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Comparitive analysis Companies Act and Companies Bill '10

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  • 1. Comparative Analysis of Companies Act 1956 and Companies Bill 2009
  • 2. Presentation Path • Introduction • Incorporation and Types of Companies • Share Capital • Dividend • Management and Administration • Accounts • Audit & Auditors • Directors • Independent Directors • Remuneration of Managerial Personnel • Compromises, Arrangements and Amalgamations • Registered Valuer’s • Rehabilitation and Liquidation • Adjudication – NCLT and NCLAT • Special Courts • Miscellaneous • Executive Summary - New Concept Introduced, Deficiencies and Contentious Issues
  • 3. Companies Act, 1956 656 Sections 14 Schedules 24 Amendments Introduction Companies Bill, 2009 426 Sections 28 Chapters
  • 4. Focus of the Companies Bill, 2009 Harmonizing Company Law With SEBI Governance Norms Retaining useful provisions Of the Companies Act Which – Relevant & Useful Combining existing provision with existing Companies Act Allowing Government To Prescribe Procedural Laws In the Form of Rules Segregating & Deleting Procedural Laws From Substantive Laws Aim of the new bill
  • 5. Incorporation of Companies Incorporation – • All Types of Companies are required to file MOA and AOA with ROC. • All other matters incidental thereto such as – alteration of MOA and AOA, Rectification of Names follows the Companies Act. • The provision under the Companies Act, which prescribed minimum paid –up share capital for private and public companies have been scrapped.
  • 6. Types Of Companies Types of Companies _________________________________________________________________________________ Company Criteria for formation _________________________________________________________________________________ • Public Company At least seven shareholders. • Private Company Between two and fifty shareholders. • One Person Company One shareholder. • Small Companies Non-public companies with a paid up capital of less than Rs 5 crore or turnover less than Rs 20 crore. Cannot be a holding or subsidiary company, charitable company, or that registered under any special Act. • Charitable Company At least one person; only for specified objectives. Dividends cannot be paid. • Dormant Companies Those formed for future projects/ to hold assets or intellectual property, and which have no significant accounting transactions; or Companies which do not carry on any business or operation for 2 years or have not filed financial statements in that time Note – One Person Companies is a concept introduced in Companies Bill, 2009
  • 7. Share Capital Companies Act ’56 • Minimum Authorized Share Capital – Public Limited Company – Rs 500,000 Private Company – Rs 100,000. • Differential Voting Rights exists with same class of shares, ( Issue of Share Capital with differential voting rights) Rules, 2001 • No Such Provision exists, No Concept of Registered Valuer is present. • Company has the right to issue of shares at discount subject to restrictions as stated in section 79 of companies Act, 1956. • A Limited Company (If authorized by its AOA) can issue redeemable preference shares. Companies Bill ‘09 • No requirements as to minimum share capital. • Concept of differential voting rights shares within a class of shares have been done away. • Further issue of share capital other than Rights Issue and Employee Stock Options Plans to be made at price determined by Registered Valuer. • Issue of Shares at discount prohibited except in the case of sweat equity shares. • Only Infrastructure companies can issue redeemable preference shares beyond 20 years.
  • 8. Dividend Companies Bill ’09 • Payment of Dividend – Clause 45 authorizes a Company to pay dividend in proportion to amount paid – up on each share. • The new addition to bill includes – Chapter VIII – Declaration and Payment of Dividend • Percentage of profits to be transferred to reserves is left to the discretion of companies. • Provides for declaration interim dividend out of profits Companies Act ’56 • Payment of Dividend Provision Complementary to Clause 45 of the Bill is Section 93 of the Companies Act Declaration and Payment of Dividend – • There is a minimum requirement of 10 % of profits to be transferred to reserves. • As per Company Amendment Act (2000) provides for payment of interim dividend.
  • 9. Dividend Continued … Company Bill ’09 If owing to inadequacy or absence of profits in any financial year, the company proposes to declare dividend out of the accumulated profits earned by it in the previous financial year or years and transferred it to the reserves , such declaration shall be made by a resolution passed at a meeting of the board – • Unanimous consent of the Board of Directors. • Approval from Financial Institutions with outstanding term loan. • Special resolutions passed by the shareholders at the AGM Company Act ’56 As Per Companies (Declaration of Dividend out of Reserves) Rules 1975 – Under the current Companies Act, if the Company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off – • Against the profits of the company for the year for which dividend is proposed • Paid against the profits of the company for any previous financial year or years. Arrived in both cases after providing for depreciation. This provision has been omitted in the Companies Bill
  • 10. Management & Administration 1. E – Governance Application of e – governance procedures is proposed to be extended to almost all compliance requirements and e – filings would be accepted as substantial evidence in any proceedings. 2. Board Meetings • Minimum period to call for Board Meeting is 7 days, such notice can be given in writing or electronic means. • Flexibility is provided to call a board meeting at a shorter notice to transact urgent business. Decision become final if at least one Independent director ratifies it. • Time interval between two board meetings increased to 120 days as against three months earlier • Bill allows participation through video conferencing or other prescribed means providing greater flexibility to directors in participating in board meetings.
  • 11. Powers of the Board and Restrictions on its Powers With regard to the powers of the board clause 159 of the Companies Bill is similar to section 291 of the Companies Act ’56. Except clause 159 has expanded the ambit of the powers to be exercised exclusively at a board meeting to include – 1. Issue of securities, including debentures, whether in India or outside; 2. Granting loans or giving guarantee or providing security in respect of loans; 3. Approving financial statements and directors report; 4. Diversification of business of the company; 5. Approving amalgamation, merger, reconstruction; and 6. Acquisition of a controlling or substantial stake in another company. Clause 160 1 (a) (i) of Companies Bill is proposed to do away with section 293 (1) (a) of Companies Act by incorporating these terms – “An undertaking for this purpose shall mean an undertaking in which investment of company exceeds 20 percent of its net worth or which generates 20 percent of total income of the company during previous financial year.” “Substantially the whole of the undertaking” – shall mean 20 percent of the value of an undertaking.
  • 12. Meetings of the Members • Notice of meeting allowed to be issued on electronic media and voting at a meeting by prescribed electronic means. • Postal ballot proposed to be made applicable for all companies and not only listed companies which was available earlier only to limited companies. • Minimum shareholding criterion under companies act, of members in a company having share capital, poll can be demanded by the member or by proxy – having not less than one – tenth of the total voting power or holding shares on which an aggregate sum of not less than Rs 50,000 has been paid up. • Under Companies Bill, the minimum paid up amount has been raised to Rs. 500,000 • A new provision under Companies Bill, company to file a report on general meeting with a registrar within 30 days of conclusion of such meeting confirming that the meeting was convened, held and conducted as provided in the law. • Time limit for filing the annual return is proposed to be reduced from 60 days under companies act (at present) to 30 days from the date of AGM.
  • 13. Related Party Transaction • The 1956 Act restricts transactions between a company and its directors, and certain other entities, on the grounds of possible conflict of interest. • Government approval is required in most cases. • The Bill restricts such transactions only for public companies but broadens the definition of a related party to include managers of the company. • The approval of shareholders, rather than the government is now required ______________________________________________________________________ Subject Companies Act, 1956 Companies Bill, 2008 ______________________________________________________________________ Companies All Companies Only Public Companies Covered Definition of Definition covers directors their Managers and Relatives and those Related relatives, firms and private accustomed to act according to the Companies companies they are involved advice of director or manager. Public companies in which director / manager along their relative hold 2% of capital. Subsidiary/ holding/ associate company or companies which shares common holding company Approval Central government approval Board approval; 75 % shareholder approval in most cases in companies above a prescribed size.
  • 14. Accounts Accounts (as per Companies Bill) – • A company has been permitted to keep books of accounts and other relevant papers in electronic mode in such manner as may be prescribed. • Annual financial statement is required to include the cash flow statement. • A holding company is required to prepare and file, in addition to its own financial statement, a consolidated financial statement of its subsidiary and itself. • If the financial statement are adopted at the AGM, then they shall be filed with registrar provisionally within 30 days from the date of the meeting. • Flexibility in choosing financial year – end for preparation of financial statements is removed. All companies would need to follow March 31 as the year – end. • Financial statements to comply with the form as may be prescribed. Reference to Schedule VI has been removed
  • 15. Directors Responsibility Statement The Directors responsibility statement to be fled along with financial statements of the company shall state that – • in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; • The directors had selected such accounting policies and applied them consistently and made judgment and estimates that are responsible and prudent so as to give a true and fair view of the state of affairs of the company; • They had taken proper and sufficient care for the maintenance of adequate accounting directors records in accordance with the provision of this act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; • They had prepared the annual accounts on a going concern basis; and • They had, in the case of listed company, had laid down internal financial controls to be followed by the company and that such financial controls have been complied with.
  • 16. Audit & Auditors National Advisory Committee on Accounting and Auditing Standards (‘NACAAS’) • NACAAS to consult ICAI before submitting its recommendations to the Central Government on matters relating to accounting and auditing policies and standards. • Notification of Auditing Standards by the Central Government shall be done, after consultation with NACAAS. Until any auditing standards are notified, any standard or standards of auditing standards. It shall be duty of the auditors to comply with such auditing standards. Appointment of Auditors • Company need to consider the recommendations of the Audit Committee, if consulted, for appointment of auditors, including filling up a casual vacancy. Role of Audit Committee has bee expanded in line with global practice. • A special resolution is required for appointing new auditors in place of retiring auditor. Under the existing Companies Act, only an ordinary resolution is required in such a situation. • Requirement of special resolution has been done away in case of a company whose 25 % or more of subscribed share capital is held by Central/ State Government of entities such as public financial institutions, insurance companies, etc. • In case no auditor is appointed or re – appointed at the AGM, the existing auditor or shall continue to be the auditor of the company.
  • 17. Powers and Duties of Auditors – • Auditor required to attend general meeting unless exempted by the company. Under Companies Act, the auditor had a right and not a duty to attend general meeting. • Auditor of a company shall have the right of access to the records of all of its subsidiaries in so far they relate to consolidation of its financial statements with that of its subsidiaries. • Requirement for auditors to do specific inquiries on matters listed in Section 227 (1 A) of the Companies Act, 1956 has been done away with. ____________________________________________________________________ Bill has proposed additional matter for specific reporting – ____________________________________________________________________ • Whether the financial statements comply with auditing standards • Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. • In case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board.
  • 18. _________________________________________________________________________ Audit of the Government Companies, the Bill has prescribed following additional matters – _________________________________________________________________________ • An Auditor to include in his audit report directions, if any, issued by C&AG in respect of the auditing standards, action taken on such directions and their impact thereof on the company’s accounts • Bill fixes 60 days time limit for C&AG to comment upon or supplement the audit report, and conduct supplementary audit of the company’s accounts. Composition of Audit Committee – • To be made in line with the conditions prescribed under the listing agreements. • Committee to be constituted with minimum 3 directors, of which majority required to be independent directors and at least one director required to have knowledge of audit, financial management or accounts. • Chairman of audit committee to be an independent director. Powers of Audit Committee has been extended to include – • Recommendation on appointment of auditors • Related Party Transactions • Valuation of undertakings or assets of company • Evaluation of internal financial controls and related matters
  • 19. Independence of Auditors To ensure independence of auditors other than disqualifications provided under sub – sections 3 of Sections 226 of current Companies Act, The Companies Bill has proposed to add to it by Clause 127 as follows – An auditor cannot provide the following service – • 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; and • management services.
  • 20. Directors Companies Bill ’09 • Same as Companies Act • Same as Companies Act • Every Company to have at least one director who is ordinarily resident in India i.e. a person who resides in India for at least 182 days in a calendar year. • Appointment of Whole Time Directors, MD require approval of members at general meeting thereby empowering shareholders • Concept of Key Managerial Personnel is introduced • No share Qualifications required Companies Act ’56 • For incorporating a Private Limited Company a minimum of two directors are required. • For incorporating a Public Limited Company a minimum of three directors are required • Appointment of Whole Time Directors , Managing Directors and Managers require approval of government. • Concept of Director and Manager addressed together • Share Qualification for appointment of directors are prescribed _________________________________________________________________ Number & Appointment of Directors _________________________________________________________________
  • 21. Duties of Directors Codified The duties of directors which under Companies Act is considered to be that of trust or fiduciary relationship has been attempted to be codified under the Companies Bill. Clause 147 deals with duties of directors – • A director shall act in accordance with company’s articles subject to the provision of the Act • He shall act in good faith in order to promote the objects of the company for the benefit of the members as a whole and in the best interests of the company • He shall exercise his duties with due and reasonable care, skill and diligence • He shall involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company • He shall not achieve or attempt to achieve any undue gain or advantage either to himself or his relatives, partners or associates • He shall not assign his offices and any assignment so made shall be void.
  • 22. Director Identification Number • The Following is a new provision proposed to be provided under the Companies Bill • Holding of Director Identification Number (“DIN”) made mandatory for appointment of any person as a director. • Provision incorporated for application and allotment of DIN, intimation of DIN to the company, information of DIN of all of its directors to the registrar by the company and obligation to indicate the DIN on returns etc.
  • 23. Independent Directors • With a View to bring harmony between listing agreements and the Companies Act, a new provision has been inserted in case of listed public company which requires the listed company to appoint a minimum of one – third of total directors as independent directors on the board. • A company having non executive shall have one – third of its board consistent of independent directors, A company with executive chairman shall have 50% of its board comprising of independent directors. • Central government will prescribe minimum number of independent directors for other public companies • All the existing companies have to comply with these new requirements of having independent directors on he board within one year.
  • 24. Key Managerial Personnel The bill proposes to redefine a company’s key managerial personnel to consist of – • Managing Director, Chief Executive officer or manager and fulltime director or directors • Company secretary; and • Chief financial officer With intent to reduce government control internal management of companies, the requirement of seeking approval of central government in the appointment and remuneration of managerial personnel i.e. managing director etc, has been done away with. The aforesaid can now be made by the board of directors followed by an approval from members in general meeting via a special resolution.
  • 25. Remuneration to Directors & Key Managerial Personnel Companies Act ’56 • Only 11 Percent of Company Net Profits could be paid as remuneration to Directors and Key Managerial Personnel Companies Bill ’09 • Under the Companies Bill (Proposed) the amount payable as remuneration to directors and other key managerial personnel has bee un – capped. • Remuneration to Independent Directors – Not entitled to remuneration other than sitting fee, reimbursement for expense of participation in meetings of the board, other profit related commission and stock – options as approved of by the members
  • 26. Compromises, Amalgamation and Arrangements Compromises and Arrangements – • Substantial changes have been proposed in the bill with respect to the existing provision. The comprehensive review and revamp to bring out a complete and transparent perspective to the entire process. • Where meeting is proposed to be called, valuation report is also to be sent to the shareholders and creditors along with the notice. • Any objection shall be made only by the shareholders holding not less than 10% of the shareholding or creditors with not less than 5% of the outstanding debt. • Voting for the respective may also be done through postal ballot. • Notice to be sent to Central Government, RBI, SEBI, Stock Exchanges etc.
  • 27. Further the Bill provides for specific arrangement that the tribunal may order (but not limited to) : • Conversion of preferential shares into equity with an option for preference shareholders to obtain arrears of dividend in cash or accept equity shares. • Protection of any class of creditors • Variation in the rights of the shareholders • If agreed by the creditors, abatement of any proceedings pending before the Board for Industrial and Financial Reconstruction • Buy back of securities not permitted under this section. Compromise/arrangement may include takeover offer as prescribed – • Where takeover offer has been defined to mean an offer to acquire all the shares (other than those already held by the offeror) at the same terms of offer. • Listed company takeover shall be as per guidelines issued by SEBI.
  • 28. Where the compromise involves merger or hive – off In addition to the notice requirements for shareholders and creditors meetings , following is required to be sent – • Confirmation of filing of the scheme with registrar • Supplementary accounting statements where the last audited accounting statements is more than six months old before the first meeting of the company. The tribunal while sanctioning the compromise / arrangement, may additionally make the following provisions: • Transfer of employees of the transferor company • Where transferor company is a listed entity and transferee company is an unlisted entity – 1) Transferee shall continue to be an unlisted company 2) Exit opportunity for the shareholder of the transferor company shall be provided for, in case they wish to opt out. 3) Where transferor company is not dissolved, it shall become unlisted and if left with small portion of assets, exit opportunity shall be provided for the public shareholders • Fees paid by the transferor company on authorized share capital shall also be available for set off against the fees payable by the transferee company on its authorized share capital subsequent to the merger.
  • 29. • The proposed bill also contemplates merger of an Indian company with a foreign company and vice – versa, where the consideration to the shareholders of the merging company may be discharged by way of cash or through Indian Depository Receipts or any combination thereof. • Further, in order to reduce regulatory rigor of merger between two small companies or a holding company and its wholly owned subsidiary, a separate process is envisaged which do not require approval from the tribunal. The key highlights of the process are given below – 1) Notice of the scheme to be sent inviting comments /objections within 30 days 2) Post consideration of the comments/ objections, the scheme is to be approved by a special resolution in the shareholders meeting and by creditors three fourths in value. 3) Post approval, the scheme has to be filed with the registrar and the official liquidators for their approval – a) Deemed approval where official liquidators do not communicate within 30 days 4) Post confirmation from the official liquidators, Registrar to register and effect the same 5) In case of scheme is not in public interest, dispute resolution mechanism has also been provided • The Bill has also proposed the concept of purchase of minority shareholding.
  • 30. Registered Valuer • The proposed bill has introduced a framework of ‘Registered Valuer’ for all valuations in respect of – Property, Stocks, Shares, Debentures, Securities, Goodwill, or net worth of a company or its assets • Valuers as registered under the act with central government shall be appointed by the audit committee of the company or he Board of Directors in its absence • Eligibility for Registration – a) Charted Accountant, Cost & Works Accountant, Company Secretary or any other person possessing necessary prescribed qualification b) Company or a body corporate not eligible to act as valuer c) Partnership firm not to act as a Valuer, unless all the partners are registered as Valuers • Applicants to give a declaration at the time of registration that they shall – a) Make an impartial and true valuation of assets b) Make the valuation as per the rules c) Not undertake valuation of any assets with existing or proposed direct or indirect interest.
  • 31. Rehabilitation and Liquidation • The provisions as regards revival and rehabilitation of sick companies have undergone significant changes with special powers being imparted to the creditors of a sick company. The key highlights are – a) The requirement for government companies seeking a prior approval from Central or State Government before making a reference to the Tribunal has been removed. b) The bill empowers the secured creditors, representing at least 50% in value of their outstanding debt for which payment has not been secured or compounded to their reasonable satisfaction within 30 days of the issue of demand notice of the company, to file an application to the tribunal to declare such a company as a sick company. c) The qualifications of a company as ‘sick company’ on the basis of reduction in net worth as it existed earlier will no longer be applicable. d) The role of an operating agency would be undertaken by an ‘interim administrator’, appointed by the tribunal.
  • 32. e) The committee of the company's creditors appointed by the interim administrator shall, along with such Administrator, decide whether it is possible to revive and rehabilitate the company. If the tribunal is satisfied with the report of the interim administrator indicating that it is not possible to revive and rehabilitate the company, then the tribunal will order the proceedings for winding up. Should the committee believe the survival of the company to be possible, the tribunal will appoint a ‘company administrator’. (f) The consent of atleast 75 % in value of the creditors outstanding would be essential before the Tribunal took a decision on either the revival of sick company or it’s winding up (g) The revival strategy is to devised by the company administrator by way of various means prescribed under the bill. The strategy has to be formulated in consultation with the various classes of creditors and should be approved by 25 % of the unsecured creditors and 75 % of the secured creditors in value. (h) If there is a proposal to amalgamate the sick company with any other company as part of the revival strategy then this has to be approved by the shareholders of both companies by way of a special resolution. OR If such a strategy is not approved by the creditors then the tribunal can order the sick company to be wound up.
  • 33. Removal of names of ‘defunct’ companies from the register • The bill also lays down the following criteria which would enable the Registrar to conclude that removal of the name of a company from the register is appropriate – a) Failure of the company to commence business; b) Failure to pay subscription amount within 180 days of incorporation of the company; and c) The company has not been trading for a period of one year and has not made any application for obtaining the status of a dormant company. Winding up by the NCLT • The bill requires the tribunal to pass, within 90 days of presentations of a petition, an order for winding up a company. Further, it is proposed to reduce the time frame for submission of the official liquidator’s report to 60 days from date of such an order. In addition, amore detailed list of particulars is required to be furnished in the report. • It is proposed that a combined meeting of creditors and contributors is held within 30 days of the date or order of winding up in order to determine the composition of the Committee of Inspection.
  • 34. Voluntary Winding up • A single process for the voluntary winding up of a company has been proposed under the Bill compared to the separate processes for members and creditors voluntary winding up detailed in the existing law. • The bill makes it mandatory for directors to make a declaration of solvency in all cases, irrespective of whether the company is solvent or not. • The Companies Act requires directors to declare that either the company has no debts or it would be able to pay its debts within 3 years of the commencement of winding up, it has been proposed that directors state either the company has no debts or that it would be able to pay its debt from proceeds of assets sold in winding up. • The bill requires creditors meeting to be called in all cases and their approval for winding up the company is required to be sought. A two –thirds majority in value is required (currently under companies act the requirement is for a simple majority) • Further, creditors are also given the power to resolve that company should be wound up by Tribunal in cases where they opine that the company is insolvent and voluntary winding up is not in interest of all parties. The company is required to file an application with tribunal within 14 days of such a resolution • The company liquidator will be required to submit a report on a quarterly basis, giving details on the progress of the winding up.
  • 35. Summary Procedure for Liquidation • The proposed Bill introduces a new summary procedure for liquidation by tribunal in cases where a company being wound up has assets valued at less than INR 10 Million in value. • In the case of winding up under the summary procedure, the official Liquidator is required to dispose of assets, recover amounts from debtors a prepare a list of accepted and rejected a claims of creditors within specified period of time.
  • 36. Inspection, Inquiry and Investigations • Tribunal can order freezing of transfer, removal or disposal of assets during inspection, enquiry or investigation. (Clause 191 of Companies Bill 2009) • No suit or proceedings in court or tribunal or stay till investigation report is submitted. (Clause 194 of Companies Act, 2009) • Provision of Inspection and investigation apply to foreign company also ( Clause 199 of Companies Bill, 2009)
  • 37. Adjudication – NCLT & NCLAT • The bill establishes the National Company Law Tribunal (NCLT) administer various provision of company law and adjudicate disputes between companies and their stakeholders. It also establishes an Appellate Tribunal to hear appeals against orders made by the NCLT. • The NCLT may ask government to investigate a company on an application made by 100 or more shareholders of the company, or those who hold 10% or more voting power. • The bill introduces the concept of class action lawsuits by shareholders or creditors. • The bill seeks to introduce the concept of adjudication of penalties in respect of non – compliance with procedural law. Heavy monetary penalties ranging from Rs 5,000 to Rs 10 Million have been prescribed. • In case of failure to repay matured deposits or interest thereon within the agreed period or any extension thereof given by the tribunal, the company is punishable by a fine of between Rs 10 Million and Rs 100 Million • In addition the officer in default is punishable by a fine of between Rs 2.5 Million and Rs 20 Million.
  • 38. Special Courts • Another feature of the bill relates to the constitutions of Special courts for speedy trials of offences for non – compliance with the law as envisaged in clauses 396 and 397 of the bill. • A special court will be established by notification. • A special court will consist of a single judge appointed by the government in concurrence of the chief justice of the high court within those jurisdiction the judge will be working. • In addition to imposing fines on companies and officers in default, many provision in the bill impose imprisonment terms ranging from six months to five years. • The bill also seeks to establish special courts outside India for rectification of register of members.
  • 39. Corporate Social Responsibility The Bill may now include provisions to mandate that every company having • net worth of 5 billion or more, or turnover of 10 billion or more; or • net profit of 50 million or more during a year shall be required to formulate a CSR Policy to ensure that every year at least 2% of its average net profits during the 3 immediately preceding financial years shall be spent on CSR activities as may be approved and specified by the company.
  • 40. Miscellaneous • Insider Trading - The Bill bans only directors or key managerial personnel from insider trading. It prescribes a penalty of Rs 5 Lakhs to Rs 1 crore or imprisonment upto 5 years or both, for those guilty of the offence. • Payment of interest out of share capital – The existing provision relating to the power of a company to pay interest out of capital raised for construction of any work or building or provision of plant which cannot be made profitable for a lengthy period have been deleted in the bill. • Section 565 of Companies Act, 1956 had provision for conversion of partnership with seven or more members to a company. This provision could have been used for conversion of LLP to company. However there is no parallel provision in Companies Bill, 2009
  • 41. Executive Summary – New Concepts, Deficiencies, Contentious Issues New Concepts – i) One Person Companies ii) Registered Valuer iii) Special Courts iv) Introduction of Class Action Suits v) Key Managerial Personnel vi) Enhanced Investor Protection vii) Corporate Social Responsibility
  • 42. Deficiencies in the current bill – • Constitutional Validity: The Bill provides for adjudication of company matters by the National Company Law Tribunal set up by the Act. However, a similar body set up under a under a 2002 amendment to the Companies Act currently faces a legal challenge in the Supreme Court. • Conflict with other laws: Some provisions in the Bill conflict with provisions in the SEBI Act and its rules i.e. Insider Trading, Independent Directors and Delisting of Companies all of which have found place in the new bill are existing in SEBI regulations • Delegated Legislation: The Committee noted that the Bill provided excessive scope for delegated legislation. Several substantive provisions were left for rule-making, the Ministry was asked to reconsider provisions made for excessive delegated legislation. These include: (a) the definition of small companies, (b) manner of subscribing names to the Memorandum of Association, (c) format of Memorandum of Association to be prescribed in the Schedule, (d) manner of conducting Extraordinary General Meetings, (e) documents to be filed with the Registrar of Companies. • Conversion of Partnership to Company has been left out
  • 43. Contentious Issues • Related Party Transaction : Addressed in S. 295 to S.301 of the Companies Act has been highlighted in Clause 166 of the Companies Bill. There has been considerable change. • Inter – Corporate Loans and Investments : Section 372 – A of the Companies Act is to be found in Clause 164 of the Companies bill with a change that has been proposed by the Standing Committee with regard to exemption that were earlier available to the private companies for inter – corporate loans and investments has been removed , and which has been accepted to by MCA, which is not to be found in the bill at present but will be included before it is passed. • Appointment of Whole time Directors and Managers : Sections 269 of Companies Act presently govern appointment of whole time directors and mangers. The corresponding clause 174 of Companies Bill, proposes some changes like firstly the position of directors has been separated from Key Managerial Personnel, secondly appointment of whole time directors under the present act for public limited companies and private companies subsidiaries of public company need approval of the central government, which has been sought to be removed by a simple approval in the general immediately following such appointment under Companies Bill
  • 44. • Remuneration of Directors: Sections corresponding to Section 309 to Section 318, Schedule XIII of Companies Act are mentioned in Clauses 174 and 175 of Companies Bill. The key changes being lifting the cap of 11% of net profit being remuneration payable under present act • Remuneration Payable when there is inadequacy of profits, Commission Payable and Tax Free Payments : Section 198 to Section 201 of Companies Act deals with remuneration payable when there is inadequacy of profits, commission payable and tax free payments to whole time directors, MDs and managers have been left out in the Companies Bill, 2009 • Further Increase / Reduction in Share Capital: Increase in Share Capital – under Companies Act is only possible 2 years after formation of company or 1 year after allotment of share, this does not seem to appear under Companies Bill 2009. Reduction of Capital – No Changes • Exit options to minority shareholders: i) Safety net of exit options to be provided in case of mergers to minority shareholders, to prevent exploitation of minority shareholders. Hence an exit option would be provide at a pre – determined price and on a fair valuation.
  • 45. KIRTHI SRINIVAS G LAW STUDENT Contact - +919049460032 **Thank You**