The Companies Act, 2013, received presidential assent on August 29, 2013, replacing the previous act with 29 chapters and 470 sections. Key issues addressed include auditor rotation, fraud reporting, and penalties, with various suggestions from the ICAI for amendments and clarifications. The Act also establishes exemptions for certain private companies, easing restrictions on loans and deposit acceptance, while a Companies Law Committee has been formed to address ongoing implementation challenges.

1. COMPANIES ACT, 2013
CHARAK RAY
libra.charak@gmail.com

2. INTRODUCTION
1
The Companies Act 2013 got assent of the
President of the country on 29th August, 2013.
2
The Act comprises of 29 chapters, 470 Sections
with 7 Schedules as against 658 sections and 14
Schedules in the Companies Act, 1956
3 A total of 283 sections have been notified as
on date

3. ISSUES IN THE COMPANIES ACT 2013
CONCERNING THE PROFESSION
 Rotation of Auditors (Section 139)
 Fraud Reporting (Section 143 (12))
 Cap on number of Audits (Section 141 (3) (g))
 Reporting on Internal Financial Control (Section 143(3) (i))
 Harsh Penalties (Section 147)
 Prohibited Services (Section 144)
 Definition of Relative in the context of Auditor and
Independent Director
 Inter Company Loans (Section 185 and 186)

4. ROTATION OF AUDITORS
(SECTION 139)
Issue
 Rotation of Auditors was made mandatory for all class of
companies excluding one-person companies and small
companies.

5. ROTATION OF AUDITORS- ICAI
SUGGESTIONS
 Rotation shall be prospective and not retrospective.
 The Rotation shall be made applicable in staggered manner. The criteria for
applicability shall be:
a) For Listed Companies only to Sensex and Nifty
companies
b) Unlisted Companies whose:
– Net worth is greater than Rs 1000 crores or
– Borrowings from public and financial institutions are greater than Rs. 500
crores.

6. ROTATION OF AUDITORS- WHAT IS
MADE APPLICABLE
Rotation of Auditors is made applicable to the following
classes of companies excluding one person companies and
small companies:-
(a) all unlisted public companies having paid up share
capital of rupees ten crore or more;
(b) all private limited companies having paid up share
capital of rupees twenty crore or more;
(c) all companies having paid up share capital of below threshold
limit mentioned in (a) and (b) above, but having public
borrowings from financial institutions, banks or public deposits
of rupees fifty crores or more.

7. FRAUD REPORTING [SEC. 143 (12)]
• Issue:
 The definition of fraud as provided in explanation to the proviso in Section 447 has been
used in very generic sense.
 The pith and substance of the fraud reporting is the element of ‘materiality’ which has
been completely overlooked. Any fraud reporting should be viewed from the element of
materiality, otherwise, for all stakeholders it will be immaterial.
 The section casts responsibility only on the auditor by way of reporting; it does not cast
any responsibility on the management.
 There is a difference between audit and investigation.
 Fraud has three dimensions: (1) fraud committed by the management and (2) fraud
committed by the employees/officers on the management and (3) fraud committed by the
third party on the management. Each element has its own dimensions, verification,
investigation, and the section talks the generality of fraud and not so of specific nature
which should be material and vital. Otherwise, reporting on fraud will lose its shine and
sheen.
 While fraud committed by the management may fall within the reporting requirements,
fraud committed by the third party will be outside the scope, ambit and responsibility of
the auditor.

8. FRAUD REPORTING- ICAI
SUGGESTIONS
 Section 143 (12), shall be kept in abeyance.
 This Section should be made applicable for the audit of the financial year 2014-2015
onwards.
 Audit and Investigation should not be mixed together. If there is scope for further
investigation, special audit can be ordered for.
 Since Standards on Auditing have been made mandatory, there is in-built mechanism
to take care and reporting thereof fraud under respective statement of auditing
standards. Fraud Reporting shall be in line with Standards on Auditing issued by
ICAI.
 Responsibility on reporting on fraud should first be cast on the management and
accountability can be laid on the auditor thereafter.
 The concept of materiality as mentioned in the auditing standards and some
threshold limit (companies having paid up capital of or above Rs. 1 crore or fraud
involving 10% of the turnover or fraud which are repetitive in nature) should be the
criteria for reporting on fraud.

9. FRAUD REPORTING- WHAT IS MADE
APPLICABLE
• The concept of materiality and threshold for reporting by the
auditors has been brought under the ambit of the Act. Now, the
auditor would be required to report fraud above mandated
threshold to the Government and below the threshold, fraud
should be reported to Audit Committee/ Board.
• Further, the amendment also provides for the companies whose
auditors have reported frauds under this sub-section to the
audit committee or the Board but not reported to the Central
Government, the Board shall disclose the details about such
frauds in the Director's responsibility statement.

10. CAP ON NUMBER OF AUDITS
(SECTION 141 (3) (G))
Issue
 It may be noted that under the Companies Act, 1956, an auditor could
audit a total of 20 companies which excluded private limited companies.
Since the Companies Act, 2013 has introduced new type of companies
such as One Person Company, Small Company and Dormant Company,
and by implication, the ceiling of 20 companies includes all types of
companies in computation of the ceiling on audit assignment by an
auditor or partner of a firm.
 The requirement of section 141 (3) (g) by further reducing the limit of
audit from 30 to 20 companies will only give rise to further problems to
the management of companies in the appointment of new auditor(s).

11. CAP ON NUMBER OF AUDITS-
ICAI SUGGESTIONS
 It was suggested that, until the section itself is
amended, the cap on ceiling on audit assignment (i.e.
20) as stated in the section can be retained, the
exclusion of certain companies from the said limit of
20 companies may be as prescribed by the Institute of
Chartered Accountants of India.

12. CAP ON NUMBER OF AUDITS-
WHAT IS MADE APPLICABLE
 With the exemptions provided to the private
companies u/s 462 of the Act, the cap of 20 excludes
one person companies, dormant companies, small
companies, and private companies having paid-up
share capital less than one hundred crore rupees.

13. REPORTING ON INTERNAL FINANCIAL
CONTROL(SECTION 143 (3) (I))
Issue
 While adequacy of internal financial control system can be
reported by the auditor but it would be difficult for the auditor to
report on the operating effectiveness of such controls.

14. REPORTING ON INTERNAL FINANCIAL
CONTROL (SECTION 143 (3) (I))- ICAI
REPRESENTATION
 The reporting should be limited to listed companies.
 ICAI will bring out a Guidance Note on reporting of
Internal Financial Control which may be made
applicable to comply with the reporting requirements.
The reporting requirement should be restricted to the
preparation and presentation of the financial
statements.

15. REPORTING ON INTERNAL FINANCIAL
CONTROL [SEC. 143 (3) (I)]- WHAT IS
MADE APPLICABLE
 Reporting on Internal Financial Control u/s 143 (3) (i) of the Companies Act,
2013 has been deferred for one year i.e., upto 31.03.2015.
 The auditor may voluntarily report for the year from 01.04.2014 to
31.03.2015.

16. INTER COMPANY LOANS[SEC.185 & 186]
Issues:
 The new Act completely prohibits loans between interested companies in
case of private companies. Private companies may be excluded from this
requirement of inter company lending.

17. INTER COMPANY LOANS [SEC. 185 &
186]- ICAI REPRESENTATION
Private companies may be excluded from this requirement of
prohibition of inter-company lending. Holding company’s loans
to subsidiary has been permitted under the old Act also and
needs to be reconsidered.

18. INTER COMPANY LOANS [SEC. 185 & 186]
- WHAT WAS MADE APPLICABLE
Amendments for Exemption u/s 185 (Loans to Directors)
provided for loans to wholly owned subsidiaries and
guarantees/securities on loans taken from banks by subsidiaries
has been have been passed in the Companies (Amendment) Act,
2015.
Also, some exemptions have been provided in the Notification
for giving Exemptions to private companies under Section 462

19. SOME OF THE EXEMPTIONS PROVIDED
TO PVT. COMPANIES ON 5TH JUNE, 2015
• Now, a big relief to the private companies which will help in
the capital formation is that the companies can accept deposits
from members which is not exceeding 100 % of aggregate of
the paid up share capital and free reserves.
• Further, Loan to Directors etc., may be provided by a private
company in whose share capital another body corporate has
invested any money and if the borrowings of such a company
from banks or financial institutions or any body corporate is
less than twice of its paid up share capital or fifty crore rupees,
whichever is lower, and such a company has no default in
repayment of such borrowing subsisting at the time of making
transactions under this section.
19

20. PENDING ISSUES
Harsh Penalties (Section 147 and 447)-
The penalties provided are very harsh especially those relating liabilities on
auditors. The penalty should be commensurate with the responsibilities and
consequent liabilities. We are continuously representing for review of
penalties.
 Prohibited Services (Section 144)
Type of Management Services to be done by a CA should be left to ICAI
 Definition of Relative in context of auditor and Independent Director
(Section 2 (77))
Definition is very wide

21. CONSTITUTION OF COMPANIES LAW
COMMITTEE
• Taking into account further difficulties and practical issues the Ministry has
constituted Companies Law Committee to make recommendations to the
Government on issues arising from the implementation of the Companies Act
2013