asa presentation the companies act 2013 major impact on indian subsidiaries

Companies Act, 2013Companies Act, 2013Impact on subsidiaries of foreign

companiescompaniesOrganiser

ASAASA

♣presented by

September 13, 2013

presented bySundeep Gupta FCA, DISA(ICA) - Partner

Parveen Kumar FCA - Partner

ASA & Associates chartered accountants www.asa.in

FLOW OF THE PRESENTATION

Enactment and background

F k Framework

Significant Changes Significant Changes

ENACTMENT AND BACKGROUND

ENACTMENT

August 29, 2013 would be remembered as a historic day forAugust 29, 2013 would be remembered as a historic day forCorporate India. For, on this very day the Honourable President ofIndia gave his assent on the much-awaited, the much-needed, amodern and contemporary company law. This was notified in Gazetteode a d co te po a y co pa y a s as ot ed Ga etteof India on August 30, 2013 and replaces the Companies Act, 1956

Rules are now in public domain for opinion. To be notified laterp p

Applicability of the Act to be from a notified date in future

THE NEED

Transformed national and international economic environmenteconomic environment

Lessons from bad corporate Lessons from bad corporate governance

Why was there a

need for Changes in stakeholders’ expectation

need for new Law ?

Manifold increase in number of companies

Year No. of Companies1956 30,000 approx2013 1,100,000 approx

THE JOURNEY

Companies Bill,2008 introduced

Report of SCF onCompanies Bill, 2009 was

Companies Bill, 2012 asamended was approved2008 introduced

on 23.10.2008 introduced in Lok Sabhaon 31.08.2010

by Lok Sabha on18.12.2012

2008 2009 2010 2011 2012 2013

Lapsed due to dissolution of LokS bh C i Bill 2011 Passed by Rajya SabhaSabha;reintroduced on 03.08.2009 asCompanies Bill, 2009.Bill referred to SCF*

Companies Bill, 2011introduced in LokSabha on 14.12.2011

Passed by Rajya Sabhaon 08.08.2013President’s assent on29.8.2013

*[SCF] Standing Committee on Finance

FRAMEWORK

THE FRAMEWORK

Companies Act, 1956

Companies Act, 2013

Parts – 13 Sections – 658Schedules – 15

Chapters – 29 Sections – 470Schedules – 7Schedules 15

Definitions - 67Schedules 7

Definitions - 95

The Companies Act, 2013 give substantial powers to the Government & hencemajor prescriptions would be in the form of Rules to be notified separately

SIGNIFICANT CHANGES

SIGNIFICANT CHANGES

Definitions increased

New classifications - One Person Company, Small Company, Dormant Company

Governance - Women Directors, Resident Directors, limits, Key Managerial Persons

Financial statements

R l d P i id d Related Parties – scope widened

SIGNIFICANT CHANGES

Foreign Company deemed to be Indian Company Foreign Company deemed to be Indian Company

Corporate Social Responsibility

New regulatory bodies to be set up

Stricter governance for private companies listed Stricter governance for private companies, listed companies

M & A i i h d l Mergers & Acquistions - methodology

DEFINITIONS

KEY NEW INSERTIONS

Section/Clause

Particulars

2 (6) Associate Company – Control of 20% or more of total share 2 (6) Associate Company Control of 20% or more of total share capital or business decisions

2 (13) Books of account – to include electronic form

2 (18) Chief Executive Officer – designated as such by Board

2 (19) Chief Financial Officer – appointed as CFO

2 (27) Control – inclusive definition ; right to appoint majority directors, control the management or policy decisions; directly or indirectly

2 (42) Foreign company – existing definition expanded; has a business place in India itself or through an agent and business activity in place in India itself or through an agent and business activity in India

2 (51) Key Managerial personnel – specifically defined; CEO, CS, Whole time director, CFO and any other prescribed person

KEY NEW INSERTIONS

Section/Clause

Particulars

2 (52) Listed company – listing of any security2 (52) Listed company listing of any security

2 (60) Officer in default – significantly expanded to include persons under the immediate authority of Board or KMP*

2 (62) O P 2 (62) One Person company

2 (69) Promoter – specifically defined now

2 (85) S ll C2 (85) Small Company

* Key Managerial Personnel

NEW CLASSIFICATIONS

ONE PERSON COMPANY

To be mentioned as such under the company name To be mentioned as such under the company name

Private company formed with only one shareholder

Shareholder to be a natural person and Indian citizen

Shareholder to also nominate another natural person ; Shareholder to also nominate another natural person ; written consent of such nominated person

Such a company provided relief from various provisions

ONE PERSON COMPANY

Not required to hold AGM

Board meeting: 1 per calendar half year gap between meetings to be at least 90 daysgap between meetings to be at least 90 days If only 1 director, then no meeting required ; merely

intimation to company by the director


SMALL COMPANY

Should not be a public company

Paid up share capital of <= INR 5 million or such amount as may be prescribed but <= INR 50 million ; or

Turnover <= INR 20 million or such amount as may be prescribed but <= INR 200 million

Does not apply to holding / subsidiary company


ASSOCIATE COMPANY

Company in which that company has a significant influence* but whichCompany in which that company has a significant influence , but whichis not a subsidiary company of the company having such influence. Italso includes a joint venture company.

*control of at the least twenty per cent of total share capital, or ofy p p ,business decisions under an agreement;

DORMANT COMPANY

Formed for the purpose of: Future project or holding an asset or intellectual property ;

and Has no significant accounting transactions

Inactive company: Not been carrying on any business or operation ; or No significant accounting transaction in last 2 years ; or Not filed financial statements and annual returns in last 2

years

Significant accounting transactions defined and includes payments for maintenance of office and records

PRIVATE COMPANY – MEMBERS LIMIT

Limit of members now increased to 200 Limit of members now increased to 200

Certain relaxations available earlier, now withdrawn

GOVERNANCE

DIRECTORS

At least one director to be resident in India – 182 days or more

Presence of woman director to prescribed* class of companies

Maximum – 15 in any company ; can be increased by special resolutionp

Minimum 1 in case of OPC 1 in case of OPC 2 in case of Private company 3 in case of Public company

A person to be a director in maximum 20 companies ; only 10 public companies

DIRECTORS

Independent directors – for listed companies

Power to prescribe class of public companies to have independent directors

Code of conduct for independent directors laid down

Duties of directors now specifically include “exercise his duties with due and reasonable care, skill and diligence” and “independent judgment”and independent judgment

Resignation by director to be filed with authorities

KEY MANAGERIAL PERSONNEL

Specifically defined under the new ActChi f E ti Offi Chi f Fi i l Offi C Chief Executive Officer, Chief Financial Officer, Company Secretary, Managing Director, Manager, Whole time director

f h ff Power to notify any other officer as KMP

Included in definition of officer in default

FINANCIAL STATEMENTS


mandatory for all companies, except OPC, Small company, dormant company:dormant company:

Cash flow statement Statement of changes in equity

Consolidated financial statements ; statement of salient features of subsidiary, including associate company / JV

Depreciation methodology now on useful life of assets instead of SLM / WDV rates ; concept of low value items dispensed with


Financial year be March 31 for all companies: holding / subsidiaries of foreign companies may follow a

different year with permission of National Company Law different year with permission of National Company Law Tribunal

Alignment with financial year to be done within 2 years Alignment with financial year to be done within 2 years

Provisions for voluntary re-opening of financial statements:Prior approval of Tribunal Prior approval of Tribunal

Maximum upto 3 preceding years

Re opening by court / Tribunal order if mismanagement or Re-opening by court / Tribunal order if mismanagement or fraudulent accounts

RELATED PARTIES

RELATED PARTIES

Scope widened to include: KMP or their relatives Private company in which the manager is a member Private company in which the manager is a member

/director Firm in which manager / his relative is a partner

Related party transactions to require Board approval

Now shareholders’ approval for companies having Now shareholders approval for companies having prescribed* paid up capital (earlier Central Government)

Interested shareholders not to vote h t d l ith Interested shareholders not to vote - how to deal with contracts between holding and subsidiary company ?

* Not yet prescribed

FOREIGN COMPANY

FOREIGN COMPANY

has a place of business in India whether by itself or through an agent, physically or through electronic mode

conducts any business activity in India in any other manner

Deemed to be an Indian Company

Have to comply with Indian regulatory compliances like conductingaudit, filing return with ROC

CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILTY

APPLICABILITYCompany which satisfies any one of the following conditionp y y gNet worth of INR 5 billion or more; orTurnover of INR 10 billion or more; orNet profit of INR 50 million or more:during any financial year*Activities separately specified

COMMITTEECOMMITTEEMandatory to constitute CSR committee of the BoardConstitution :At least 3 Directors;At least 3 Directors;At least one director shall be an independent director

Role of CSR Committee :Formulate and monitor the CSR policy; andFormulate and monitor the CSR policy; andRecommend the expenditure to be incurred on such activities

Board Role and responsibility :Disclosure of CSR committee and contents of policy in reportp y pCompliance with CSR policy At least 2% of average net profits during 3 immediately preceding years on CSR activitiesIn case of failure, Board to give reasons in report

NEW REGULATORY BODIES

NEW REGULATORY BODIESNEW REGULATORY BODIES

NATIONAL COMPANY LAW TRIBUNAL

NATIONAL FINANCIAL REPORTING AUTHORITYREPORTING AUTHORITY

SERIOUS FRAUD INVESTIGATION INVESTIGATION

AUTHORITY

STRICTER GOVERNANCE

STRICTER GOVERNANCE

Not to commence business unless: Registered office is verified Subscribed capital is received Subscribed capital is received

Directors’ Report to include: Extract of Annual return Extract of Annual return Number of Board meetings Declaration by independent directors Details of loans guarantees investments Details of loans, guarantees, investments Details of contracts with related parties Such other matters as may be prescribed

STRICTER GOVERNANCE

Annual return to contain information up to financial year (instead of till AGM) and to include:

Ch f / KMP i i fi i l Changes of promoters / KMP since previous financial year Meetings of Board / shareholders with attendance Remuneration of Directors / KMPs

Penalties / p nishments imposed on compan Penalties / punishments imposed on company

Audit committee to be constituted by every listed company ib d l f ior prescribed class of companies

Nomination and Remuneration Committee: For every listed or prescribed class of companies To recommend appointment and removal of directors Carry out performance evaluation of directors

STRICTER GOVERNANCE

Stakeholders relationship committee: Mandatory for every company with > 1000 shareholders,

debenture holders or any other security holdersdebenture holders or any other security holders

Quorum now based on number of shareholders

Voting through electronic means permitted

S i l d d f b d / h h ld i Secretarial standards for board / shareholders meetings now mandatory (earlier recommendatory); as specified by ICSI

Minimum 7 days notice to hold Board meeting ; quorum to be 1/3 of total strength/ g

STRICTER GOVERNANCE

Loans given in excess of prescribed limits: Extended to “any person” (earlier only corporates) Rate linked to government securities based on tenure of Rate linked to government securities based on tenure of

loan (earlier prevailing bank rate) Made applicable to private companies Relaxation to loans given by holding company to subsidiary Relaxation to loans given by holding company to subsidiary

company dispensed with

MERGERS AND ACQUISITIONS

PARTICULARS COMPANIES ACT, 2013 COMPANIES ACT, 1956

Merger of Indian Co into • Permitted Not permittedgForeign Co

• Prior approval of the RBI required beforeany foreign company merges with an Indiancompany or vice versa

p

Merger or amalgamationbetween smallcompanies or between

Proposed new process of merger/amalgamation of small companies or groupcompanies involves the approval of

No such provision

holding companies and aWOS or prescribedCompanies

a. shareholders holding at least 90% ofthe shares of the company

b. RoCc. Official liquidatord. Central Government

PARTICULARS COMPANIES ACT, 2013 COMPANIES ACT, 1956

Auditors Certificate Auditor to certify accounting No such provisiony gtreatment in the scheme is inconformity with the ASprescribed under Clause 133of the Act

p

END OF SESSION 1

Accounting Standards and A di i S d dAuditing Standards

FINANCIAL STATEMENTSFINANCIAL STATEMENTSFINANCIAL STATEMENTS…FINANCIAL STATEMENTS…

FinancialFinancial Position

OBJECTIVES Performance

Cash Flows

48

Provide information ……useful to wide range of users….economic decisions

Investor

CustomerCreditor

USERSEmployeePublic

RegulatorLender

Underlying AssumptionsUnderlying AssumptionsUnderlying Assumptions…Underlying Assumptions…

Going Concern

AccrualConcern

ConsistencyConsistency

Clause 22, 23, 24 of the Framework

FrameworkFrameworkFramework…Framework…

Understandabilityy

Relevance

Qualitative Reliability

Substance Over QCharacteristics Form

Comparabilityp y

Prudence

Completeness

Example:Example:-A Listed Indian Companies having listed subsidiaries in US, Europe etc

R T tiRegroup Transactions& Report as per USGAAPFor SEC.

Regroup Transactions& Report as per Indian GAAPFor ROC and SEBI.

Regroup Transactions& Report as per IFRS

Major Challenges:-a) Huge Cost and Resource Requirment

52

& Report as per IFRSFor Europe.

b) Comparability

To achieve the Global Objective – IASB - Introducedj

IFRS (International Financial Reporting Standards) (earlier also knows as IAS)(earlier also knows as IAS)

Group Transactions

USIndia Europe

Transactions& Report as per IFRS Only

53Understanding Financials Across Boundaries ….

Challenges…Challenges…Challenges…Challenges…

54

Challenges…Challenges…Challenges…Challenges…

55

India works on a multi-regulator model

Reserve Bank (RBI) MCA State RegistrarOf Chit Funds

NationalHousing

BankIRDA SEBI

NBFCs RBI regulates deposittaking activity

CCCCHFC SBC MF

…FC AAA.C XXXXXX ZZZZ

LC..C

XXXNidhi

ZZZZChit Fund C. General

Insurance ABC

XX co.YY

Infrastructure

Tax Cost

To Help User

Tax Standards

Cost Standards

IFRSAS

To Help User Take Decisions

IndAS

Regulators –RBI, SEBI, IRDA…. AS

(Schedule VI)

Financial Statements

New Concepts and Disclosure New Concepts and Disclosure RequirementsRequirements

Accounting Standards Auditing Standards

58

g g

Current Structure of auditing standards In IndiaCurrent Structure of auditing standards In India

• Standard on Quality Control – 1 ‐ Quality control for firms that perform audit SQC & reviews

• Standards of Auditing (SA 200 to 810) – applicable for the auditors while SAs conducting the audit of historical financial information

• Standards on Review Engagement (SAEs 2000 and 2699) ‐ to be applied fro SREs review of historical financial information

• Standards on Assurance Engagement (SAEs 3400 and 3402) ‐ applicable on all SAEs assurance engagement dealing on other than historical financial information

• Standards on Related services (SRSs 4400 and 4410) – applicable in case of SRSs

( ) ppengagement for agreed procedures and compile financial information

59

Title Auditor’s Report-Addressee

Introductory Para

pContents

y

Mgt Responsibility for FS Para

Adobe Acrobat Document

Auditor’s Responsibility Para

Auditor’s Opinion

Other Reporting Responsibilities

Signature of the Auditor

Date of the Auditor’s Report

Place of Signature 60

Inte nal A ditInte nal A ditInternal AuditInternal Audit

• Prescribed companies will appoint an internal auditor to conduct internal• Prescribed companies will appoint an internal auditor to conduct internal audit of the functions and activities of the company.

• Internal auditor will either be a chartered accountant or a cost accountant, or such other professional as may be decided by the board.

• The Central Government, may, by rules, prescribes the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

IssuesIssuesIssues…Issues…

ActStandardsStandards

CASE STUDY 1CASE STUDY - 1

What if departure from standard is allowed by the regulatorthe regulator

AS – 15

• Feb 9, 2011 ‐ RBI issued circular (DBOD.BP.BC.80/21.04.018/2010‐11) on reopening of Pension Option to employees of Public Sectorreopening of Pension Option to employees of Public Sector Banks and Enhancements in Gratuity limits.

• In terms of this circular the bank may amortize this expense over a period of 5 years p y

This is departure from requirements of AS 15

AS – 15• ICAI Announcement

– Since the accounting treatment for such expenditure is prescribed under prudential regulatory framework of the Regulator, the auditors need not qualify their audit report on this account

– As per Standard of Audit (SA) 706 – the matter should be brought out by way of “Emphasis of Matter Paragraph” in the audit report

“Without qualifying our opinion….


Whether two or more views are possible in Accounting StandardsAccounting Standards

AS – 15

• Airlines X allows its employees to purchase i i k i l iair tickets at concessional price

• Scheme allows an employee to purchase p y pmaximum 10 tickets in a yearThi ill b bj t t il bilit f t i• This will be subject to availability of seats in the relevant flight and with prior reservation

Evaluate whether it needs to fair value the tickets provided to the employees and recognize the difference as employee cost under AS 15

View• Clause 4 of AS 15 – Employee benefit also includes non monetary

benefits such as medical care housing, car and free or subsidized goods • So provision of air tickets at concessional price is covered under AS 15

AS 15 generally talks about measurement of benefits as “The Cost” of the benefits –g yhence the measurement are based on difference between cost and amount charged.

Since no specific guidance on measurement of such benefits, an alternative view also seems possible. The management may measure the cost of benefits byalso seems possible. The management may measure the cost of benefits by reference to Fair Value of the goods.


Whether error corrections allowed in Accounting StandardsAccounting Standards

LISTED COMPANYIncome Tax to SCH XIV

Dep Rate Changed from past

IncreasedIncreased Profits of 109+ cr rp

ose

ProperDisclosures

109+ crAS-6 Pur

AS-1AS-5

Your View………???????

Change in Policies (AS 5)Change in Policies (AS 5)

S Ch Eff t

Change in Policies (AS 5)Change in Policies (AS 5)

S. No

Changes Effect

1 Change in Accounting Policies

Retrospective

2 Change in Estimates Prospective

3 P i P i d It R t ti 3 Prior Period Items Retrospective

71


Whether Accounting Standards have a role....

Case Study – Private Limited Company

As per Local office

Rs. Million

As at March 31, 2010

Capital 500

Loans from Headoffice to Subsidiary

‐

Creditors 100

Stock 500

Debtors 600

Case Study – Private Limited Company

As per Local office As per Head

Rs. Million

office at Japan

As at March 31, 2010 March 31, 2010

Capital 500 100Capital 500 100

Loans from Headoffice to Subsidiary

‐ 400

Creditors 100 100

Stock 500 500

D b 600 600Debtors 600 600

Collecting Evidence Audit wasCollecting Evidence ‐ Audit was..

Planned

m

File

According to Standards

Recording significant

items for future emen

t tea

ting en

gag

Basis for conclusion

As per regulatory

requirements

Assist

Law

75

requirements

RECAP … New Companies Act 2013RECAP … New Companies Act 2013pp

Responsibilities FlexibilityResponsibilities

Compliances

Penalties

???Mergers

One man company

Rules???

IFRS Compatible

CSRCompatible

Class suit actionwww.asa.in

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