3. NEED TO REPLACE COMPANIES ACT, 1956 WITH A
NEW COMPANIES ACT
• In view of changes in the national and
international economic environment and
expansion and growth of economy of our Country.
• Consultation with various bodies & J.J. Irani
Committee
4. Not so lenient stand anymore
• The new Bill looks to put more information in the
public domain, particularly related to unlisted and
private Companies.
• As of now, this set has much more lenient
reporting requirements as compared to the listed
Companies, which only constitutes about 1% of
the 1.06 million Companies registered with the
MCA
5. Companies Act, 1956 Companies Bill, 2012
• It was introduced on 1st
April, 1956.
• It has 658 Section and 15
Schedules.
• It extends to the whole
of India (Sikkim has its
own Companies Act).
As passed by the Lok-
Sabha on 18th December,
2012.
The Bill has 470 Clauses,
29 chapters and 7
Schedules.
It applies to the whole of
India.
6. SOME QUICK BITES
• Financial Year (1st
April to 31st
March)
• Private Limited Company: Number of members
increased (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. (such
countries as may be notified by the Central Govt.)
• And Vice-versa
7. KMP (Key Managerial Personnel)
• The MD or CEO or Manager and in their absence
WTD
• The Company Secretary
and The CFO
• Appointment to be made by the Board
• No Escape clause
(Every Company belonging to such class(es) as may be
prescribed shall have a whole time KMP – Clause
203(1))
8. Contd…
A KMP shall not hold office in more than 1 company
except in its subsidiary company at the same time.
But a Company may appoint as its MD if he is the MD
or manager of one other company (other conditions
to be fulfilled)
If the office of KMP vacated, the vacancy to be filled
up within a period of six months
A KMP may be a director of any Company with the
permission of the Board
9. Functions of a CS laid out
Clause 205
Functions shall include:
- to report to the Board about compliance with the
provisions of the Companies Act, the rules made there
under and other laws applicable to the Company
- to ensure compliance with applicable secretarial
standards
- to discharge such other duties as may be prescribed
10. Penalty for not appointing KMP
• On Company – Rs.1.00 lakh, may extend to Rs.5.00
lakh
• On every Director & KMP who is in default–
Rs.50,000.00
• For continuing default– Rs.1000.00……PER DAY
11. One Person Company
Promote Entrepreneurship
Other than a public limited
Company
MOA have to mention
successor
May have one or more directors
Less cumbersome
Restriction on number of
members (not exceeding 100)
Option to dispense with AGM
Financial Statement may not
include cash flow statement
12. OPC…..Contd….
• At least one meeting of the Board of Directors to be
conducted in each half of a calendar year and the gap
between the two meetings should not be less than 90
days (This also applicable to small and dormant
companies)
• The above requirement shall not apply to OPC in
which there is only one director on its Board of
Directors.
13. MOA and AOA
Only objects for which company is incorporated along
with matters considered necessary for its furtherance
shall be mentioned. The Company cannot provide for
other objects clause.
Articles of Association of the Company may contain
provisions with respect to entrenchment whereby the
specified provisions of the article can be altered only if
the more restrictive conditions or procedures as
compared to those applicable in case of special
resolution have been met with.
14. Registered Office
• Only communication address may be given at the
time of incorporation.
• Registered office address is required to be intimated
within 30 days of its incorporation.
• Notice of every change of the situation of the
registered office shall be given to the Registrar within
15 days of the change, who shall record the same.
15. Certificate of Commencement Not Required
• A Company having a share capital (whether public
or private) shall not commence any business or
exercise any borrowing power unless - declaration is
filed by a director with the Registrar and
• A confirmation that the Company has filed with the
Registrar a verification of its registered office, has to
be filed.
16. Compromise, Amalgamation & Mergers
• Simplified for some
• Transferee Company may continue as an unlisted
entity
• Minority ‘squeeze out’ concept
• Auditor’s certificate- Compliant with applicable
accounting standards
• Objection criteria
17. Prospectus & Allotment of Securities
Governs the issue of not only
shares but all types of securities
Provides that a public Company
can only issue securities by
following the provisions related
to Public Offer or Private
Placement or by way of bonus or
right issue.
Private Company may issue
securities only through private
placement.
QIB shall not be covered under
the provisions related to Private
Placement.
18. Prospectus & Allotment of Securities
Now any person (including
group or association) affected
by any misleading statement,
inclusion or omission of any
matter in the prospectus - file
any suit or take any action
providing for civil liability for
fraudulently inducing persons
to invest money.
In addition to shares, return of
allotment is required to be
filed for all types of securities.
19. Shares
• Company cannot issue shares at discount other than
as sweat
• Company may issue preference shares redeemable
after 20 years for infrastructure projects
• No reduction of capital if deposit not repaid
20. A Bold Step
• If a Company, with intent to defraud, issues a
DUPLICATE Certificate of shares, the Company shall
be punishable with fine:
• Which shall not be less than 5 times the face
value of the shares involved
• But which shall extend to 10 times the face
value of such shares or Rs.10.00 crores, whichever is
higher.
• Stringent penalties have also been imposed for
defaulting officers of the Company.
21. Share Capital
• Redemption of unredeemed preference shares by issue of further
preference shares with consent of holders of 75% in value of such
preference shares and the NCLT.
• Unlike section 94(1) (b) of the 1956 Act, alteration of share capital by
consolidation and division of share capital into shares of larger
amount than existing shares to require NCLT’s approval.
22. Accounts of Companies
• Permit for the first time maintenance of books of account and
other books , paper, minutes in electronic mode.
• Compulsory consolidation of accounts of Holding Company and
its 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 company
shall also include additional statement related to internal finance
control and compliance of all applicable laws.
23. Directors’ Report
• The Director’s Report for every Company, inter-alia,
except for One Person Company, shall have to
provide various types of additional information:
• number of meetings of the Board
• company’s policy on directors’ appointment and
remuneration
• 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 in
the auditors report
• particulars of loans, guarantees or investments etc.
• specify reasons for not spending specified amt in CSR
24. New provision for D/Report
Every listed Company shall disclose in
the Board’s Report, the ratio of the
remuneration of each director to the
median employee’s remuneration and
such other details as may be
prescribed.
25. CSR
• Provisions related to Corporate Social Responsibility
(CSR). Activities that can be undertaken given in Schedule
VII.
• For CSR, Net worth criteria >= Rs.500 crore or
Turnover criteria >= Rs.1000 crore or
Net profit criteria >= Rs.5 crore or more during any
financial yr.
• In every financial yr, atleast 2% of the average NP made
during the 3 immediately preceding financial years
• Preference to local areas where it operates
• Average NP shall be in accordance to clause 198
26. Secretarial Audit
• Every listed Company and Companies belonging to
other class of Companies as prescribed will have to
mandatorily 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 in
Director’s Report
• If contravention, the Company, every officer of the
Company or the PCS, who is in default shall be fined :
not less than 1,00,000/-, may extend to 5,00,000/-
27. Certification of Annual Return
In case a PCS certifies the Annual Return
otherwise in conformity with the requirements of
the specified section, such PCS shall be
punishable with fine which shall not be less than
Rs.50,000 but which may extend to Rs.5,00,000.
Changes in shareholding of promoters and top 10
shareholders
A listed company to file a return with the ROC
with respect to changes in the above details (to
ensure audit trail of ownership)
28. Report on AGM
Listed company along with the report on
each AGM, shall also file a confirmation
that the AGM was convened, held and
conducted as per law
Report will be in the prescribed manner
To be filed with the ROC within 30 days of
conclusion of the AGM
Non-filing will be a punishable offence
29. Audit & Auditors
• Individual or Audit Firm for a period of 5 years and block
of 5 years thereafter
• For Listed Companies and other prescribed class of
companies – Compulsory rotation in 5 years (individual)/
10 years (firm)
• In addition to accounting standards, auditing standards
also being made compulsory
• Not to render certain services
30. First auditor-interesting provision
Shall be appointed by the BOD within 30 days
from the date of registration of the Company
In case the BOD fails to do so, it shall inform the
members of the Company
The members shall appoint the auditor within 90
days
At an EGM
The auditor to hold office till the conclusion of
the first AGM
31. Internal Audit
Prescribed class of companies shall be required to
appoint an internal auditor to conduct internal
audit of the functions and activities of the
Company.
This internal auditor could be a CA or a Cost
Accountant or such other professional, as may be
decided by the Board.
Appointment to be done by the Board.
32. The current scope of internal
audit
Inter-alia:
Obtaining knowledge of legal and regulatory
framework within which the entity operates
Obtaining knowledge of the entity’s accounting and
internal control systems and policies
Determination of the effectiveness of internal control
procedures adopted by the entity
Determination of the nature, timing and extent of
procedures to be performed
(source: website of the ICAI)
33. Directors
• At least 1 woman director in such class or classes of Companies
as may be prescribed.
• At least 1 director shall be a person - stayed in India for a total
period of not less than 182 days in the previous calendar year.
• Listed public company shall have at least 1/3 of the total number
of 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 resolution
without getting the approval of Central Government, as earlier
required.
• Cannot become directors in more than 20 Companies instead of
15. Out of this 20, he cannot be director of more than 10 public
Companies.
• 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 to
give a declaration of meeting the criteria of independence.
34. Look at this-Register of Directors
The register shall contain:
- Particulars of its Directors
- KMP
Details like:
- Securities held by each of them in the Company or
its holding, subsidiary, subsidiary of company’s
holding company or associate companies
- Other details as may be prescribed
35. Vacation of office of Director
If he absents himself from all the meetings of the BOD
held during a period of 12 months without or without
seeking LOA of the Board (clause 167(b))
Fine is hefty if he continues even after he should have
vacated his office
Resignation of Director (clause 168)
Director also needs to forward to ROC, a copy of his
resignation along with detailed reasons within 30 days of
resignation in the prescribed manner
Quick fix solution
Where all directors have resigned, the promoter or in his
absence, the CG shall appoint required number of
directors. These directors to hold office till the directors
are appointed in General Meeting
36. Notice of Board Meeting
Atleast 7 days notice is required
The notice may be sent by electronic means
Meeting may be called at shorter notice
Condition that atleast 1 independent director, if any,
shall be present at the meeting
In the absence of the independent director from such
a meeting, decisions of the meeting will be final only
on ratification by atleast 1 independent director
37. Meeting of Board & Its Powers
• Not more than 120 days shall elapse between 2 consecutive
meetings – applicable to private companies also
• Meetings through video conferencing incorporated
• Besides Audit, Remuneration Committee also made
mandatory; Corporate Social Responsibility Committee
where CSR applicable; Stakeholders Relationship
Committee 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 investment
has been extended to include loan and investment to any
person
• Investments not beyond 2 layers of investment companies
• Listed company may have one director elected by such
small shareholders
38. Clause 184 akin to sec 299
Every Director, whether directly or indirectly,
concerned or interested in a/proposed contract or
arrangement:
- with a body corporate in which such director in
association with any other director, holds more than
2% 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
39. Audit Committee
Every listed company and such other prescribed class
– Audit Committee
Inter-alia, it shall review and monitor the auditor’s
independence and performance, and effectiveness of
the audit process
Vigil Mechanism
Every listed company or for those prescribed,
establish a vigil mechanism for directors and
employees to report genuine concerns. It shall
provide for adequate safeguards against victimisation
40. En block resolution
A single resolution not allowed for appointing 2 or
more persons as directors of the Company
unless
A proposal to move such a motion has first been
agreed to at the meeting without any vote being cast
against it.
(Clause 162)
41. Managerial Remuneration
• CLAUSE 197
Provisions relating to limits on remuneration
provided 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, Schedule
V will be applicable
42. Accounts of Companies
If the MD, WTD in-charge of finance, CFO or any
other person specifically charged by the Board,
contravenes the provisions relating to accounts, the
said person shall be punishable with imprisonment or
with fine
In case of subsidiaries, prepare a consolidated
financial statement and all the subsidiaries in the
same form and manner as that of its own. This also
needs to be laid before the AGM
For this purpose, subsidiary includes associate
company and joint venture
43. Quantification to be done
Where the Financial Statements do not comply with
the applicable AS as specified in clause 129(1), the
Company will have to disclose:
- the deviation from the AS
- the reasons for such deviation
- financial effects, arising out of such deviation
After obtaining approval of the Tribunal, provision of
voluntary revision of financial statements or Board’s
Report has been included in the Bill (clause 131)
44. New provision (clause 137)
Provided the FS not adopted at AGM or adjourned
AGM, such un-adopted FS along with the required
documents shall be filed within 30 days of AGM and
the ROC shall take it in records as provisional till the
adopted FS filed.
Where the AGM for any year not held, FS duly signed
along with the statement of reasons shall be filed.
A company will have to attach the accounts of its
foreign subsidiary and which have not established
their place of business in India.
45. Remodel the Corporate Structure
• It is seen how discreetly Companies route their
investments by forming a myriad matrix
• The Bill proposes to restrict the number of layers of
investment Companies to 2. This will help in
identifying the ultimate beneficiary
• The catch is that the number of layers of subsidiaries
that the 2 investment/ holding Companies can have is
yet not specified
46. Case for study
• Chintamani Agrotech
• 2 Companies – Jinbhuvish Power and Aarya
Agrotech owned a majority stake in Chintamani,
but the ultimate beneficiary of these Companies
was very hard to determine
• Upto 3 layers, the ownership was tried to be
traced but only to encounter new corporate
entities at every level
47. Class Action Suits
• A minimum of 100 or a % to be specified later, can
join hands to claim damages against the:
* Company
* Auditors
* Consultants
* Experts or Advisors
for any ‘wrongful, fraudulent or unlawful’ conduct!!
A weapon in the hands of the investors to save their
common interest.
48. Case for reference
• Satyam Computer Services now known as Mahindra
Satyam paid $125 million to settle ‘class-action’ suits
filed by shareholders in the US, where its shares were
listed.
• Its auditors shelled out $25 million to do the same in
the US.
• Indian shareholders did not receive a penny from any
such settlement as the Country did not allow class-
action suits.
49. ‘Fraud’ defined
• Broadly:
‘Any omission or concealment with an INTENT to
deceive and gain undue advantage from
shareholders or creditors, whether or not there is
any wrongful gain or loss’
So, for example, if the 2 former executives of
Reebok India are found guilty of falsification of
documents, under the proposed new law, they
could face arrest and pay fines.
50. 18 situations
• 18 situations in which the bill has prescribed frauds
and penalties
• In several cases, the penalties have been increased
upto 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 receive
statutory status (but not a constitutional body like the
CAG). This will give more teeth to the Investigator.
• As per MCA’s latest annual report, there has been no
conviction in the 835 cases of prosecution filed in
different courts following an investigation by the
SFIO
51. NFRA & NCLT
• NFRA (National Financial Reporting Authority) will
recommend accounting and auditing standards,
currently the domain of ICAI.
• In the Satyam accounting fraud, the partners of audit
firms were made liable for wrongdoing and not the
firm. This could change. NFRA can take action against
the audit firm.
• NCLT (National Company Law Tribunal) to replace
the CLB.
• NCLT will have to complete proceedings in 3 months.
52. Sick Companies
Any secured creditor may file an application to
the Tribunal representing 50% or more of its
outstanding amount of debt; if the debt remains
unpaid for more than 30 days of the service of the
demand notice
This application would be for determination that
the Company be declared as a sick company
53. ROC’s Register of Companies
Where the Registrar has reasonable cause to believe:
- that a Company has failed to commence its business
within 1 year of its incorporation
- that the subscription money remains unpaid for
more than 180 days
- that the Company is not carrying on any business for
a period of 2 immediately preceding financial years
and not even applied for dormant status
The ROC shall send a notice to such companies of his
intention to remove the name from the Register
54. Miscellaneous Provisions
• Annual Return –up to the date of closure of financial
year
• First AGM – within 9 months
• Increased quorum - for public Companies > 1000
members
• Every Company to follow the Secretarial Standards
while making the minutes of board and general
meeting
• Penalty for tampering with minutes which may extend
to 2 years of imprisonment and with fine which shall
not be less than Rs.25,000 but which may extend to
Rs.1,00,000.
55. Continued….
Provisions for approval of Financial Statements by
way of signatures, before they are signed on behalf
of the Board
Clause 247: New chapter on registered valuers
inserted
Valuation in respect of any property, stock,
shares, debentures, goodwill etc. by a person
registered as a valuer
Appointment on such terms and conditions as
may be prescribed
56. Schedules
I – MOA & AOA
II – Useful lives to compute depreciation
III – General Instructions for preparation of balance
sheet and statement of profit and loss of a Company
IV – Code for Independent Directors
V – Managerial Remuneration
VI – Explanation of terms like agriculture,
telecommunication etc.
VII – Activities for CSR
57. Wait and Watch!!
•“The challenge is not to introduce new
provisions, but the implementation”
•The devil lies in the details…….details are
yet to be received in the public domain
•The aim is not to impose ‘inspector raj’. It is
to make India an attractive and safe
investment destination.
