India Companies Act 2013: Beginning of a new era

787 views

Published on

Regulatory checks, accountability and governance standards in India have received a serious boost with the introduction of the new Companies Act 2013. Business and investors have expressed confidence in the Act’s ability to induce transparency and welcomed the legislation as an attempt to restore the appeal of Indian business. The Government of India introduced this landmark legislation in the beginning of fiscal year 2014.

This report focuses on some key topics in respect of which the 2013 Act and rules are notified. These topics are broadly classified into - financial reporting, audit and auditors, related party transactions, loans and investments, corporate social responsibility, corporate governance and mergers, amalgamations and reconstructions.

The SEBI (Substantial Acquisition of Shares and Takeovers) Circular dated 17 April, 2014, amended Clauses 35B and 49 of the Listing Agreement. The RC49, among other matters, deals with aspects such as related party transactions, independent directors, Audit Committee and vigil mechanism.

Though this publication focuses on the requirements of the 2013 Act in certain specific areas; to help listed companies better understand applicable framework; a brief overview of RC49 is also provided where relevant.

For further information, please visit: http://www.ey.com/companiesact2013

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
787
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
39
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

India Companies Act 2013: Beginning of a new era

  1. 1. Companies Act 2013: Beginning of a new era
  2. 2. B | Companies Act 2013
  3. 3. 1Beginning of a new era | Dear reader, We are delighted to share with you our new publication Companies Act 2013: Beginning of a new era. be addressed through appropriate changes in the rules, the MCA to continue engaging with constituents as it has been Ernst & Young LLP
  4. 4. | Companies Act 2013 Financial Reporting 4 Board report 6 Disclosures required 6 Preparation of board report 6 Depreciation 20 Audit and auditors 30 Appointment of auditors 30 Rotation of auditors 32 Contents
  5. 5. Beginning of a new era | Related parties transactions 46 reconstruction
  6. 6. 4 | Companies Act 2013 of this Act applicable to the preparation, adoption and mutatis mutandis
  7. 7. Beginning of a new era | criteria prescribed in accounting standards for use of different National Financial Reporting standards for adoption by auditors
  8. 8. 6 | Companies Act 2013 Board report Dis Change in the nature of business, if any resigned during the year during the year Practical perspectives present MD&A either separately in the annual report or as part Practical perspectives
  9. 9. 7Beginning of a new era | Disclosure regarding median remuneration Practical perspectives earning, if they were arranged in an ascending or descending addition to the disclosures required as per the Managerial
  10. 10. | Companies Act 2013 and those related to strategic and operational aspects of the year shall include, in the report by its Board of directors,
  11. 11. Beginning of a new era | Companies
  12. 12. 10 | Companies Act 2013 the purposes of a particular section for interpreting another strategic and operational business decisions, including whether share capital of `
  13. 13. 11Beginning of a new era | mutatis mutandis, to The Guidance Note on Audit of Consolidated Financial Statements fact that part of the audit of the group was carried out by other Other key perspectives
  14. 14. | Companies Act 2013 ,
  15. 15. Beginning of a new era | mutatis mutandis, apply the
  16. 16. 14 | Companies Act 2013 mutatis mutandis prepare and present CFS in accordance with AS 21. Keeping
  17. 17. Beginning of a new era | prepare CFS under Indian GAAP. Will this position continue net worth of `
  18. 18. 16 | Companies Act 2013 mutatis mutandis
  19. 19. 17Beginning of a new era | Place separate audited accounts in respect of each of its subsidiary on its website, if any statements prepared as per local GAAP for this purpose.
  20. 20. | Companies Act 2013 foreign subsidiaries prepared in accordance with their local the purposes of preparing CFS.
  21. 21. Beginning of a new era | a separate statement containing the salient features of the in accordance with Indian GAAP or the local GAAP of the mutatis mutandis
  22. 22. | Companies Act 2013 Depreciation Amendments in Schedule II to the 2013 Act Minimum vs. indicative rates Continuous process plant for which there is no special depreciation rate otherwise BOT assets an asset is used in double shift depreciation will increase by uses the asset on triple shift basis during any subsequent year, in the opening balance of retained earnings where
  23. 23. Beginning of a new era | depreciate the asset using either 10 year life prescribed in total cost of the asset and useful life of that part is different II. How does component accounting interact with AS 6
  24. 24. | Companies Act 2013 Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets is no change in Part A and it still requires depreciation to be , states
  25. 25. Beginning of a new era | declaration related issues, reference is drawn to discussion AS 6 useful life. to retained earnings in accordance with the transitional Tax effect of expenses/income adjusted directly against the reserves and/ or Securities Premium Account.” depreciation out of surplus (emphasis added)
  26. 26. | Companies Act 2013
  27. 27. Beginning of a new era | Section 123 of the 2013 Act dealing with declaration of publication for discussion on the issue related to charging Utilization of securities premium Writing off debentures and preference share issue
  28. 28. | Companies Act 2013 otherwise, or
  29. 29. Beginning of a new era | any other instrument of a company evidencing a debt, whether (emphasis added) and any other securities of a company, whether constituting a (emphasis added) particularly onerous, if one considers it together with the 2013 Act Nil Nil Nil NA
  30. 30. | Companies Act 2013 Re-opening of accounts on the court/tribunal’s order
  31. 31. Beginning of a new era | presented to the directors who authenticated the original
  32. 32. | Companies Act 2013 Appointment of auditors The draft rules required that if the board does not agree it is stated that the board will record reasons for its Audit and auditors consider only order or pending proceeding relating to
  33. 33. Beginning of a new era | committee need to consider order/pending proceeding relating to matters of professional conduct against the committee cannot recommend such person for appointment The Audit Rules state that if the appointment of auditor is appointment of auditor or will it follow the procedures relating whose accounts are subject to audit by an auditor
  34. 34. | Companies Act 2013 Rotation of auditors share capital of ` ` share capital of ` `
  35. 35. Beginning of a new era | entities, or to listed entities and public interest entities, such as, the purposes of this Act to be a subsidiary of a public
  36. 36. | Companies Act 2013 share capital of `20 crore or more on 1 April 2014. It needs ` ` ` on approach to be followed if there is a change in the threshold
  37. 37. Beginning of a new era |
  38. 38. | Companies Act 2013 guarantee or securit ` ` connection with indebtedness of any third person to the `
  39. 39. Beginning of a new era | Practical perspectives `1 ` ` Business relationship Practical perspectives
  40. 40. | Companies Act 2013 refers to aspects such as ordinary course of business and and conditions of the transaction are standard or the criterion related to indebtedness beyond prescribed its partners or through its parent, subsidiary or associate for business relationship is not only restricted to the audit
  41. 41. Beginning of a new era | Practical perspectives of its partners or through its parent, subsidiary or associate An auditor is not allowed to enter into any new
  42. 42. 40 | Companies Act 2013 Management services
  43. 43. 41Beginning of a new era | Fraud reporting The auditor will forward his report to the board or the mutatis mutandis, to a cost auditor ` ` Practical issues and perspectives The procedure prescribed for fraud reporting is a step in the
  44. 44. | Companies Act 2013 report on all cases of suspected fraud to the Central that an reasons” conclusion, then the auditor needs to further probe the
  45. 45. Beginning of a new era | parties, the auditor is not required to report directly to the The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. An auditor
  46. 46. 44 | Companies Act 2013 Practical perspectives
  47. 47. Beginning of a new era |
  48. 48. 46 | Companies Act 2013 transactions partner director and1 professional capacity professional capacity
  49. 49. 47Beginning of a new era | also a subsidiary Related parties under “enabling clause” (clause (ix)) or prescribed under the draft rules, will result in a long list Common directorship or holds along with his (emphasis added). He has recently been appointed as independent director Companies 1st (Removal
  50. 50. | Companies Act 2013 other entity is an associate of the third entity The entity is controlled or jointly controlled by a SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, They are husband and wife, or Daughter
  51. 51. Beginning of a new era | Companies the concerned clause for identifying related party is not related party as both the criteria for identifying a public Public Public Nil Nil Nil Nil ABC No Whether ABC is related party to No, if ABC is a public
  52. 52. | Companies Act 2013 Company S 50% 50% 30% Company A Company Z Company H Diagram 1
  53. 53. Beginning of a new era | transactions related parties with respect to “selling or otherwise disposing
  54. 54. | Companies Act 2013 The 2013 Act ordinary course of business other than transactions of whether they are in the ordinary course of business and entered into the ordinary course of business, and
  55. 55. Beginning of a new era | Criteria Board Rules Draft rules Paid-up share capital threshold ` ` ` ` worth `1,000,000 shareholders either the transaction has to be in the ordinary ordinary course of business and it has been entered into on an resolution of disinterested shareholders based on the criteria, corporate assets and abuse in related party transactions.”
  56. 56. | Companies Act 2013 Audit Committee approval, if applicable1 Board of Director’s approval Listed company? Board’s approval and special resolution of disinterested shareholders is required. Special resolution of disinterested shareholders is required. Special resolution of disinterested shareholders is not required. Neither board’s approval nor special resolution of disinterested shareholders is required. Disclosure in the board report - Refer Form AOC-2 Related party transactions NO NO NO NO NO Has the transaction been entered into by the company in its ordinary course of business? Has the transaction been entered into on arm’s length basis? Yes Yes Yes Yes No Is the share capital of the company below prescribed limit? Is the transaction amount within prescribed threshold (refer table 5)? Yes Yes 1 Under the 2013 Act, non-listed companies, which do not meet the prescribed criteria, are not required to constitute Audit Committee. In such case, Audit Committee approval requirement does not apply. Is the related party transac- tion material (RC49)?
  57. 57. Beginning of a new era | related party transactions to be by the Audit with a related party to any director, or is authorised by any special resolution of disinterested shareholders, will be obtained
  58. 58. | Companies Act 2013 Related parties not entitled to vote on the special resolution. It is clear that P is not entitled resolution. Public shareholding 29% Parent P 51% Investor A 20% Subsidiary S Diagram 3
  59. 59. Beginning of a new era | Special resolution in case of wholly owned subsidiaries concerning special resolution of disinterested shareholders, if Master agreements With regard to the Audit Committee/Board/disinterested
  60. 60. | Companies Act 2013 Non-reciprocal relationship Ordinary course of business Related Parties restructurings or acquisitions Transactions with offshore entities in jurisdictions with returns
  61. 61. Beginning of a new era | cases where related party transaction is not falling under either building thereon just to lease the entire building to its third parties Arms’ length purpose of the TP guidelines is to ensure that there is no
  62. 62. 60 | Companies Act 2013 between two related parties that is conducted as if they contracting parties has not affected the transaction and its Policy on dealing with related parties on its website and in the annual report
  63. 63. 61Beginning of a new era | This disclosure regarding related party transactions in the board
  64. 64. | Companies Act 2013 Loans to directors and instructions of the board, or of any director or directors,
  65. 65. Beginning of a new era | companies disclose the details of such loans or guarantee or security or or guarantee on behalf of its wholly owned subsidiary Omnibus resolution
  66. 66. 64 | Companies Act 2013 Investment in mutual funds loans, guarantee and security refer to person as well as body Foreign currency loans Loan between fellow subsidiaries act on behalf of its parent and apply all the restrictions of the Loan from foreign parent
  67. 67. Beginning of a new era | Transitional requirements
  68. 68. 66 | Companies Act 2013 ` ` ` Constitution of CSR committee of these three directors, at least one director should be an Corporate social responsibility the board, in its report, needs to specify the reasons for not
  69. 69. 67Beginning of a new era | Scope/ applicability `
  70. 70. | Companies Act 2013 ` this purpose. average net the average
  71. 71. Beginning of a new era | CSR expenditure and its accounting Also, there does not appear to be any legal obligation on The Framework for the Preparation and Presentation of Financial Statements Expenses assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to The Chartered Accountant
  72. 72. 70 | Companies Act 2013 furnished by the querist, it is not clear as to whether there is any legal or contractual obligation for afforestation,
  73. 73. 71Beginning of a new era | ` ` ` of trust in the Guidance Note on Accounting for Employee Share-based Payment. requires consolidation of only those controlled entities which
  74. 74. | Companies Act 2013 Transitional requirements ` ` ` ` ` ` ` `
  75. 75. Beginning of a new era |
  76. 76. 74 | Companies Act 2013 4 Corporate (I) Strategy: (II) Performance: (III) Risk: (IV) People:
  77. 77. Beginning of a new era | Woman director Draft Rules ` ` ` ` the criteria for appointment of woman director in non-listed capital of ` but does not include any other amount received in respect of such shares, by whatever name called (Emphasis added)
  78. 78. 76 | Companies Act 2013
  79. 79. 77Beginning of a new era | Independent directors Particulars Draft rules All listed companies Two Criteria – either of the following ` ` ` ` Aggregate outstanding loans, debentures and deposits ` ` independent director at the earliest but not later than the
  80. 80. | Companies Act 2013 Board of subsidiary companies Meaning: Nominee directors: Stock options: Limit on number of directorship: in which a person can be appointed as a director cannot Tenure and rotation requirement: Limitation of liability: director will be held liable, only in respect of such acts of
  81. 81. Beginning of a new era | Audit Committee Board Rules Draft Rules ` ` `1 No such criterion Aggregate outstanding loans, or borrowings, or debentures or deposits ` ` separately and deposits separately or they should be considered ` ` and outstanding deposits of `
  82. 82. | Companies Act 2013 Nomination and Remuneration Committee Board Rules Draft Rules ` ` NA `1 No such criterion NA Aggregate outstanding loans, or borrowings, or debentures or deposits ` ` NA
  83. 83. Beginning of a new era | Vigil mechanism ` ` periodically bring to the attention of the board of the listed resolution
  84. 84. | Companies Act 2013 Internal audit Particulars Accounts Rules Draft rules ` ` ` No such criteria year ` ` ` ` ` year `
  85. 85. Beginning of a new era |
  86. 86. | Companies Act 2013 property and all assets, tangible and intangible, Mergers, reconstruction This will prohibit creation of any treasury shares under the
  87. 87. Beginning of a new era |
  88. 88. | Companies Act 2013 Glossary 1 Crore 10 Million 100 Crore 1 Billion Annual General Meeting AGM Depreciation Accounting Accounting for Fixed Assets The Effects of Changes in Foreign Exchange Rates Consolidated Financial Statements Accounting for Investments in Associates in Consolidated Financial Statements Interim Financial Reporting Intangible Assets Financial Reporting of Interests in Joint Ventures Provisions, Contingent Liabilities and Contingent Assets Financial Instruments: Recognition and Measurement Continuous Process Plant CPP Generally Accepted Accounting Principles GAAP
  89. 89. Beginning of a new era | Related Party Disclosures Ministry of Corporate Affairs MCA The Auditor’s Responsibilities Relating To Fraud In An Audit Of Financial Statements Related Parties Transfer Pricing guidelines TP guidelines
  90. 90. | Companies Act 2013
  91. 91. Beginning of a new era | Ahmedabad nd Bengaluru 6th th th th th Chandigarh 1st Chennai th & 7th Hyderabad Hitech City, Madhapur Kochi th Kolkata rd Mumbai 14th th NCR 10th 6th 4th th Pune th
  92. 92. Ernst & Young LLP EY YEARS OF EXCELLENCE IN PROFESSIONAL SERVICES

×