The document provides an overview of key provisions introduced under the new Companies Act 2013 relating to incorporation of companies, types of companies, share capital, prospectus and allotment of securities, debentures, holding-subsidiary relationships, acceptance of deposits, accounting standards and depreciation accounting. Some of the important changes introduced include more stringent norms for incorporation, provisions for one person companies and small companies, restrictions on acceptance of deposits, mandatory creation of debenture redemption reserve, and shift from block depreciation to component accounting.

1. Bombay Chartered Accountants’ Society
Important provisions under
the Companies Act, 2013
CA P. R. Ramesh
9 October 2013

2. Background

3. New Company Law
A delegated legislation
•
•
The Companies Act, 2013 (2013 Act) now enacted
To come in force - as notified
‒
•
98 sections notified on 12 September 2013. Corresponding
sections of Companies Act, 1956 (1956 Act) ceased to have
effect
Rules issued for public comments in phases
‒
‒
‒
•
1st set of Draft Rules released on 9th September
2nd set of Draft Rules released on 20th September
Further draft Rules expected soon!
Delegated legislation - over 330 areas where
Rules will clarify law!
• Significant emphasis on
‒ Self-regulation with disclosure/transparency instead of
‗Government approval‘ based regime
‒ e-Governance and Corporate Governance measures
‒ Accounting and Reporting considerations
‒ Stricter enforcement - investigate, adjudicate and penalize
• Provisions will be applicable on the date(s) when they are
notified in Official Gazette
‒ Different sections of the Act may be applicable from different dates
‒ Class of companies can be prescribed to which provisions may
apply
3

4. 98 Sections of Companies Act 2013 brought into force
•MCA notification on 12 September 2013: MCA has issued a notification bringing into force 98
sections of the Companies Act, 2013 from 12 September 2013. These inter alia includes:
•
•
•
•
•
•
•
Definitions
Prospectus and allotment of securities
appointment of directors
Restrictions on powers of Board
Loan to directors
Holding of AGM, EGM, quorum and proxy thereof
Constitution of National Company Law Tribunal etc..
•MCA circular on 13 September 2013:
• Till the Standards of Accounting or any addendum thereto are prescribed by CG in consultation with
and having recommendation of NFRA, the existing Accounting Standards notified under the 1956
Act shall continue to apply
• In respect of requirements of special resolution under Section 180 of the 2013 Act, as against
ordinary resolution required the 1956 Act, if notice for any such general meeting was issued prior to
12 September 2013, then such resolution may be passed in accordance with the requirements of the
1956 Act
•MCA circular on 18 September 2013: MCA has clarified that the relevant provisions of the
1956 Act corresponding to provisions of 98 sections of 2013 Act brought into force, will cease
to have effect from 12 September 2013
4

5. Incorporation of companies

6. Incorporation of companies
Mandatory formation
• No association or partnership consisting of more than prescribed number of
persons (not more than 100) shall be formed for the purpose of carrying on
any business unless it is registered as a company or is formed under any
other law
• The above is not applicable to:
an HUF carrying on any business and association; or
partnership formed by professionals governed by special acts
Under the 1956 Act, the limit was 10 for entities carrying on banking business
and 20 in other cases
6

7. Incorporation of companies
Contents of MOA and AOA
• MOA to contain the objects for which the company is proposed to be
incorporated and any matter considered necessary in furtherance thereof
Entrenchment
• 2013 Act permits AOA of a company to contain provisions relating to
‗entrenchment‘.
‒ An entrenchment clause is a provision which makes further amendments to
AOA more difficult.
• AOA may be altered only if conditions or procedures that are more restrictive
than those applicable to a special resolution are complied with
• Entrenchment provisions can be included in the AOA either on formation of a
company or thereafter by an amendment to the AOA approved by
‒ all the members in case of a private company and
‒ special resolution in case of a public company
• Entrenchment clause may assist in protecting the rights of minority members or
prevent unilateral amendments to the AOA which may be a joint venture
company between 2 or more parties
7

8. Incorporation of companies
Companies with charitable objects
• Scope of companies that may be formed with charitable objects (i.e. Section 25
company under 1956 Act – Section 8 in 2013 Act) increased to include sports,
education, research, social welfare, protection of environment in addition to the
promotion of commerce, arts, science, religion and charity
Takeaway
The objects outlined above may not necessarily align with the charitable
purposes as defined under the Income Tax Act, 1961. Hence, if registration is
sought the provisions under the said Act, would also need to be considered.
8

9. Incorporation of companies
Incorporation process
• Promoters may provide a temporary address for correspondence till the company is
formed. A new company should have a registered office address within 15 days from its
incorporation
• Particulars of interest in other firms and bodies corporate, if any, in relation to the first
directors is to be filed with ROC
• A newly formed company cannot commence business or exercise any borrowing power
unless it has filed with ROC a prescribed declaration to the effect that:
‒ every subscriber has paid-in the value of shares subscribed to MOA;
‒ paid-up share capital of the company is not less than the minimum prescribed; and
‒ verification of its registered office
• A company may be struck off by the ROC on the following grounds:‒ subscribers to the MOA have not paid subscription money within 180 days from the
date of incorporation
‒ company has failed to commence its business within 1 year from the date of
incorporation
Takeaway
• Incorporation process tightened
• Difficult to maintain off the shelf company
9

10. Types of Companies

11. Types of Companies
Types of Companies
Public Company
Private Company


Minimum paid-up share
capital of `1,00,000
Restricts by its Articles:
 Transferability
of
shares
 Maximum Members –
200 (not including joint
holders, past & current
employees
holding
shares)
 Invitation to public to
subscribe to securities



Not a private company
Minimum
paid-up
share
capital of `5,00,000
a private company which is a
subsidiary of a company
which is not a private
company shall be deemed to
be a public company
One Person Company
(OPC)

Only one
member
individual
as
The condition of 1956 Act to have a restriction in the AOA of a private company prohibiting invitation or
acceptance of deposits has been removed.
a

12. Types of Companies
OPC
•
•
―One Person Company‖ means a company which has only 1 individual as a member
A company may be an OPC having a sole member. The memorandum of such OPC is required to
indicate the name of the person who shall become member in the event of death or incapacity of the
sole member
• OPC is required to specifically mention the word ―one person company‖ below the name wherever it is
used
• Relaxations provided to OPC:
‒ OPC should have minimum 1 director
‒ Where an OPC has only 1 director, the date on which the resolution is signed and dated by such
director is considered as the date of the board meeting
‒ Provisions of board meeting, quorum and interested director shall not apply to OPC
‒ OPC need not hold an AGM
‒ Provisions relating to notice, explanatory statement, EGM, quorum, voting, chairman, poll, proxies,
postal ballot, NCLT‘s power of calling for EGM does not apply to OPC
‒ Financial Statements can be signed by only 1 director
‒ Financial Statements are to be filed with ROC within 180 days from the end of FY
‒ OPC can contract with the sole member who is a director
Takeaway
• Converting a sole proprietary concern into an OPC will help carrying on the business with limited
liability. If the conditions under the tax laws are satisfied, such conversion from sole proprietorship to
an OPC may be tax neutral.
Draft Rules
Only an individual who is an Indian citizen and resident in India can incorporate OPC and can be a
nominee for an OPC
12

13. Types of Companies
Small Company
•
•
"Small company"‘ means a company, other than a public company:
‒ whose paid-up share capital does not exceed ` 5 million or such higher amount as
may be prescribed (not exceeding ` 50 million); or
‒ whose turnover as per its last P&L account does not exceed ` 20 million or such higher
amount as may be prescribed (not exceeding ` 200 million)
Small Company cannot be a holding or subsidiary company
Relaxations provided to a small company and OPC:
• Cash flow statement is not required
• Annual Return can be signed by CS or one director if there is no CS
• Board meeting is required to be held at least once in each half of a calendar year and the
gap between the 2 meetings is not less than 90 days
• Merger process between 2 or more ‗small companies‘ is to be approved on fast track
basis. Such merger would require approval of ROC, OL, members holding at least 90% of
total number of shares and majority of creditors representing 9/10th in value
13

14. Types of Companies
Dormant Company
• Where a company is formed and registered under 2013 Act for a future project
or to hold an asset or intellectual property and has no significant accounting
transaction, such a company or an inactive company may make an application
to ROC to obtain status as a ―dormant company‖
• The dormant company may become an active company by making necessary
application to ROC
14

15. Share Capital

16. Share Capital
Types of Share Capital
• Equity shares
‒ With voting rights; or
‒ With differential rights as to dividend, voting or otherwise
• Preference shares
Issue and redemption of preference shares
• Tenure of preference shares has been kept at 20 years
‒ Companies having "infrastructural projects" (as defined) can issue preference shares
for tenure beyond 20 years, subject to the redemption of specified percentage of
shares as per Rules to be prescribed, on an annual basis at the option of the
preference shareholders
Further issue of capital
• All types of companies to comply with provisions for further issue of capital. This is to
ensure that the shareholders are consulted and their opinion considered for issue of
shares by special resolution
• Pricing of a preferential issue of shares by a company shall be determined by a
Registered Valuer
• Amounts received as share application money by private companies also will not be
available for use until allotment of shares
16

17. Share Capital
Issue of Bonus shares
• Issue of fully paid-up bonus shares can be made out of its free reserves or the securities
premium account or CRR account
• Company cannot issue bonus shares by capitalizing revaluation reserves
• A company is required to comply with the following conditions in addition to the conditions
to be prescribed under the Rules before issuance of bonus shares:
‒ authorization by AOA
‒ shareholders‘ approval in a general meeting
‒ not defaulted in payment of interest or principal in respect of fixed deposit or debt
securities issued by it;
‒ not defaulted in payment of statutory dues of the employees like provident fund,
gratuity and bonus;
‒ partly paid shares outstanding on the date of allotment should be fully paid- up prior to
issue of bonus shares and
• Bonus shares cannot be issued in lieu of dividend
Issue of shares at a discount
No shares can be issued at discount except in case of "sweat equity shares" issued to the
employees of the Company
17

18. Prospectus and allotment of securities
• Allotment in respect of private placement of securities must be completed within
60 days from the date of receipt of application money
• In the event of such non-allotment, the application money is to be refunded to
the subscribers within 15 days from the date of completion of 60 days.
• If the company fails to refund, interest is payable @ 12% from the end of the
60th day
18

19. Utilization of securities premium
•
•
•
19
Securities premium may be applied for permitted purposes
Utilization of securities premium for any other purpose would entail compliance with
provisions relating to reduction of capital
For classes of companies to be prescribed in the Rules, utilization of securities premium
for the following purposes will require such a company to ensure that the AS prescribed
have been complied:
‒ Issue of bonus equity shares
‒ Writing off the expenses of or the commission paid on any issue of equity shares
‒ Buy-back of shares or other securities

20. Debentures

21. Debentures
• A Company may issue debentures either with an option to convert such
debentures into shares wholly or partly at the time of redemption.
• Debenture issue to be approved by special resolution at a general meeting
• Compulsory creation of DRR
‒ DRR to be created out of profits of the company available for payment of
dividend
‒ Amount credited to such account is to be utilized only for the redemption of
debentures
• Appointment of Debenture Trustees
‒ Before issuing a prospectus or making an offer or invitation to the public or to
its members exceeding 500, for the subscription of its debentures, a
company is required to appoint 1 or more debenture trustees
21

22. Holding – Subsidiary Company

23. Holding – Subsidiary Company
• Holding company
‒ controls composition of the Board; or
‒ exercises or controls more than 50% of the total share capital either at its
own or together with one or more of its subsidiary companies
• Prescribed classes of holding companies not to have layers of subsidiaries
beyond prescribed numbers
Takeaway
• Investment in total share capital (equity + preference) of the company to be considered
for determining holding company – subsidiary company relationship
Draft Rules : Total share capital means total paid-up share capital
• 'Holding-subsidiary relationship will have to be examined especially when company
issues preference share capital in future, which may trigger unintended consolidation
Draft Rules yet to be issued for layers of subsidiaries
23

24. Acceptance of Deposits

25. Acceptance of Deposits
•
•
•
•
Only Banking Company, NBFC and such other company as the CG may specify, are permitted
to accept deposits from public
A company may accept deposit from its members by passing a resolution in general meeting
and subject to compliance of Rules and subject to conditions which includes:
‒ obtaining credit rating
‒ providing deposit insurance
‒ depositing at least 15% of deposits maturing during current and next financial year in a
scheduled bank
Public company having net worth or turnover as may be prescribed would be allowed to raise
funds through public deposit
‒ Mandatory requirements for such companies to obtain rating from CRA
Deposit accepted before the commencement of the 2013 Act or any interest due thereon to be
repaid within 1 year from commencement of 2013 Act or from the date on which such payments
are due, whichever is earlier
Takeaway
•
To examine Rules to be issued for determining what receipts are regarded as ‗deposits‘.
‒
‒
•
25
If a non-exempted company has accepted a deposit, it will have to organize for its repayment within 1 year from
the date of commencement of 2013 Act
Penalties for non-compliance are severe for the KMPs and such personnel should take adequate steps to
ensure adequate compliance
Funding through ICDs and other deposits like secured debentures etc. which are considered exempt
under Companies Act, 1956 need to be examined for eligibility of exemption in the Draft Rules (yet to
be released)

26. Accounting

27. Accounting - New Standards
•
Central Government, in consultation with NFRA to issue new Accounting Standards
•
For classes of companies to be prescribed in the Rules, utilization of securities premium
for the following purposes will require such a company to ensure that the Accounting
Standards prescribed have been complied
Issue of bonus equity shares
Writing off the expenses of or the commission paid on any issue of equity shares
Buy-back of shares or other securities
•
Scheme of amalgamation / capital reduction should comply with the requirements of
Accounting Standards.
Takeaway
• Old is gold only till new is born!
• Implications of the Accounting Standards to be notified should be evaluated
27

28. Depreciation Accounting
•
Depreciation on tangible fixed assets based on estimated useful life.
From a Rates regime to Useful Lives
Useful life of an asset is the period over which the asset is expected to be available for
use by the entity or the number of production or similar units expected to be obtained from
the asset
•
Depreciation of plant & machinery based on industry category. Specified industries are:
Production and exhibition of motion picture
films
Glass manufacturing
Non-ferrous metals
Mines & quarries
Medical & surgical operations
Telecommunication
Pharmaceuticals and chemicals
Exploration, production and refining of oil &
gas
Civil construction
Generation, transmission and distribution of
power
28
Steel
Salt works

29. Depreciation Accounting
•
Componentization of assets mandated
Separate capitalisation and depreciation of a part of an asset if its cost is significant to
the total cost of the asset and its estimated life is different from the remaining asset
Accounting for replacement costs
•
Significant increase in rate of depreciation of commonly used assets as compared to
Schedule XIV rates under the 1956 Act
Nature of asset – illustrative
Companies Act, 2013
Useful Life
Deemed rate
Companies
Act, 1956
Increase
%
change
General Plant and Machinery other than
continuous process plant
15
6.33%
4.75%
1.58%
33.33%
General furniture and fittings
Office equipment
Desktops, laptops, etc.
Electrical Installations and Equipment
10
5
3
10
9.50%
19.00%
31.67%
9.50%
6.33%
4.75%
16.21%
4.75%
3.17%
14.25%
15.46%
4.75%
50.08%
300.00%
95.35%
100.00%
•
Depreciable amount to be determined after reducing expected residual value
Residual value generally not more than 5% of the original cost of the asset
29

30. Depreciation Accounting
•
For prescribed class of companies, justification needs to be made, where a useful life or
residual value different from that indicated in Schedule II
•
Transitional provisions:
Carrying value (net of residual value) is to be depreciated over the remaining revised
useful life of the asset
If the remaining revised useful life is nil, the carrying value, net of residual value, is to
be charged to the opening balance of retained earnings
•
Depreciation / amortisation of intangible assets is to be per Accounting Standards
Intangible assets such as toll roads, etc. can no longer be amortised based on the
expected revenue from operating such assets
•
Incremental depreciation relating to surplus on revaluation of assets is to be charged to
the Profit & Loss Account
Depreciable amount is the cost of an asset or other amount substituted for its cost less
residual value
30

31. Takeaway - Depreciation Accounting
Takeaway
• Changes to the amount of depreciation charge will impact profits for managerial
remuneration and profits available for distribution as dividend
•
Componentisation of assets involves judgment and establishing thresholds. It is critical
to evaluate appropriateness of criteria, since it would impact profits
•
Information Systems, particularly the Accounting module would need to be modified to
meet the new requirements for calculating depreciation
•
Changes in the profits consequent to changes in depreciation could impact terms of
conversion of convertible instruments, if the conversion is based on book profits
•
Evaluation of lease as an operating or finance lease will need to consider the estimated
useful life, as provided in the Schedule II to the new Act
•
Impact of transitional provisions is likely to be significant where the expired life (to date
of transition) is less than that under The Companies Act, 2013
31

32. Financial Statements &
Directors Report

33. Financial Year
•
FY of a company / body corporate means the period ending on 31st March every year
‒ Transition period: - 2 years
•
In case a company has been incorporated on or after the 1st day of January of a year,
the period ending on the 31st day of March of the following year, will be its first FY
•
Extension of FY – no longer permissible
‒ Exception – A company or body corporate, which is a holding company or a
subsidiary of a company incorporated outside India and is required to follow a
different FY for consolidation of its accounts outside India, with NCLT approval
Takeaways:
• Aligned with ―previous year‖ under Income Tax Act 1961
• Whether an application will be entertained by NCLT for following a different period as FY by company
in India which is an associate company or joint venture company of a foreign entity
33

34. Financial Statements
―Financial Statement" in relation to a company to include:
i. a balance sheet as at the end of the FY;
ii. a P&L account / an income and expenditure account for the FY;
iii. cash flow statement for the FY;
iv. a statement of changes in equity, if applicable; and
v. any explanatory note annexed to, or forming part of, any document referred to above
Exceptions:
• for OPC, small company and dormant company cash flow statement excluded
Takeaways:
• Legal recognition under Company law for financial statements – aligned with Indian
GAAP
34

35. Financial Statements
Consolidation of Financial Statement (CFS)
• CFS mandatory for all companies, if a company has a subsidiary / associate / joint
venture. CFS to be prepared and laid before an AGM in addition to standalone financial
statements
• ―subsidiary‖ includes ‗associate company‘ and ‗joint venture‘ (Associate means a
company other than subsidiary company and joint venture company in which the other
Company has significant influence
‒ Significant influence means control of at least 20% of total share capital or of
business decisions under an agreement)
• a separate statement containing salient features of the financial statement of
subsidiaries to be attached to the holding company‘s financial statements
Takeaways:
• CFS mandatory for all companies
35

36. Financial Statements
Audited Accounts
• Audited Accounts of all subsidiaries are required to be prepared and provided to
shareholders on request
• Audited accounts of the listed companies along with the subsidiaries to be placed on the
website
• Subsidiaries have been defined to include Body Corporates i.e. Foreign companies
Signing of financial statements
• Financial Statements to be signed at least by
• Chairperson of the company, if authorized by BOD; or
• 2 directors including MD, where there is one; and
• CEO if he is a Director,
• CFO and CS, wherever they are appointed
In case of OPC balance sheet and statement of profit and loss to be signed by 1 director
only
Takeaways:
• Accounts of subsidiary to be made available to shareholders on request – step towards
striking balance between transparency and ‗need to know‘
• CFO where required, to be appointed to sign the financial statements
36

37. Financial Statements
Voluntary Revision of financial Statement or BOD’s report
• BOD may prepare revised financial statement or a revised board report in respect of any of the
3 preceding FYs after obtaining approval of NCLT, if it believes that the financial statement or
the BOD report do not comply with the relevant provisions.
• Draft Rules contain elaborate provisions
Mandatory re-opening or re-casting of book of accounts by Statutory Authorities
• A company can re-open its books of accounts or re-cast its financial statements on the below
grounds:
‒ that the relevant earlier accounts were prepared in a fraudulent manner; or
‒ affairs of the company were mismanaged during the relevant period casting a doubt on the
reliability of the financial statements
on an application made by CG, IT authorities, SEBI or any other statutory regulatory body or
authority or any person concerned and on an order being made by a Court or NCLT
Period for maintenance of Books of Accounts
CG may direct keeping books of accounts of a company to be maintained for a period more than
8 years where any investigation has been ordered
Takeaways:
• Restatement of financial statement in event of fraud legally possible – subject to safeguards
• Regulatory clarity – books etc. to be preserved for more than 8 years in case of pending
investigations
37

38. Directors report
Contents of Directors’ Report
In addition to existing requirements under 1956 Act, following to be added:
• Extract of the Annual Return
• Number of meetings of BOD
• Listed and prescribed class of companies - Policy on directors appointment, remuneration
and annual evaluation of the performance of the BOD, committee and individual directors
• Statement on declaration given by ID
• Related party contracts, certain loan / guarantees / investments and
• Development and implementation of a Risk Management Policy and CSR
In Directors responsibility statement following disclosures are added:
• For listed Company – laid down internal financial controls and such internal financial
controls are adequate and were operating effectively
• For all companies – System for ensuring compliance with all applicable laws
Key provisions of the Draft Rules:
• Ratio of remuneration of each director to the median remuneration of the employees of
the company.
• Percentage increase in the median remuneration of employees
• Key parameters for any variable component of remuneration availed by the directors
• Particulars of employees drawing remuneration of ` 5,00,000 p.m. or ` 60,00,000 p.a.
38

39. Audit and Auditors

40. Tenure
Appointment of auditor in listed and prescribed class or classes of companies:
Appointment
Maximum period of appointment
Of an individual as an auditor
1 term of 5 consecutive years
Of an audit firm as an auditor
2 terms of 5 consecutive years
Cooling off period of 5 years before next appointment
Appointment of auditor in other companies i.e. other than listed and prescribed
class or classes of companies:
Appointment
Period of appointment
to hold office till conclusion of 6th AGM subject to ratification
At first AGM
by members at every AGM
to hold office till conclusion of 6th meeting, subject to
Subsequent
ratification by members at every AGM
Transition period – 3 years
Takeaways
• Mandatory rotation of auditors for listed and prescribed classes of companies introduced
Draft Rules
• Prescribed class of companies means all companies other than OPC and small
companies
40

41. Provisions for appointment / rotation
Common conditions for appointment of auditor in listed and classes of companies to
be prescribed :
• Incoming audit firm should not have any common partners who were the partners
of the outgoing audit firm i.e. the audit firm whose tenure expired in the
immediately preceding FY by virtue of mandatory rotation requirement
• Rules to be prescribed to state the manner in which the companies shall rotate
their auditors
• Audit committee of listed and other prescribed classes of companies to
recommend appointment of an auditor
41

42. Requirements applicable to all companies
First auditor
• First auditor to be appointed by the BOD within 30 days of incorporation of a company
• If the first auditor is not appointed by the BOD as above, the members to appoint the first
auditor within 90 days at the EGM
• Tenure of the first auditor shall be upto the conclusion of first AGM
Additional conditions
• The company may resolve:
• If audit firm is appointed, the audit partner and his team shall rotate at such intervals
as may be resolved by members
• that audit shall be conducted by more than 1 auditor (i.e. joint auditor)
• 1956 Act requires all the partners of the audit firm to be a qualified CA and practicing in
India. 2013 Act provides that:
• Majority of partners practicing in India should be qualified CA;
• If LLP is appointed as auditor, only partners who are CA shall be authorized to sign
• Procedure and manner of selection of auditor to be prescribed by the Rules
• Additional grounds for disqualifications for appointment as auditor provided
• An auditor or audit firm who or which has been performing any non-audit services on or
before the commencement of 2013 Act shall comply with the above before the closure of
the 1st FY after the date of such commencement
42

43. Proscribed services
Auditor cannot provide following services "directly or indirectly" to the company or its holding
company or subsidiary company, namely:—
• 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;
• management services; and
• services prescribed under the Rules
Transition period: To comply with the restriction before the closure of the 1st FY after the date
of commencement of 2013 Act
Takeaway
• Board / audit committee approval required for appointing auditor to carry on non-proscribed services
43

44. Proscribed services
Key Points
• For proscribed services: "Directly or indirectly" shall include rendering of services by the
auditor –
• Where auditor is an individual - Either himself or through his relative or any other
person connected or associated with such individual or through any other entity,
whatsoever, in which such individual has significant influence or control, or whose
name or trade mark or brand is used by such individual
• Where auditor is a firm – Either itself or through any of its partners or through its
parent, subsidiary or associate entity or through any other entity, whatsoever, in which
the firm or any partner of the firm has significant influence or control, or whose name
or trade mark or brand is used by the firm or any of its partners.
Takeaway
• Above restrictions to be applicable even to network of firm / companies having common brand even when
partners / owners are different
44

45. Internal Auditor
Appointment
Such class or classes of Companies as may prescribed need to compulsory appoint Internal
Auditor to conduct the internal audit of functions and activities of the company
Qualification
Internal Auditor shall either be a CA or a cost accountant, or such other professional as may
be decided by the BOD
Takeaway
• CARO contained provisions requiring auditor‘s comments on existence and efficacy of internal audit
system in case of listed companies and / or companies having net worth > ` 50 lakhs or average annual
turnover > ` 5 crores for a period of 3 consecutive FY immediately preced-ing the FY concerned. 2013 Act
contains specific provision of appointment of internal auditor
Draft Rules
Prescribed class of companies means:
• listed companies ; and
• public companies• with paid-up capital of ` 10 crores or more,
• with outstanding loans or borrowings from banks or public financial institutions exceeding ` 25
crores or which have accepted deposits of ` 25 crores or more at any point of time during the last
FY
45

46. Reporting in case of fraud
•
Auditor is required to report directly to CG where he has reason to believe that
an offence involving fraud is committed against the company by the officers or
employees of the company
Takeaways:
• Audit processes to be revamped to be able to detect fraud
• Responsibilities of auditors increased
46

47. Dividend

48. Declaration and Payment of Dividend
Declaration of dividend
• Dividend can be declared for any FY out of the profits of the company for that FY or
previous FY(s) after providing for depreciation
Draft Rules:
• Loss or depreciation, whichever is less, in previous years to be set off against the profit of
the company for the year for which dividend is declared or paid
Transfer to reserves
• A company may voluntarily transfer a portion of its profits to reserves as considered
appropriate. Mandatory transfer to reserves is not required
Declaration of dividend in case of inadequate or absence of profits
In case of inadequacy or absence of profits in any FY, the company can declare dividend out
of the accumulated profits earned by it in previous years and transferred to reserves in
accordance with the prescribed rules
48

49. Declaration and Payment of Dividend
Key provisions of the Draft Rules:
•
49
In case of inadequacy or absence of profits:
‒ Rate of dividend should not exceed average rate of dividend declared in last 3
preceding years
‒ Amount to be drawn from free reserves shall not be more than 1/10th of paid-up
share capital + free reserves
‒ Utilized amount shall be first set off against the losses incurred in the financial year
‒ Balance reserves after withdrawal shall not fall below 15% of the paid-up share
capital

50. Declaration and Payment of Dividend
Restrictions on declaration of dividend / interim dividend
• Interim dividend may be declared out of the surplus in the P&L Account as well as profits
of the FY in which dividend is sought to be declared
• In case company has incurred loss in the current FY upto the end of the quarter
immediately preceding the date of declaration of interim dividend, then interim dividend
shall not be declared at a rate higher than the average dividends declared by the company
during the immediately preceding 3 FYs
• Failure to comply with provisions relating to acceptance and repayment of deposits will bar
the company to declare any dividend during the period of non-compliance
Takeaway
• Mandatory transfer to reserves done away. Flexibility of transfer of surplus profit to reserves
• More funds will be available with the company for declaring dividend
• Restrictions on declaring interim dividends out of reserves and in case losses are incurred
in the year of interim dividend payout
50

51. Declaration and Payment of Dividend
Unpaid / unclaimed dividend transferred to IEPF
• Where the unpaid / unclaimed dividend has been transferred to Investor Education and
Protection Fund (IEPF), the corresponding shares on which such dividend was unpaid /
unclaimed shall also be transferred to IEPF
IEPF – additional transfers
• Application money received for allotment of securities and due for refund – not paid for 7
years
• Sale proceeds of fractional shares on merger, bonus for more than 7 years
• Redemption amount of preference shares remain unpaid for more than 7 years
• Amounts as prescribed in Rules etc.
Takeaway
• Shares in respect of which unpaid / unclaimed dividend is transferred to IEPF also stands
transferred to IEPF
Draft Rules
• Voting rights in respect of such shares shall be frozen
51

52. Related Party Transactions

53. Key managerial personnel
"Key managerial personnel", in relation to a company, means –
• Chief Executive Officer or the managing director or the manager
• company secretary
• whole-time director
• Chief Financial Officer; and
• such other officer as may be prescribed
A Whole time KMP shall not hold office in more than 1 company at the same time
Draft Rules
Following class of companies shall have KMP
• Listed company
• Every other company with paid-up capital of ` 5 crores or more
53

54. Related Party Transactions
Specified persons with whom contracts are covered
Related Party with reference to a company means:
• director or his relative;
• KMP or his relative;
• firm, in which a director, manager or his relative is a partner;
• private company in which a director or manager is a member or director ;
• public company in which a director or manager is a director or holds along with his
relatives, more than 2% of its paid-up share capital;
• any body corporate whose BoD, MD, or manager is accustomed to act in accordance with
the advice, directions or instructions of a director or manager;
• any person under whose advice, directions or instructions a director or manager is
accustomed to act;
• any company which is –
a holding, subsidiary or an associate company of such company; or
a subsidiary of a holding company to which it is also a subsidiary
• such other persons as may be prescribed.
Takeaway
The scope of related party is substantially expanded to ensure interest of shareholders.
Draft Rules
―other prescribed persons ― means a director or KMP of the holding, subsidiary or associate company of
such company or his relative or any person appointed in senior management in the company or its holding,
subsidiary or associate company
54

55. Related Party Transactions
Scope of Section
a. sale, purchase or supply of any goods or material;
b. buying, selling or disposing of property of any kind;
c. leasing of property of any kind;
d. availing or rendering of any services;
e. appointment of any agents for purchase or sale of goods, materials, services or
property;
f. related party‘s appointment to any office or place of profit in the company, its
subsidiary company, associate company; or
g. underwriting the subscription of any shares in or derivatives thereof;
Takeaway
• Immovable property also brought under the ambit of related party transactions
55

56. Related Party Transactions
Approval required
• Where a transaction with a related party is (i) not in the ordinary course of business or (ii) is
in the ordinary course of business but not on an arm‘s length basis:
- Prior consent of the BOD by a resolution at a board meeting and compliance with the
conditions to be prescribed is necessary (refer slide 57)
- Prior approval of the shareholders where paid-up capital of company or transaction
amount exceeds prescribed limit (refer slide 58)
Related party who is a member of such a company cannot vote on such a special
resolution
• Requirement of obtaining CG approval for related party transactions done away with
'Arm’s length transaction' means a transaction between 2 related parties that is conducted as if
they were unrelated, so that there is no conflict of interest
Takeaway
• Removal of taking CG approval for related party will remove the uncertainty in timeline and execution of
the related party transactions
• Related party transactions at arms' length price will call for aligning the benchmarking under transfer
pricing norms as per Income tax Act for both domestic and international transactions
56

57. Related Party Transactions
Draft Rules - Additional conditions to be complied with by the BOD
A company shall enter into any contract or arrangement with a related party with prior consent
of the BOD by a resolution at a board meeting and subject to compliance with the following
conditions :
• The notice of the Board meeting at which the resolution is proposed to be moved shall
disclose‒ name of the related party and nature of relationship;
‒ nature, duration of the contract and particulars of the contract or arrangement;
‒ material terms of the contract or arrangement including the value, if any;
‒ any advance paid or received for the contract or arrangement, if any; and
‒ any other information relevant or important for the BOD to take a decision on the
proposed transaction.
•
57
Where any director is interested in any contract or arrangement with a related party, such
director shall not be present at the meeting during discussions on the subject matter of the
resolution relating to such contract or arrangement

58. Related Party Transactions
Draft Rules – Shareholder’s approval
Prior approval of the shareholders will be required for a company to enter into a contract or
arrangement with any related party where:
• Paid-up share capital is ` 1 crores or more;
• The transaction(s) to be entered into :
‒ individually or taken together with previous transactions during a FY, exceeds 5% of
annual turnover or 20% of net worth of the company as per the last audited financial
statements of the company, whichever is higher, for the following contracts or
arrangements:
a.
b.
c.
d.
e.
sale, purchase or supply of any goods or material;
buying, selling or disposing of property of any kind;
leasing of property of any kind;
availing or rendering of any services;
appointment of any agents for purchase or sale of goods, materials, services or property; or
‒ relates to appointment to any office or place of profit in the company, its subsidiary
company or associate company at a monthly remuneration exceeding ` 1 lakh; or
‒ is for a remuneration for underwriting the subscription of any securities or derivatives
thereof of the company exceeding ` 10 lakhs
58

59. Related Party Transactions
Non-cash transaction with directors
Non-cash transaction with a director of the company or its holding, subsidiary or associate
company or a person connected for acquisition or sale of assets allowed only with prior
approval of the members in a general meeting and supported by values determined by
Registered valuers
Exemptions
Transaction entered into by a company in the ordinary course of its business with a related
party on an arm‘s length basis
Takeaways
• Related party transactions at arms' length price will call for aligning the benchmarking
under transfer pricing norms as per Income tax Act for both domestic and international
transactions
• Operating / license fees for immovable property also covered
• Justification to be provided in BOD report for related party transaction – more onus on
BOD
59

60. Loan to Directors

61. Loan to Directors
• No company shall directly or indirectly make any loan including book debt or give any guarantee
or provide any security to its director or to ‗any other persons in whom the director is interested‘
• The definition of ‗any other persons in whom the director is interested‘ is similar to Sec. 295 of
1956 Act
• Applicable to public and private companies
Exemptions
Restriction will not apply to:
• Loan to MD / WTD
‒ as a part of contract of services extended to all its employees; or
‒ Pursuant to scheme approved by members by special resolution
• A Company which in the ordinary course of its business provides loan, guarantee or security for
due repayment of any loan and charges interest thereon being not less than bank rate declared
by RBI
Takeaway
• Ability of a company, whether public or private, to give loan etc. to directors is substantially curtailed
• Even if a loan etc. obtained in contravention of the above provisions is repaid, the contravener would still
be exposed to punishment by way of imprisonment
• These provisions should be considered applicable prospectively and should not affect existing loans etc.
which are given in compliance with the 1956 Act but which are not in conformity with the 2013 Act. After
the enactment of the 2013 Act, any renewal of loan etc. needs to be in conformity with the 2013 Act
61

62. Inter-corporate loan, guarantee,
security and investment

63. Inter-corporate loan, guarantee, security and investments
Coverage
Investment, Loan, Guarantee or Security to body corporate or any other person
Rate of interest
Rate of interest on the loan granted shall not be lower than the prevailing yield of 1 year, 3
year, 5 year or 10 year Government Security closest to the tenure of the loan.
Investment through layers
Company can not make investment through more than two layers of investment companies,
unless required by law
Takeaway
• Companies to ensure that exposure is within the ceiling in view of the provisions having been expanded
to include investment / loan / guarantee / security made to ‗any other person‘– e.g. if a loan is given to a
partnership firm, it would require compliance of the above provisions
• After the enactment of the 2013 Act, any renewal of loan etc. to be in conformity with the 2013 Act
• These provisions should be considered applicable prospectively and should not affect existing
investments, loans etc. which are given in compliance with the 1956 Act but which are not in conformity
with the 2013 Act. One would have to examine the Rules to be notified in this regard
63

64. Inter-corporate loan, guarantee, security and investments
Exemptions
• Any loan, guarantee or security provided by:
banking company; or insurance company; or housing finance company; in-ordinary
course of their business ;
company engaged in the business of financing of companies or of providing
infrastructural facilities;
• Investment and lending by NBFC whose principal business is acquisition of securities;
• Acquisition by companies having principal business of acquisition of securities;
• Acquisition of shares pursuant to further issue of capital.
Takeaway
Following exemptions available under the 1956 Act are no longer available:
• Investment by banking company or insurance company or housing finance company in the ordinary course of
its business, or a company engaged in the business of providing infrastructural facilities
• Loan / investment / guarantee / security by a private company
• Loan / investment / guarantee / security by a holding company to its WOS
• Loan / guarantee / security by a company whose principal business is acquisition of securities
64

65. Multilayer investment subsidiaries
• Measure adopted to prevent money laundering and to ensure transparency by
restricting one‘s ability to set up multiple investment companies
• A company unless permitted under the Rules can make investment through not
more than 2 layers of investment companies.
• Exceptions to this basic law are:
‒ acquisition of a foreign company which has investment subsidiary beyond 2
layers as per the relevant foreign law; and
‒ a subsidiary company making investment to comply with any relevant law.
"Investment Company" has been defined to mean a company whose principal
business is the acquisition of shares, debentures or other securities.
65

66. Corporate Social
Responsibility

67. Corporate Social Responsibility
• Provisions applicable to every company having
‒ net worth of ` 500 crores or more; or
‒ turnover of ` 1000 crores or more; or
‒ net profit of ` 5 crores or more
‒ during any FY.
• BoD of such companies shall mandatorily spend, in every FY, minimum 2% of
the average net profits of the company made during the 3 immediately
preceding FYs, in pursuance of its CSR Policy (activities listed in Schedule VII).
• The company is required to give preference to local area and areas where it
operates for spending the amount earmarked for CSR.
• If the company fails to spend such amount, BoD shall specify the reasons for not
spending the amount in the BoD report
67

68. CSR activities – Illustrative list
Activities relating to the following may be included by companies in CSR Policies:
• eradicating extreme hunger and poverty
• promotion of education
• promoting gender equality and empowering women
• reducing child mortality and improving maternal health
• combating HIV, AIDS, malaria and other diseases
• ensuring environmental sustainability
• employment enhancing vocational skills
• social business projects
• contribution to the Prime Minister's National Relief Fund or any other fund set up
by the CG or State Governments for socio-economic development and relief and
funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other
backward classes, minorities and women; and
• such other matters as may be prescribed
68

69. Appointment and qualifications
of directors

70. Directors
Additional /
Alternate /
Casual
Vacancy
Managing
Director /
Whole time
Director
Small
Shareholders‘
Representative
Director
Director
Woman
Director
70
Independent
Director

71. Appointment and qualification of directors
Resident Director
One of the directors in a company shall be a person who has stayed in India for 182 days or
more in the previous calendar year
Transition period – 1 year
Woman director
Listed and prescribed class of companies to have at least 1 woman director
Transition period – 1 year
Draft Rules
Following class of companies shall appoint at least 1 woman director:
• Listed company within 1 year of the commencement of provisions
• Every other public companies• with paid-up capital of ` 100 crores or more; or;
• Turnover of ` 300 crores or more
Within 3 years from the commencement of provisions – appears to be an error
71

72. Independent Director
• Listed companies to have at least 1/3rd of its total number of directors as IDs
• CG may prescribe minimum number of IDs in case of any class of public
companies
• ID is not liable to retire by rotation
• ID not to be included in the ―total number of directors‟ liable to retire by rotation
• Code for IDs containing detailed guidelines for professional conduct, roles and
responsibilities provided.
Draft Rules
following class of companies shall appoint ID:
• Unlisted public companies having
• paid-up capital of minimum ` 100 crores; or
• Turnover of minimum ` 300 crores or more ; or
• Aggregate outstanding loans or borrowings or debentures or deposits of
minimum ` 200 crores
72

73. Independent Director – Compliances
Particular
Compliances Requirement
Remuneration
•
Independent directors shall not be entitled to any stock option and may
receive remuneration by way of sitting fee (draft rules - upto ` 1,00,000
per Board / Committee meeting), reimbursement of expenses for
participation in the BOD and other meetings and profit related
commission as may be approved by the members
Separate meetings
•
Independent directors of the company are required to hold at least one
meeting in a year without the attendance of non-independent directors
and members of management
Alternate Director
•
Only an independent director can be appointed as an alternate director
to an independent director
Retirement by rotation
•
Independent Director excluded from the Directors liable to retire by
rotation
Transitional Provision
•
1 year
73

74. Appointment and disqualification of directors
Maximum number of companies in which a person can be director
• 20 including in directorship as alternate director and private companies.
Directorship in not more than 10 public companies permitted
• Shareholders may specify lesser number of companies in which a director of the company may
act as director
Ground for disqualification - failure to file accounts and annual return
Provisions extended to all companies including private companies
Additional grounds for vacation of office as director
Director to vacate office as director if he remains absent from all the meetings of the BOD
held during 12 months whether with or without seeking leave of absence of the BOD
Limits on directors
Maximum limit increased to 15 (can be increased by passing a special resolution)
Takeaway
• Maximum number of companies in which person can be appointed as director curtailed as private
companies are also included in ceiling limits
• Directors to attend 1 BOD meeting held during last 12 months or else would be required to vacate
the office as director. This will ensure that the directors participate in the meetings and are
accountable for decisions made therein.
74

75. Small shareholder’s directors
•
•
Only listed companies may appoint a small shareholder‘s director.
Shareholders holding shares of nominal value of not more than Rs. 20,000 or such other
sum as may be prescribed in a listed company, may appoint 1 director from amongst
them.
Takeaway
• Appointment of Small shareholder‘s director made optional only for listed companies
75

76. Duties of Directors
A director of a company:
• to act in accordance with the AOA
• to act in good faith to promote the objects of the company and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment
• exercise of duties with due and reasonable care, skill and diligence and exercise of
independent judgment
• not 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 etc.
Contravention of the above will entail fine ranging between ` 1 to ` 5 Lacs
76

77. Resignation of Director
• Resigning director to file his resignation letter with the ROC within 30 days,
giving detailed reasons for resignation
• Resignation to take effect from the date on which notice of resignation is
received by the company, or the date, if any, specified by director in the notice,
whichever is later
• Where all directors of a company resign or vacate office, the promoter or in his
absence, the CG will have to appoint the required number of directors till new
directors are appointed in a general meeting
77

78. Remuneration to Directors
•
•
•
•
Provisions relating to limits on managerial remuneration provided in the 1956 Act retained
i.e. no change in overall limit of 11% of net profits
In case of companies with no profits or inadequate profits, remuneration payable in
accordance with new Schedule of Remuneration - Schedule V
• However, the Company with the approval of shareholders and CG can pay in excess of
11% subject to conditions of Schedule V
One MD or WTD or Manager can get upto 5% of the net profit
• If there is more than 1 such MD or WTD or Manager, remuneration can be paid upto 10%
of all such directors and manager taken together with the shareholders approval
Remuneration to directors other than MD / WTD may be
upto 1% of net profit
3% of net profits
•
•
•
78
if there is a MD/WTD/Manager
in any other case
CG may prescribe different sitting fees for different classes of companies and fees in respect
of IDs for attending meeting of BOD or committee thereof
NRC to recommend BOD policy relating to remuneration of directors, KMP and other
employees keeping in mind appropriate performance bench marks striking a balance
between fixed and incentive pay etc.
A Director who is in receipt of any commission from the company and who is a MD or WTD
of the company shall not be disqualified from receiving any remuneration or commission
from any holding company or subsidiary company of such company subject to its disclosure
by the company in the BOD‘s report.

79. Board Meetings

80. Board meetings
•
•
•
•
•
•
First meeting of BOD - within 30 days of incorporation
Time gap between 2 consecutive meetings not to exceed 120 days
Participation in BOD meeting allowed through Video Conferencing (VC) or other audio
visual means
CG may provide a list of businesses where meeting by means of VC will not be
recognized
7 days‘ notice for BOD meeting
BOD meeting may be called at a shorter notice to transact urgent business, if at least 1 ID
is present at such meeting.
Decision taken at such meeting in absence of an ID is final only on ratification thereof
by at least 1 ID
Quorum
• The quorum for BOD meeting is 1/3rd of its total strength or 2 directors, whichever is
higher
• Participation of directors by VC or other audio visual means also to be counted for the
purposes of quorum
• Where at any time the number of interested directors is 2/3rd or more of the total strength
of the BOD, the number of directors who are not interested directors and present at the
meeting, being not less than 2, shall be the quorum
80

81. Circular resolution
• Circular resolution to be approved by a majority of the directors or members,
who are entitled to vote on the resolution
• Where at least 1/3rd of the total number of directors of the company require that
any resolution under circulation must be decided at meeting of BOD, the
chairperson shall put the resolution to be decided at a meeting of BOD
• A circular resolution is required to be noted at a subsequent meeting of the BOD
or the committee thereof, as the case may be, and made part of the minutes of
such meeting
81

82. Powers of Board
Exercisable at BOD meeting
In addition to existing powers under 1956 Act, following powers added:
• to approve financial statement and the BOD‘s report;
• to diversify the business of the company;
• to approve amalgamation, merger or reconstruction;
• to take over a company or acquire a controlling or substantial stake in another company;
• to approve related party transactions
• to fill-up the casual vacancy of KMP
• any other matter which may be prescribed
Exercisable by BOD requiring approval at general meeting
• Restriction on BOD to exercise specified powers with shareholders approval at general
meeting extended to private companies
• Shareholders approval to be obtained by passing special resolution
Takeaway
• List of powers to be exercised at board meeting widened
• Financial statements cannot be approved by circular resolution
82

83. Board Committees

84. Board Committees
Audit
Committee
CSR
Committee
Committees
Stakeholders
Relationship
Committee
84
Nomination
and
Remuneration
Committee

85. Board Committees
Particulars
Audit
committee
Stakeholder
relationship
committee (SRC)
Applicability Listed and
prescribed
classes of
companies
Companies whose
total number of
shareholders,
deposit holders,
debenture holders
and other security
holders exceed
1,000 at any time
during a FY
Constitution Minimum 3
To be decided by
BOD
directors,
majority being
IDs
85
Nomination and Corporate Social
Remuneration
Responsibility
committee (NRC) committee
(CSRC)
Company having:
Listed and
prescribed classes • net worth of `
of companies
500 crores or
more; or
• turnover of `
1000 crores or
more; or
• net profit of ` 5
crore or more
during any FY
Minimum 3 or
Minimum 3
more NED of
directors of which
which at least ½
at least 1 shall
shall be IDs
be ID

86. Board Committees
Particulars
Audit
committee
Stakeholder
relationship
committee (SRC)
Chairperson
Chairperson
and majority
of directors
on this
committee
should be
able to read
and
understand
the financial
statements
Chairperson should
be NED
86
Nomination and Corporate Social
Remuneration
Responsibility
committee (NRC) committee
(CSRC)
Chairperson of the -company can be a
member of the
NRC but cannot
be a chairperson
of the NRC

87. Board Committees
Particulars
Audit committee
87
Corporate Social
Remuneration
Responsibility
committee
• To recommend
appointment and
Responsibility
remuneration of
auditors
• To review and
monitor the
auditor‘s
independence and
performance and
effectiveness of
audit process
• To examine
financial statement
and the auditors‘
report
• To approve or
modify any related
party transactions
Nomination and
relationship
Role &
Stakeholder
committee (NRC)
committee (CSRC)
(SRC)
• To consider
and resolve
grievances of
the security
holders of the
company
• To identify persons • To formulate and
who are qualified
recommend to
to be directors of
BOD, a CSR
the company and
policy for
who can be
undertaking
appointed in senior
permissible
management
activities
• To recommend
the amount of
expenditure to be
incurred on CSR
activities

88. Board Committees
Particulars
Audit committee
Stakeholder
Nomination and
Corporate Social
relationship
Remuneration
Responsibility
committee
committee (NRC)
committee (CSRC)
(SRC)
Role &
Responsibility
88
• To scrutinize intercorporate loans
and investments
• To value
undertakings or
assets of the
company
• To evaluate
internal financial
controls and risk
management
systems
• To monitor the
end use of funds
through public
offers, etc.
• To recommend to
• To monitor the
BOD a policy
CSR Policy
relating to
remuneration of
directors, KMP and
other employees
keeping in mind
appropriate
performance
bench marks
striking a balance
between fixed and
incentive pay etc.
• To evaluate
performance of
every director of
BOD

89. General meeting
89

90. General Meeting
Quorum for general meeting
Presence of members in person only will be counted for the purpose of determining quorum
• Quorum for a private company shall be 2 members personally present.
• Quorum for a public company is depended on the number of members in the Company as shown below:
Total number of members in a public
company as on the date of meeting
Quorum
(Members personally present)
Upto 1,000 members
5
Between 1,000 to 5,000 members
15
More than 5,000 members
30
90

91. Secretarial Standards
91

92. Secretarial Standards
• Every company shall observe Secretarial Standards with respect to General and
Board Meetings specified by ICSI and approved by the CG.
• Duty is cast on the CS to ensure that the company complies with the applicable
Secretarial Standards.
92

93. CFO

94. CFO
•
•
•
94
Companies Act 2013 has enhanced the role of CFO and entrusted greater responsibilities.
CFO is a KMP
CFO made responsible and liable for penalty and / or prosecution for compliance with
various provisions such as – maintenance of books of accounts, preparation & filing of
annual accounts, disclosure of financial information in offer document, risk management,
internal control etc.
CFO mandatorily required to sign audited accounts

95. Buy-back of securities
95

96. Buy-back of securities
Multiple buy-back in financial year:
• Under 1956 Act, it is possible to carry out more than 1 buy-back in a financial year as long
as conditions were complied with
• 2013 Act has restricted the ability of a company to do multiple buy-back of securities
Accordingly, no offer for buy-back can be made within a period of 1 year from the date of
closure of the preceding offer for buy-back.
Longer waiting period for buy-back by defaulter companies
If company has defaulted in repayment of deposits or interest payment or redemption of
debentures or preference shares or payment of dividend, or repayment of any term loan or
interest thereon to any financial institution or banking company then until the default is
remedied and period of 3 years is completed after remedying, company will not be eligible to
buy-back its securities
96

97. Buy-back of securities
Buy-back under scheme of arrangement or compromise
Buy-back under scheme of compromise or arrangement cannot exceed 25% of
aggregate of paid-up share capital and free reserves and further buy-back in a FY
cannot exceed 25% of paid-up equity capital
Utilisation of securities premium for prescribed class of companies
Prescribed class of companies will not be entitled to utilize securities premium for
buy-back unless their financial statements comply with AS prescribed for such
class of companies.
97

98. Compromise, Arrangement and
Amalgamation

99. Compromise, Arrangement & Amalgamation
•
Approval for compromise / arrangement
‒ majority representing 3/4th in value of the creditors or members (under 1956 Act, it is
majority in number representing 3/4th in value of the creditors or members)
‒ Voting in person or by proxy or by postal ballot
‒ Approval of NCLT (under 1956 Act, it is High Court)
• Objection by minority:
Objection to compromise or arrangement can be raised only by:
- persons holding > 10% shares; or
- creditors having outstanding debt of >5% of total outstanding debt as per the latest
audited balance sheet
•
Notice of meeting to be served to CG, IT authorities, RBI, SEBI, Stock exchanges, ROC,
OL, CCI, sectoral regulators / authority
•
Auditors Certificate for compliance with AS now mandatory for all companies (earlier only
listed companies were required to follow this in terms of the Listing Agreement)
•
Valuation report to be given to shareholders / creditors
Takeaway
• Only voting power to be considered for merger approval and not majority in number of members /
creditors
99

100. Compromise, Arrangement & Amalgamation
Takeaway
• Doing away with approval of shareholders and creditors of 3/4th majority (in numbers) and
raising the threshold limit for raising objection by shareholders (10% holding) and creditors
(5% of outstanding debt) in a scheme of arrangement will obviate the entire process being
jeopardized by small stakeholders
• The process of giving notice to various regulators like IT, SEBI etc. could delay the
process of amalgamation, merger, demerger etc. if there are any pending matters with
these regulators.
100

101. Compromise, Arrangement & Amalgamation
Fast Track merger
• Fast track provisions made to facilitate merger between 2 or more ‗small companies‘ or
between holding company and its wholly owned subsidiary company or such other class of
companies as may be prescribed
• Approval required of :
‒ ROC;
‒ OL;
‒ members or class of members holding at least 90% of total no. of shares;
‒ majority of creditors or class of creditors representing 9/10th in value
•
Merger of Indian company with foreign company possible with prior approval of RBI
Takeaway
• Fast Track merger permissible between small companies and between holding and WOS
without the approval of NCLT. This will facilitate quicker internal reorganization
• Indian company can be merged with Foreign Company with approval of RBI – structuring
option available
101

102. Compromise, Arrangement & Amalgamation
Treasury stock
Holding of shares in its own name or in the name of trust whether through subsidiary or
associate companies by the transferee company as a result of the compromise or
arrangement will not be allowed and any such shares shall be cancelled / extinguished
102

103. Compromise, Arrangement & Amalgamation
• Exit by minority shareholders:
‒ Acquirer and / or PAC or person or group of persons who hold 90% or more of the
issued equity capital of the company by virtue of amalgamation, share exchange,
conversion of securities or for any other reason, can notify the company of his intention
to purchase the remaining equity shares of the company from minority shareholders
‒ The exit price is to be determined by RV
‒ The minority shareholders of the company may also offer to sell their equity shares to
the majority shareholders at a price determined under the Rules
• Takeover Offer may be included as a part of the scheme of compromise and arrangement
in the manner as may be prescribed in Rules. In case of listed companies such takeover
offer shall be as per the guidelines issued by SEBI
• Transfer of Listed Company with Unlisted Company - Possible to keep transferee company
remain unlisted if exit option is given to the shareholders of the listed transferor company
Takeaway
• Parent / promoter will get opportunity to increase their stake in unlisted companies where
they hold substantial holding by purchasing stake of minority shareholders at fair value
determined by the RV
103

104. Registered Valuer

105. Registered Valuer
Where valuation is required to be made under the Act, in respect of any property,
stocks, shares, debentures, securities or goodwill or other assets or of networth of a
company or its liabilities, such valuation shall be done by a registered valuer
Responsibilities
(a) To make true and fair valuation of any assets
(b) To exercise due diligence while performing the functions as valuer;
(c) To make the valuation in accordance with such rules as may be prescribed; and
(d) Not to undertake valuation of any assets in which he has a direct or indirect
interest.
Scope
Any valuation under the Companies Act 2013 to be done by registered valuer.
Illustratively;
• Valuation of further issue of shares
• Valuation of properties / assets of the company for non cash consideration
• Valuation report in respect of shares, properties etc. for compromise and arrangement
• Valuation for purposes of minority squeeze out
• Voluntary winding up – valuation of assets
105

106. Registered Valuer
Draft rules
• Following persons are the registered valuer:
a) CA / CS / Cost Accountant in whole time practice or any other person holding
qualification as MCA may recognize
b) Merchant Banker registered with SEBI
c) Member of Institute of engineers in whole time practice
d) Member of Institute of architects in whole time practice etc.
Person refer to in (a) and (b) shall be require in respect of financial valuation and
Person refer to in (c) and (d) shall be require for technical valuation
•
106
Manner of valuation prescribed.

107. National Financial Reporting
Authority

108. National Financial Reporting Authority
•
•
•
•
•
•
•
108
NFRA to be constituted by Central Government to provide for dealing with matters relating to
accounting and auditing policies and standards to be followed by companies and their auditors
Functions of NFRA are as below:
‒ Make recommendations to CG on the formulation of accounting and auditing policies and standards;
‒ Monitor and enforce compliance with accounting and auditing standards;
‒ Oversee the quality of service of the professions and suggest measures required for improvement in
quality of services and such other related matters as may be prescribed;
‒ Perform other prescribed functions in relation to above as may be prescribed.
CG may prescribe standards of accounting or any addendum thereto, as recommended by the ICAI in
consultation with and after examination of the recommendations made by NFRA
NFRA to consist of Chairperson and other part time and the full time members not exceeding 15
The Chairperson and full time members of NFRA shall not be associated with any audit firm (including
related consultancy firms) during the course of their appointment and 2 years thereafter
2013 Act provides powers to NFRA, which includes:
‒ Investigate into the matters of professional or other misconduct committed by member or firm of CA.
‒ Powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit.
‒ Where professional or other misconduct is proved, NFRA have the power to make order for
imposing monetary penalty or debarring the member or the firm from engaging himself or itself from
practice as member of the institute for a minimum period of 6 months or for such higher period not
exceeding 10 years.
Any person aggrieved by the order of NFRA can prefer an appeal to NFRAA.

109. Other Significant Provisions

110. Provisions relating to Fraud
•
Defined to include acts, omission, concealment of facts which may or may not have
resulted in any wrongful gain or wrongful loss
‒ No materiality threshold provided
•
Audit Committee to set up Vigil Mechanism for directors and employees to report genuine
concerns
•
Auditor to be a whistle blower and report directly to the Central Government in case of
fraud against the company by its employees or officers
•
Shareholders/deposit-holders eligible to initiate Class Action suits against company, its
officers and auditors
•
Authorities who can investigate – RoC / NFRA / SFIO / National Company Law Tribunal
•
Stringent penalties, including imprisonment
Takeaway
•
Definition of fraud very wide and will include corruption, corrupt practices and bribery.
•
Need for education and training within the organisation and setting up controls for
preventing, identifying and reporting fraud.
110

111. Revival and rehabilitation of financially distressed
companies
•
•
The provisions of revival and rehabilitation of financially distressed companies has been
made applicable to all companies and not only to "industrial company" as defined under
SICA
The criteria of erosion of 50% of networth for filing application with BIFR has been done
away with. Test for determining stress necessitating regulatory intervention is made
uniform i.e. inability of a company to pay debts. Accordingly,
‒ If a company fails to pay debts due to its secured creditor representing 50% or more of
outstanding amount of debt within 30 days of demand, any secured creditor may file an
application to NCLT to declare such company as a ―sick company‖
‒ The company may also file an application to NCLT to declare it as a sick company on
above ground
111

112. Protection of minority shareholders interest
Measures to protect the interest of minority shareholders include the following:
• a company, which has raised money from public through prospectus and still has any
unutilized amount out of the money so raised and which proposes to change its objects,
then the promoter and shareholders having control of a company are required to provide
an exit to the dissenting shareholders in accordance with regulations to be specified by
SEBI
• Where any benefit accrues to promoter, director, manager, KMP, or their relatives, either
directly or indirectly as a result of non-disclosure or insufficient disclosure in the
explanatory statement annexed to the notice of general meeting then such persons shall
hold such benefit in trust for the company and shall be liable to compensate the company
to the extent of the benefit received by him
112

113. Protection of minority shareholders interest
Class Action Suit:
• In case of oppression / mismanagement, specified number of members or depositors are
entitled to file Class Action Suit before NCLT for seeking prescribed reliefs.
• They may claim damages / compensation for fraudulent / unlawful / wrongful acts from or
against the company / directors / auditors / experts / advisors etc.
• Some of the actions that can be taken are as under:
‒ Restrain company from any act which is ultra vires the AOA / MOA
‒ Restrain company for breach of provisions of MOA / AOA, Act or any other law
‒ Declare a resolution void if material facts are not provided
‒ Restrain company/ directors from acting on such resolutions
‒ Restrain company from taking action contrary to any resolution passed by shareholders
‒ Claim damages or compensation or demand any other suitable action.
‒ Seek other remedies as Tribunal may deem fit
113

114. Serious Fraud Investigation Office (SFIO)
•
•
•
•
CG to establish SFIO for investigation of frauds relating to a company. Till the time SFIO is
not established, SFIO already set up by CG in terms of directions of GOI to be used. CG
may under the specified situations including in public interest refer affairs of a company to
be investigated by SFIO.
Where CG is of the opinion, that it is necessary to investigate into the affairs of a company
by the SFIO ‒ on receipt of a report from the ROC or inspector appointed under 2013 Act;
‒ on intimation of a special resolution passed by a company that its affairs are required to
be investigated;
‒ in the public interest; or
‒ on request from any Department of the Central Government or a State Government
the CG may, by order, assign the investigation into the affairs of the said company to
SFIO.
The company and its officers and employees, who are or have been in employment of the
company, are responsible to provide all information, explanation, documents and
assistance in connection with SFIO inquiry
114

115. Glossary
AGM: Annual General Meeting
AOA: Articles of Association
BOD: Board of Directors
CA: Chartered Accountant
CCI: Competition Commission of India
CEO: Chief Executive Officer
CFO: Chief Finance Officer
CG: Central Government
CMA: Cost and Management Accountant
CRA: Credit Rating Agency
CS: Company Secretary
CSR: Corporate Social Responsibility
DRR: Debenture Redemption Reserve
EGM: Extra-Ordinary General Meeting
FY: Financial Year
GOI: Government of India
HUF: Hindu Undivided Family
ID: Independent Director
IEPF: Investor Education and Protection Fund
KMP: Key Managerial Personnel
LLP: Limited Liability Partnership
MCA: Ministry of Corporate Affairs
MD: Managing Director
MOA: Memorandum of Association
NBFC: Non-Banking Finance Companies
NCLT: National Company Law Tribunal
NCLAT: National Company Law Appellate Tribunal
NED: Non-Executive Director
NFRA: National Financial Reporting Authority
OL: Official Liquidator
OPC: One Person Company
PAC: Persons Acting in Concert
RIF: Rehabilitation and Insolvency Fund
RBI: Reserve Bank of India
RSE: Recognised Stock Exchange
ROC: Registrar of Companies
SEBI: Securities and Exchange Board of India
RV: Registered Valuer
SRC: Stakeholders Relationship Committee
SFIO: Serious Fraud Investigation Office
VC: Video Conferencing
WTD: Whole Time Director
WOS: Wholly Owned Subsidiary
115

116. Thank You