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Lecture on Companies Act, 2013

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Lecture on Companies Act, 2013

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Lecture on Companies Act, 2013

  1. 1. Lecture on Companies Act, 2013 Prof. (Dr) Shyam Agarwal
  2. 2. Syllabus Components 1. Course Objective, Need of Regulating Mechanism and Legal Paradigm 2. Sources of Business Law 3. Companies Act, 2013 (CA 2013): Evolution & Structure 4. Company: Meaning, Essential Features 5. Types of Companies and Salient Characteristics 6. Promotion and Formation of a Company (Co) 7. Memorandum of Association (MoA) & Changes 8. Articles of Association (AoA) and Amendment 9. Prospectus and Misstatement in it 2
  3. 3. Syllabus Components (2) 10. Co Meetings 11. Board of Directors (incl. Independent Directors) 12. Co Directors and Managers 13. Duties of Directors 14. Duties and Accountability of Managers 15. Appointment, Remuneration and allied Matters 16. Company Secretary: Duties and Responsibilities 17. CSR Activities of a Co and its place in overall Structural Framework 18. Overview of Learnings from CA, 2013. 3
  4. 4. Course Objective  Understanding of the Act and How it influences Business in India.  Appreciation of - Opportunities, - Risks and - Challenges.  Working on Implications and Relevance for Managerial Decisions in tandem with Enterprise Goals. 4
  5. 5.  Law is the Regulating Mechanism, - Enforced by the Government, State, - For Maintenance of Peace and Order, - by Controlling and Policing Conduct (of Citizens and Entities)  Law, Social Institution for ensuring Justice in Society and its - Role in achieving various Socio-economic Goals with - Protection of Property and Contractual Rights.  Business Law furthers the cause of - Enterprise in terms of higher Profits, while ensuring - Economic Development and Growth. 5
  6. 6.  Knowledge of Law; hence a Must and Imperative. For, ignorance is no Bliss, implying No Excuse and (May be) Lost Opportunities for Better Outcome.  Growth of Materialism and Individualism in Life necessitates Reform in Laws, Rules of Conduct both - Conceptually and - Structurally.  Changes must result in JUSTICE and ECONOMIC SECURITY and DEVELOPMENT through LEVEL PLAYING FIELD for INNOVATIVE IDEAS and MERIT. 6
  7. 7. LAW (A Taxonomy) 1. Constitutional Law 2. International Law 3. Administrative Law 4. Criminal Law 5. Civil Law 6. Business Law (part of Civil Law Architecture.) (Mercantile Law or Commercial Law) Ensures Regulation of Business Transactions on touchstones like Common Sense, Natural Justice, and principles of Equity. 7
  8. 8. Sources of Business Law 1. English Mercantile Law (Anglo-Saxon heritage). 2. Law by Precedents and Judicial Pronouncements. 3. Statutory Laws, enacted by Indian legislatures. (Not Unwritten laws as in British jurisprudence.) 4. Customary and Trade usage (in practice) Adopted by Courts, when it is - Ancient, Reasonable and Certain; - Definite and Consistent with other customs in place and - Has Uniform Recognition in ordinary course of Business. 8
  9. 9. The Companies Act, 2013 (CA 2013): Evolution Fore-Runners: Indian Companies Act - 1866, - 1882, - 1913, The Companies Act - 1956, and - 2013. “In a time of drastic change, it is the unlearners who inherit the future. The learned find themselves equipped to live in a world that no longer exists.” ERIC HOFFER. 9
  10. 10. CA, 2013 CA, 1956  Sections 470 658 (in 29 chapters)  Schedules 7 15  New Definitions 33 -  Provision of Delegated Legislation 74 % 16 % Above implies more flexibility with Executive wingof Govt. of India (GoI) to take quick decisions, ensuring faster Adaptability for changes in Business eco-system.  Substantial part of Act is in form of Rules. All Sections, Rules stand notified, as on date. (in Phases) 10
  11. 11. Re-enactment of the new CA, 2013: The Objective 1. Bringing flexibility & Adoption of Internationally Accepted Practices. 2. Self Regulation with more Disclosures. 3. Stringent Punishment for Violation as a Deterrent. 4. Effective Protection for different sections of Society. 5. Innovative Measures in tune with Emerging Realities. 6. Healthy Growth if India Inc. 7. Efficient Enforcement of Law. 11
  12. 12. CA, 2013: Major Areas of Focus 1. New Concepts 2. Corporate Governance Enhanced 3. Liberalization 4. Disclosures and Accountability 5. Accounts and Audit 6. Investor Protection 7. Tightening Provisions 8. Restructuring 9. Enforcement of Law - New Institutions 12
  13. 13. CA 2013: New Concepts 1. Introduction of One Person Company 2. Stipulation of Woman director 3. Provision of Class Action Suits 4. Concept of Associate Company 5. Introduction of Registered Valuer 6. Fast Track Merger for holding & Subsidiary Companies 7. Cross Border Merger 8. Sickness redefined (omitted by Insolvency and bankruptcy Code 2016) 9. Use of electronic mode (e-governance): maintenance of Documents, Records, Registers, Books of accounts etc. in e-Form 13
  14. 14. CA 2013: Novelties 1. Secretarial Standards & Auditing Standards 2. Secretarial Audit 3. Listed Company 4. Corporate Social Responsibility (CSR) 5. Mediation and Conciliation Panel 6. Special Courts 7. Fraud 8. Association of Experts like Chartered Accountant, Valuer, Cost Accountant, Engineer, Company Secretary amongst others. 9. Code for Independent Directors. (IDs) 14
  15. 15. Enhanced Corporate Governance 1. Independent Directors (IDs) – Exhaustive Definition, Code of Conduct, Performance Evaluation, Separate Meetings of IDs, Restricted Tenure, Limited Liability etc. such concepts added as to IDs. 2. Provision to spend at least 2% of Average Net Profit on CSR by Companies meeting a specific criteria 3. Compulsory rotation of Individual Auditors every 5 yrs & of Audit firms every 10 yrs. Cap of 20 Cos. for audit by a firm 4. Quorum of General Meeting of a public Company to depend upon the number of its members. 15
  16. 16. Enhanced Corporate Governance (Cont..) 5. Restriction on Insider Trading & Forward Dealing by Directors & Key Managerial Personnel. 6. Consolidated financial statements of all subsidiaries to be laid before AGM along with financials, Subsidiaries to include Associate companies & Joint Ventures. 7. For uniformity & better compatibility, Financial year of the Companies can be from April to March only (exceptions: Foreign Holding/ Subsidiary subject to Tribunal’s approval). 8. Mandatory Internal & Secretarial Audit for prescribed Companies 16
  17. 17. CA 2013: Some Liberal Provisions 1. Bifurcation of Objects clause into main, ancillary & other objects has been done away with. Only objects to be stated in MoA. 2. No approval from Central Govt. for related party transaction/loan to whole-time Director / MD - (Section 295, 297 approval has been done away with). 3. For paying monthly salary to Non-Executive director (Some Limits) – (Section 309(4) approval has been done away with). 4. Rationalization of process of removing Company name by ROC. 5. For holding the place of profit by the Director to in Company or its Subsidiary – (Section 314 approval has been done away with) 6. Summary Procedure for winding up of Companies 17
  18. 18. CA 2013: Disclosures and Accountability 1. Private placement norms made more stringent. 2. Justification of entering into Related Party Transaction required to be disclosed in the Directors Report. 3. Verification of registered office address required. 4. Enhanced Disclosures in the Prospectus , source of promoters contribution is also required to be disclosed. 5. Exit opportunity to dissenting shareholders if the Company intends to vary the objects as specified in the Prospectus. 6. Rubber Stamp Directors: Absence from Board Meetings for a consecutive period of 12 months shall make his Office vacant. 18
  19. 19. CA 2013: Disclosures & Accountability and Audit 7. Duties of Directors towards the Company now prescribed. 8. Immunity to Independent & Non-Executive Directors not being Promoters. (Liability only if the act occurred with their knowledge attributable through Board Process). 9. Apart from the Balance Sheet and P&L account, auditors are required to report on the Cash Flow of the Company. 10. Restriction on Non Audit functions by Auditor. Auditors to Comply with the Auditing Standards also along with the Accounting Standards. 19
  20. 20. CA 2013: National Financial Reporting Authority 1. Monitor & Enforcing Compliance of Accounting & Auditing Standards. 2. Power to investigate matters of Professional or other misconduct committed by any member of ICAI. 3. No other Institute or Body shall initiate or continue any proceeding where NFRA has initiated an investigation. 4. In case of misconduct, power to order penalty of not less than Rs.1 lakh (Individual) not less than Rs. 10 lakh (Firms). 5. Debarring member or firm from engaging himself or itself from practice for a period which can extend up to max. 10 years. 20
  21. 21. CA 2013: Investor Protection 1. Class Action suit empowering minority shareholders. 2. Mandatory Exit Opportunity to the dissenting shareholders in case of Change of Objects or change in the Prospectus. 3. Shares in respect of which unpaid / unclaimed dividend has been transferred to IEPF shall also be transferred to IEPF. 4. Person claiming Share / amount in the Unpaid Dividend Account that got transferred to IEPF may apply to the authority for the dividend / Shares. 21
  22. 22. CA 2013: Law Enforcement – Institutional Structure with Redefined Roles 1. Establishment of National Company Law Tribunal (NCLT) & Appellate Tribunal. 2. Establishment of Special Courts, Mediation & Conciliation panel for speedy trial of offences under the Act. 3. Serious Fraud Investigation Office (SFIO) - A separate agency for investigation of Company related frauds. 4. National Financial Reporting Authority. 5. Investor Education & Protection Fund. 22
  23. 23. Fraud: Enforcement against, 1. Fraud is defined in CA 2013 to clearly identify the defaulters. 2. Fraud is an Act of Omission, Concealment of Fact or Abuse of Position (Even with the connivance in any manner) with intent to Deceive, or Gain undue advantage from or Injure interests of Company or Shareholders or Creditors or any other person. (whether or not there is Wrongful Gain or Wrongful Loss.) 3. Stringent Punishment for fraud – Imprisonment max. up to 10 years & fine maximum up to 3 times of amount involved. 4. Imprisonment & twice the prescribed penalty in case of repeated defaults committed within a span of 3 years. 5. Offences punishable with fine or imprisonment or both to be compounded only by Special Courts. 23
  24. 24. Basis CA 2013 CA 1956 OPC One Person can form a One Person Company (OPC). One Person can’t form a company. Types of Companies (Co) 15 10 Maximum number of members allowed in private company 200 (for a private company other than OPC). 50 Commencement of Business A Co having a share capital (whether public or private) shall not commence any business or exercise any borrowing powers unless a declaration is filed by a director with the Registrar . A company having a share capital cannot commence business or exercise borrowing powers unless it has complied with long formalities. CA 2013 and CA 1956: Comparative Perspective24
  25. 25. Basis CA 2013 CA 1956 Registered Office On and from 15th day of its incorporation. From earlier of following two dates:  Day it begins business,  30th day after date of its incorporation. Notice of change of registered office address To be given to Registrar of Companies (RoC) within 15 days of such change. To be given to RoC within 30 days of such change. Service of documents by electronic mode Electronics mode for sending documents to Co recognized by CA 2013 Act. It also recognizes “such electronic or other mode as may be prescribed” for service of documents to RoC. Service by electronic mode not recognized by the 1956 Act. 25
  26. 26. Basis CA 2013 CA 1956 Service of documents on member / RoC by speed post / Courier Recognised mode of service ‘Courier’ defined. Not a recognized mode of service. Record of Depository Record of the depository is the prima facie evidence of the interest of the beneficial owner of shares held in depository form. No provision in this regard. Prohibition on issue of shares at discount The 2013 Act has prohibited issue of shares (other than sweat equity shares) at a discount. Under the 2013 Act, only sweat equity shares can be issued at a discount. Section 79 of the 1956 Act permitted issue of shares at a discount subject to certain conditions. 26
  27. 27. Basis CA 2013 CA 1956 Notice of redemption of redeemable preference share to ROC. If Co redeems redeemable preference shares, notice has to be given to RoC with an altered memorandum. Notice not required to be given to ROC. Inspection of registers, copies of returns etc. The 2013 Act does not empower the Co to restrict right to inspect registers, copies of indices, returns, etc. Section 163: Right of inspection of registers of members, debenture holders etc. shall be subject to such reasonable restrictions, as Co may impose. (Not less than 2 hours in each day are allowed for inspection.) Annual General Meeting (AGM) Section 96(2) clarifies what is meant by ‘business hours’ as between 9 am and 6 pm The term ‘business hours’ was not defined in the 1956 Act. 27
  28. 28. Basis CA 2013 CA 1956 Notice for general meetings Sec 101 permits giving notice of Co general meetings through electronic mode. No express provision permitting notice to be given in electronic mode. Quorum for general meetings for public companies 5 members personally present if number of members as on date of meeting is ≤ 1000. 15 members personally present if number of members as on date of meeting is > 1000, but ≤ 5,000. 30 members personally present if number of members as on date of meeting is > 5,000. Quorum requirements for public companies for general meetings are 5 members personally present unless the articles stipulate a larger number. 28
  29. 29. Basis CA 2013 CA 1956 Proxy Sec 105 provides that a person appointed as proxy shall act on behalf of such no. of members, ≤ 50 and such no. of shares as may be prescribed. No such restriction in 1956 Act. Dividend only from free reserves No dividend shall be declared or paid by a Co from its reserves other than free reserves. No express provisions in this regard in the 1956 Act. Whether transfer to reserves compulsory? No. A company may, before declaration of any dividend in any financial year, transfer its profits for that financial year as it may consider appropriate to reserves of the company. Yes. Where Co proposes to declare dividend for any fiscal (at a rate >10% of paid- up capital) out of profits for that year, Co has to transfer to profits as prescribed in the Co (Transfer of Profit to Reserves) Rules 1975. 29
  30. 30. Basis CA 2013 CA 1956 Notice for Board of Directors (BoD) Meetings ≥ 7 days notice to be given for BoD Meetings. Shorter notice may be given for BoD meeting to transact urgent business provided at least one independent director, if any, shall be present at the meeting. Length of notice period not mentioned. Frequency of BoD meetings > 120 days shall not intervene between 2 consecutive BoD Meetings. Sec 285 provided that a meeting of its BoD shall be held at least once in every 3 (calendar) months. Audit committee Every listed Co and such other class or classes of Co, as may be prescribed. Every public Co having paid-up capital of ≥ Rs. 5 cr. 30
  31. 31. Basis CA 2013 CA 1956 Appointment of Managing Director (MD), whole- time director or manager - All companies No Co shall re-appoint any person as its MD, whole time director or manager, ≤ 1year before expiry of his term. Any re-appointment, re- employment or extension of MD or manager, ≤ 1year before expiry of his term. Ratio of remuneration of each director to the median employee’s remuneration Every listed Co shall disclose in BoD’s report ratio of remuneration of each director to median employee’s remuneration and such other details as may be prescribed. Such disclosure not required. Secretarial audit Mandatory secretarial audit by a Co Secy in practice for listed Co and such class of Co as may be prescribed. Secretarial audit report to be annexed to BoD’s report. No such requirements. 31
  32. 32. Thank You. 32

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