BOD fails to do so, it shall inform themembers of the CompanyThe members shall appoint the auditor within 90daysAt an EGMThe auditor to hold office till the conclusion ofthe first AGM
Internal AuditPrescribed class of companies shall be required toappoint an internal auditor to conduct internalaudit of the functions and activities of theCompany.This internal auditor could be a CA or a CostAccountant or such other professional, as may bedecided by the Board.Appointment to be done by the Board.
The current scope of internalauditInter-alia:Obtaining knowledge of legal and regulatoryframework within which the entity operatesObtaining knowledge of the entity’s accounting andinternal control systems and policiesDetermination of the effectiveness of internal controlprocedures adopted by the entityDetermination of the nature, timing and extent ofprocedures to be performed(source: website of the ICAI)
Directors• At least 1 woman director in such class or classes of Companiesas may be prescribed.• At least 1 director shall be a person - stayed in India for a totalperiod of not less than 182 days in the previous calendar year.• Listed public company shall have at least 1/3 of the total numberof directors as independent directors.• Term of 5 years + 5 years and then cooling period of 3 years.• Maximum limit of directors has been increased to 15 from 12.More directors can be added by passing of special resolutionwithout getting the approval of Central Government, as earlierrequired.• Cannot become directors in more than 20 Companies instead of15. Out of this 20, he cannot be director of more than 10 publicCompanies.• Resignation of Directors – A formal clause introduced.• Definition of Independent Directors (ID) in the Bill (clause 149)• Like 274(1)(g) is laid in the beginning of each year, every ID togive a declaration of meeting the criteria of independence.
Look at this-Register of DirectorsThe register shall contain:- Particulars of its Directors- KMPDetails like:- Securities held by each of them in the Company orits holding, subsidiary, subsidiary of company’sholding company or associate companies- Other details as may be prescribed
Vacation of office of DirectorIf he absents himself from all the meetings of the BODheld during a period of 12 months without or withoutseeking LOA of the Board (clause 167(b))Fine is hefty if he continues even after he should havevacated his officeResignation of Director (clause 168)Director also needs to forward to ROC, a copy of hisresignation along with detailed reasons within 30 days ofresignation in the prescribed mannerQuick fix solutionWhere all directors have resigned, the promoter or in hisabsence, the CG shall appoint required number ofdirectors. These directors to hold office till the directorsare appointed in General Meeting
Notice of Board MeetingAtleast 7 days notice is requiredThe notice may be sent by electronic meansMeeting may be called at shorter noticeCondition that atleast 1 independent director, if any,shall be present at the meetingIn the absence of the independent director from sucha meeting, decisions of the meeting will be final onlyon ratification by atleast 1 independent director
Meeting of Board & Its Powers• Not more than 120 days shall elapse between 2 consecutivemeetings – applicable to private companies also• Meetings through video conferencing incorporated• Besides Audit, Remuneration Committee also mademandatory; Corporate Social Responsibility Committeewhere CSR applicable; Stakeholders RelationshipCommittee where 1000 or more security holders;• Limit on political contribution increased from 5% to 7.5%(political party defined)• Provisions related to inter-corporate loans and investmenthas been extended to include loan and investment to anyperson• Investments not beyond 2 layers of investment companies• Listed company may have one director elected by suchsmall shareholders
Clause 184 akin to sec 299Every Director, whether directly or indirectly,concerned or interested in a/proposed contract orarrangement:- with a body corporate in which such director inassociation with any other director, holds more than2% shareholding of that body corporate or- is a promoter/ manager/ CEO of that body corporate- with a firm or other entity, in which he is a partner,owner or member as the case may be
Audit CommitteeEvery listed company and such other prescribed class– Audit CommitteeInter-alia, it shall review and monitor the auditor’sindependence and performance, and effectiveness ofthe audit processVigil MechanismEvery listed company or for those prescribed,establish a vigil mechanism for directors andemployees to report genuine concerns. It shallprovide for adequate safeguards against victimisation
En block resolutionA single resolution not allowed for appointing 2 ormore persons as directors of the CompanyunlessA proposal to move such a motion has first beenagreed to at the meeting without any vote being castagainst it.(Clause 162)
Managerial Remuneration• CLAUSE 197Provisions relating to limits on remunerationprovided in the existing Act included in the bill.Maximum limit of 11% (of net profits) being retained.For cases of no profits or inadequate profits, ScheduleV will be applicable
Accounts of CompaniesIf the MD, WTD in-charge of finance, CFO or anyother person specifically charged by the Board,contravenes the provisions relating to accounts, thesaid person shall be punishable with imprisonment orwith fineIn case of subsidiaries, prepare a consolidatedfinancial statement and all the subsidiaries in thesame form and manner as that of its own. This alsoneeds to be laid before the AGMFor this purpose, subsidiary includes associatecompany and joint venture
Quantification to be doneWhere the Financial Statements do not comply withthe applicable AS as specified in clause 129(1), theCompany will have to disclose:- the deviation from the AS- the reasons for such deviation- financial effects, arising out of such deviationAfter obtaining approval of the Tribunal, provision ofvoluntary revision of financial statements or Board’sReport has been included in the Bill (clause 131)
New provision (clause 137)Provided the FS not adopted at AGM or adjournedAGM, such un-adopted FS along with the requireddocuments shall be filed within 30 days of AGM andthe ROC shall take it in records as provisional till theadopted FS filed.Where the AGM for any year not held, FS duly signedalong with the statement of reasons shall be filed.A company will have to attach the accounts of itsforeign subsidiary and which have not establishedtheir place of business in India.
Remodel the Corporate Structure• It is seen how discreetly Companies route theirinvestments by forming a myriad matrix• The Bill proposes to restrict the number of layers ofinvestment Companies to 2. This will help inidentifying the ultimate beneficiary• The catch is that the number of layers of subsidiariesthat the 2 investment/ holding Companies can have isyet not specified
Case for study• Chintamani Agrotech• 2 Companies – Jinbhuvish Power and AaryaAgrotech owned a majority stake in Chintamani,but the ultimate beneficiary of these Companieswas very hard to determine• Upto 3 layers, the ownership was tried to betraced but only to encounter new corporateentities at every level
Class Action Suits• A minimum of 100 or a % to be specified later, canjoin hands to claim damages against the:* Company* Auditors* Consultants* Experts or Advisorsfor any ‘wrongful, fraudulent or unlawful’ conduct!!A weapon in the hands of the investors to save theircommon interest.
Case for reference• Satyam Computer Services now known as MahindraSatyam paid $125 million to settle ‘class-action’ suitsfiled by shareholders in the US, where its shares werelisted.• Its auditors shelled out $25 million to do the same inthe US.• Indian shareholders did not receive a penny from anysuch settlement as the Country did not allow class-action suits.
‘Fraud’ defined• Broadly:‘Any omission or concealment with an INTENT todeceive and gain undue advantage fromshareholders or creditors, whether or not there isany wrongful gain or loss’So, for example, if the 2 former executives ofReebok India are found guilty of falsification ofdocuments, under the proposed new law, theycould face arrest and pay fines.
18 situations• 18 situations in which the bill has prescribed fraudsand penalties• In several cases, the penalties have been increasedupto 3 times of the amount involved• In select sections, imprisonment has been introduced- ranging from 6 months to 10 years• Serious Fraud Investigations Office (SFIO) to receivestatutory status (but not a constitutional body like theCAG). This will give more teeth to the Investigator.• As per MCA’s latest annual report, there has been noconviction in the 835 cases of prosecution filed indifferent courts following an investigation by theSFIO
NFRA & NCLT• NFRA (National Financial Reporting Authority) willrecommend accounting and auditing standards,currently the domain of ICAI.• In the Satyam accounting fraud, the partners of auditfirms were made liable for wrongdoing and not thefirm. This could change. NFRA can take action againstthe audit firm.• NCLT (National Company Law Tribunal) to replacethe CLB.• NCLT will have to complete proceedings in 3 months.
Sick CompaniesAny secured creditor may file an application tothe Tribunal representing 50% or more of itsoutstanding amount of debt; if the debt remainsunpaid for more than 30 days of the service of thedemand noticeThis application would be for determination thatthe Company be declared as a sick company
ROC’s Register of CompaniesWhere the Registrar has reasonable cause to believe:- that a Company has failed to commence its businesswithin 1 year of its incorporation- that the subscription money remains unpaid formore than 180 days- that the Company is not carrying on any business fora period of 2 immediately preceding financial yearsand not even applied for dormant statusThe ROC shall send a notice to such companies of hisintention to remove the name from the Register
Miscellaneous Provisions• Annual Return –up to the date of closure of financialyear• First AGM – within 9 months• Increased quorum - for public Companies > 1000members• Every Company to follow the Secretarial Standardswhile making the minutes of board and generalmeeting• Penalty for tampering with minutes which may extendto 2 years of imprisonment and with fine which shallnot be less than Rs.25,000 but which may extend toRs.1,00,000.
Continued….Provisions for approval of Financial Statements byway of signatures, before they are signed on behalfof the BoardClause 247: New chapter on registered valuersinsertedValuation in respect of any property, stock,shares, debentures, goodwill etc. by a personregistered as a valuerAppointment on such terms and conditions asmay be prescribed
SchedulesI – MOA & AOAII – Useful lives to compute depreciationIII – General Instructions for preparation of balancesheet and statement of profit and loss of a CompanyIV – Code for Independent DirectorsV – Managerial RemunerationVI – Explanation of terms like agriculture,telecommunication etc.VII – Activities for CSR
Wait and Watch!!•“The challenge is not to introduce newprovisions, but the implementation”•The devil lies in the details…….details areyet to be received in the public domain•The aim is not to impose ‘inspector raj’. It isto make India an attractive and safeinvestment destination.