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  • Companies Act, 2013 - Rules

  • Companies Act, 2013: Rules

    The Companies Act, 2013 ("2013 Act") was enacted on 29 August 2013 on accord of Hon'ble President's

    assent, and has the potential to be a historic milestone as it aims to improve corporate governance, simplify

    regulations, enhance the interests of minority investors, and for the first time legislates the role of whistle-

    blowers. The new law replaces the nearly 60-year-old Companies Act, 1956 ("1956 Act").

    The 2013 Act provides an opportunity to catch up and make our corporate regulations more

    contemporary, as also potentially to make our corporate regulatory framework a model to emulate for

    other economies with similar characteristics. The 2013 Act is more of a rule-based legislation containing

    only 470 Sections, which means that the substantial part of the legislation will be in the form of Rules.

    There are over 180 Sections in the 2013 Act where Rules have been prescribed.

    To facilitate the ease of implementation, a phased approach is being followed by the Ministry of Corporate

    Affairs ("MCA"). Accordingly, 282 sections have been notified and are in force as of 1 April 2014. Final

    Rules for 19 chapters have also been released by the MCA, which are also applicable with effect from 1

    April, 2014. The Rules for the remaining chapters are in draft stage.

    This publication summarises the final and the draft Rules, wherever issued on the key chapters/ sections

    of the 2013 Act.

    "Having rules outside the 2013 Act provides a great opportunity for the Companies Act to focus

    on principles, and the Rules to stay relevant and be revised without the need to go back to

    Parliament. The notification of 282 sections and final Rules in key areas reaffirms the

    commitment of the MCA to make the 2013 Act a reality as soon as practicable. These are exciting

    times for us to participate in the implementation of the landmark legislation that will change the

    rules of the game for corporate India."

    Vishesh C Chandiok

    National Managing Partner

    Grant Thornton India LLP

  • Governance (Final Rules) Threshold for having one woman director on the Board defined - listed companies and other public

    companies with share capital of Rs 100 crore or more; or turnover of Rs 300 crore or more from the

    commencement of its charging section

    Threshold for having independent directors on the Board defined for other public defined- public

    companies with share capital of Rs 10 crore or more, turnover of Rs 100 crore or more or aggregate

    outstanding loans/ deposits exceeding Rs 50 crore, as per the latest audited financial statements

    Requirements and procedures for conducting a Board meeting through video conferencing and other

    visual means prescribed

    Matters compulsorily to be dealt with in a physically convened meeting prescribed - approval of the

    annual financial statements and the Boards report, approval of the prospectus, Audit Committee

    meetings for consideration of accounts; and approval of the matters relating to amalgamation, merger,

    demerger, acquisition and takeover

    Requirement to constitute an Audit Committee and Nomination and Remuneration Committee

    applicable for listed companies and other public companies with share capital of Rs 10 crore or more or

    a turnover of Rs 100 crore or more or aggregate outstanding loan/borrowings/debentures/deposits

    exceeding Rs 50 crore, as per the latest audited financial statements

    Establishment of vigil mechanism mandated for listed companies, deposit accepting companies and

    companies with borrowing from banks and public financial institutions exceeding Rs 50 crore

    Sitting fee payable to a director for attending meetings may be as decided by the Board or the

    Remuneration Committee and shall not exceed Rs 1 lakh per meeting

    Board report to contain detailed disclosures of the remuneration paid to each director and a comparison

    to the remuneration paid to employees. Disclosures include:

    - the ratio of the remuneration of each director to the median remuneration of the employees of the

    company for the financial year

    - percentage increase in remuneration of each director and Chief Executive Officer ('CEO') in the

    financial year

    - explanation on the relationship between average increase in remuneration and company's

    performance

    Every listed company and every other company having a paid-up share capital of Rs 10 crore or more

    shall have the following whole-time key managerial personnel:

    - Managing Director or CEO or Manager and in their absence a whole-time director

    - Company Secretary; and

    - Chief Financial Officer

    Every listed company or a company having 1,000 or more shareholders may provide to its members

    facility to exercise their right to vote at general meetings by electronic means

    Databank for independent directors posted on the MCA website shall be publicly accessible at the

    specified website

  • Governance (Final Rules) A person shall act as proxy on behalf of members not exceeding 50 and holding in the aggregate not

    more than 10% of the total share capital of the company carrying voting rights

    Formal annual evaluation to be made by the Board of its own performance and that of its committees

    and individual directors in case of every listed company and every other public company with share

    capital of Rs 25 crore or more, calculated as per the latest audited financial statements

    Related parties to include step relationships and exclude second generation lineal ascendants and

    descendants.

    No contract or arrangement with related party to be entered except with prior approval by special

    resolution in case of:

    - companies with share capital of Rs 10 crore or more; or

    - transaction/(s) to be entered into:

    with threshold amount determined as percentage of turnover /net worth as per the latest

    audited financial statements (threshold varies depending on the nature of related party

    transactions)

    relating to appointment to any office or place of profit at a monthly remuneration exceeding Rs

    2.5 lakh

    for a remuneration for underwriting the subscription of any securities or derivatives thereof of

    the company exceeding 1% of the net worth

    Any loan, guarantee or security provided by a holding company to its wholly-owned subsidiary

    company is exempted from the prohibitions contained in section 185 of the 2013 Act, provided such

    loans are utilised by the subsidiary company for its principal business activities

    Similarly, with respect to Loan/ guarantee/ security given/ provided by a company to its wholly owned

    subsidiary company or a joint venture company, the requirement of section 186 (3) would not apply.

    That means, if these loans etc. exceed the specified limit as per this section, the prior approval by

    means of a special resolution at a general meeting is not required

    Accounts, Audit and Auditors (Final Rules) Listed companies and public companies, with net worth more than Rs 10 crore, given a choice of

    sending financial statements to members by electronic mode

    The annual return to be certified by a Company Secretary in practice for listed companies or a company

    with paid-up share capital of Rs 10 crore or more and turnover of Rs 50 crore or more

    Auditor rotation is mandatory for the following class of companies, excluding one person companies

    and small companies:

    - unlisted public companies with share capital of Rs. 10 crore or more

    - private companies with share capital of Rs. 20 crore or more

    - all companies with borrowings from bank/public financial institution or public deposit of Rs. 50

    crore or more

  • Accounts, Audit and Auditors (Final Rules) Rotation requirement applies retrospectively i.e. period prior to the commencement of the 2013 Act,

    included in computing 5/10 consecutive years. The Rules also provide examples for explaining the

    transitional provisions in different situations

    For auditors disqualification with respect to business relationships, the term business relationships

    defined to construe any transaction entered into for a commercial purpose, except for the transactions

    in the ordinary course of business at arm's length price or in the nature of professional services

    permitted for auditors under the 2013 Act and the Chartered Accountants Act,1949, or related Rules

    and regulations under said legislations

    Incoming auditor/audit firm disqualified for appointment, if associated with the outgoing auditor/audit

    firm under the same network of audit firms or operating under the same trade mark or brand. The

    phrase 'same network of audit firms' is defined to mean the firms operating or functioning, hitherto or

    in future, under the same brand name, trade name or common control

    Additional comments in auditors report prescribed - disclosure of the effect of pending litigations;

    provisions required under any law or accounting standards for material foreseeable losses on long-term

    contracts, including derivatives and delay in depositing money into the Investor Education and

    Protection Fund

    Internal audit made mandatory for listed companies, public companies with share capital of Rs 50

    crore or more,