COMPANIES ACT 2013 – Urgent & Important actions

before March 15- By CS Makarand Joshi

- makarandjoshi@mmjc.in

Coverage of Session

Borrowings / Deposit Allotment of Shares / Securities Fixed Assets Group Company Loans Other Loans / Investments CSR Related Party Transactions Remuneration to Directors ROC Filings

Who can approve borrowing? Board of Directors can approve

borrowing Board can delegate this power to

committee or to MD If borrowing exceeds paid up capital +

free reserves, it requires prior special resolution

All the resolutions [shareholders / directors] to be filed with ROC

Charge – secured loan

Means an interest or lien created on –1. Property or2. Asset of a company or3. Any of its undertakingas a security and includes mortgage Now requires charge registration for lien

on FD or pledge of shares Charge on vehicle is also required to be

registered.

What if not complied?

If charge is not registered – secured lender is at part with unsecured lender

Penatly = 100,000 – 500,000 + imprisonment of 6 months

If borrowing made without special resolution, borrowing may be considered as ultra vires

Summary

Repayment of Deposits

Deposits as on 1 April 2014 to be repaid till 31 March 2015

Deposit under Old act or Under New Act? Penalty for non repayment = 1cr >10 cr

+ officer liable for imprisonment >7 years and fine 25 lacs>2cr

What is ‘deposit’ under acceptance of deposit rules? The major highlights of this definition are – This is an inclusive definition. It says ‘deposit’

includes any receipt of money by way of deposit or loan or any other form, by a company, but does not include.....

There are 14 exclusions from the definition of deposit

Here any other manner has to be read in the context of receipt either as deposit or loan.

What are 14 exclusions?

1. Any amount received from government or from any other source whose repayment is guaranteed by central government

2. Any amount received from foreign source, so long as it is in compliance with Foreign Exchange Management Act

3. Any loan or facility received from Bank

4. Any loan or financial assistance received from public financial institutions

5. Any amount received against issue of commercial paper or any other instrument issued under guidance of RBI

What are 14 exclusions?

6. Any amount received from any other company

7. Any application money received under this act, against issue of any securities [so long as the allotment is done in 60 days of receipt of money]

8. Any amount received from Director of the Company [however the amount received should not be out of borrowed funds]

9. Any amount received against issue of secured bond or debentures OR Any amount received against issue of compulsory convertible bond or debentures [bond should be convertible into shares within a period of 5 years]

What are 14 exclusions?

10. Any security deposit received from employee of the company [not exceeding 12 months salary]. This deposit should be non interest bearing.

11. Any non interest bearing amount received or held in trust [by the company]

12. Any amount received in the course of and for the purpose of business of the company –

as an advance for the supply of goods or provisions of services accounted for in the manner, provided that such advance is appropriated against supply of goods or services within a period of 365 days from acceptance of deposit

What are 14 exclusions?

as advance accounted for in any manner, received in connection with consideration for property

as security deposit for performance of contract for supply of goods or services

as advance under long term projects for supply of capital goods

13.any amount brought by promoters in pursuance of stipulation imposed by the lending institution

14.any amount accepted by a Nidhi Company in accordance with section 406 of the Companies Act 2013.

Acceptance of Deposit

Private Company can take deposit only upto 25% of paid up capital + free reserves, if –

1. Credit rating is obtained

2. deposit insurance is obtained

3. Special Resolution is passed Only Public companies with min. networth of

Rs.100 Cr or turnover of Rs.500 can accept Public Deposit [other than shareholders]

Limits may be relaxed to 100% of paid up capital for private companies!!

What is the solution?

Let money received fall under any of 14 exemptions

ELSE Repay the Deposits before March 15 OR Convert Promoters Money into Capital and

accept DepositOR Seek extension of time from CLB for

repayment of Deposit

Compliances

On or before 30th Day of June, return of deposit – Registrar in Form DPT-3

Depositing on or before 30th April of each year not less 15% of the amt maturing during the financial year and following year in a scheduled bank to be maintained separately as deposit repayment reserve

The Amt so deposited shall not be used for any purpose other than for repayment.

Share Capital

Share Capital

All Shares to be offered on rights basis; ELSE It is Private Placement Private Placement requires - Special Resolution

+ valuation report Private Placement offer document!!! Separate Bank account required in private

placement Funds can not be used till allotment is completed Any mis statement in Offer document can be

alleged as ‘Fraud’

Prohibited Loan/ Guarantee/ Security

Section 185 prohibits loans / guarantee/ security to director or person in whom director is interested

Such loans can not be given This section has become effective from

12 September 2013

What is the consequence of default? For Company granting loan fine 5-25 lacs For director / entity receiving loan –

imprisonment upto 6 months OR fine 5-25 lacs

If director does not disclose his interest – vacation of directorship

Loan granted may be considered as ultra vires and person granting it may be personally responsible

Directors personal default in his duties

Section 185

Provisions of section 185 prohibits loan / security guarantee given by any company to following entities –

1. Director of lending company2. Director of holding company of lending company3. Partner/ relative of such director4. Firm in which such director is partner5. Firm in which relative of such director is partner6. Private company in which such Director is a

Director or member

Section 185

Body corporate at general meeting of which not less than 25% of total voting power may be exercised or controlled by such director or by two or more such directors together;

Body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

How to comply with Section 185? Loan from company other than prohibited

entity Loan from exempted entities Change Shareholding / Directorships Don’t take loan. Take investment Don’t take loan. Take business advance Merge entities Convert companies into LLP Convert Partnership Firms to Company and

change shareholding / directorship

Model - 1

Operating Cos provide loan to each other

Model - 2

1] A can provide to B & C2] B & C can provide each other3] B & C can not provide A

Exemption:

Any loan given to MD as part of employee benefits OR under some scheme approved by shareholders

Advance loan, give guarantee or provide security in respect of loan made by any person to wholly owned subsidiary

Give guarantee or provide security in respect of loan made by any bank or financial institution to subsidiaries companies

NBFC can give loans/ provide guarantee / security

If borrowing party is anybody other than prohibited list

Comparison

Nature of Transaction

Section 179 Section 185 Section 186

Investments Applicable wrt to every investment

Not applicable Applicable wrt every investment made in securities of body corporate

Lending Applicable wrt to all loans

Applicable if loan is given to director or person in whom director is interested

Applicable wrt to all loan

Guarantee -do- -do- -do-

Security -do- -do- -do-

What is Investment?

Laying of money in such a manner that it would produce some revenue [dictionary meaning]

It may include following –1. Shares, 2. Debentures3. Property [which is not purchased for business]4. Fixed Deposit is investment? – Yes, it can be

said as Investment for the purpose of section 179

Investments – Who can approve? Every Investment requires approval of

the Board of Directors If loans / investments / guarantee/ security

made in excess of 100% of free reserves or 60% of paid up capital + free reserves, it requires prior approval of shareholders

Approval of public financial institutions, in certain cases, is required

Every such Board / Shareholder resolution to be filed with ROC

Loans and Investments

Limits on Investment /Loan /Guarantee /Security Given(186) Interest rate note lower than yield on Govt.

Security Applicable even to private limited company Applicable even for loan given to

employees Requires approval of board – to be filed

with ROC Register to be maintained

Loans and Investments

Special Resolution and Board resolution to be filed with ROC

Exemption: Loan given or guarantee or security

provided by holding company to wholly owned subsidiary or joint venture company

Investment in shares by holding company to its wholly owned subsidiary company.

This section shall not apply to NBFC

Summary

Assets

All ‘investments’ in assets should be made in company’s name

1. Motor Car?2. Agricultural Land? Depreciation to be changed on useful life

from next financial year

Disposal of Assets

Any disposal/ lease / sell of undertaking OR substantial undertaking of the Company requires Special Resolution

Undertaking includes – property / investment / business undertaking

Undertaking = undertaking in which investment of the company exceeds 20% of its net worth OR

Undertaking which generates 20% of total income of the Company as per last financial year

This section does not apply to company, where selling and leasing property is an Ordinary Course of Business

What if special resolution is not

obtained?

Disposal of Assets

Buyer will not be impacted if he proves that he acted in good faith

If buyer is aware about this non compliance, title will be faulty

It is subject to litigation If you are acquiring property from the

Company, get this special resolution passed and filed with ROC

Summary

Approach TOWARDS Related Party Transaction Scope is widened Transactions to be at arms length And in

Ordinary Course If not in ordinary Course OR if not at arms

length –requires approval of board and may be Special Resolution of Shareholders

Interest Directors not to participate at board meetings Related Party shareholders not to vote at General

Meeting Transactions with Wholly Owned Subsidiary Exempted

Remuneration

Board and Shareholder approval essential Require compliance of schedule V Appt of Non Resident MD /WTD requires CG

approval No remuneration restriction on private company, if

–no default in payment of debts Disclosure is required in the annual report Interested Directors should not vote [section 166] Related Shareholders can vote [Se. 188 does not

cover these transactions]

Liabilities

Every working Director/ KMP is officer in default

Director made accountable is officer in default

If there is no working Director, all Directors will be officer in default

Non executive / independent Directors are liable for acts / omissions occurred with his knowledge attributable through broad process

Summary

Corporate Social Responsibility

Who is covered under CSR?

Every company having: Net worth of Rs. 500 crore or more, or Turnover of Rs. 1000 crore of more, or Net profit of Rs. 5 crore or more

during 3 previous financial year Foreign company havg branch

office or project office are also included

How much to be spend?

At least 2 % of the average net profits of the company made during the three immediately preceding financial years

Profit to be calculated as prescribed under section 198 of the Act

What if not spend?

The reason for same shall be mentioned in Board report

Section 450? Duties of Director

Monitoring and Reporting of CSR Spending MONITORING - CSR Committee to

formulate and recommend CSR Policy, recommend amount to be spent and monitor the CSR policy

REPORTING: In Board report as per prescribed format In case of foreign company, the balance

sheet to contain as annexure

Summary

Importance of Type of Companies Small Company – Need not prepare Cash Flow Statement, Need not do rotation of Auditor Does not require certification of A/R by

PCS u/s 92(1)

Holding / Subsidiary / Associate Holding Subsidiary requires

consolidation Books of Associate to be consolidated

with Holding Holding – Subsidiary – enjoys exemption

u/s. 185, 186 and 188 Subsidiary – Subsidiary – no exemption Holding – Associate – no exemtion

Directorships

Max. number of Directorship per person is 15 Resident Director is mandatory Non filing of Fin. Statement or A/R makes

director disqualified and his existing offices would vacate

Non attendance of BM for 12 months – VACATION

Appt of – Woman / Independent directors Appointment of CS / CFO Appointment of one level below KMP to be

intimated to ROC

Auditors

Disqualification norms changed Restriction on Number of audits Auditor Rotation [3 yrs transition] Appointment of Internal Auditor Appointment of Cost Auditor Appointment of Secretarial Auditor

Companies (Indian Accounting Standards) Rules, 2015 Ministry has issued Companies (Indian Accounting Standards)

Rules, 2015. The Cos., may comply for the accounting period on or after

1st April, 2015 with the comparatives for the periods ending on 31st March, 2015 or thereafter

Mandatory for the following Cos., for the accounting period on or after 1st April, 2016 with the comparatives for the periods ending on 31st March, 2016 or thereafter Equity or debt listed or are in process of being listed on any

stock exchange in India or outside AND net worth of Rs. 500 cr or more

Cos., other than above AND net worth of Rs. 500 cr or more holding, subsidiary, joint venture or associate companies of

above mentioned Cos.

Companies (Indian Accounting Standards) Rules, 2015

Mandatory for the following Cos., for the accounting period on or after 1st April, 2017 with the comparatives for the periods ending on 31st March, 2017 or thereafter Equity or debt listed or are in process of being listed

on any stock exchange in India or outside AND net worth les than Rs. 500 cr or more

Cos., other than above AND net worth of Rs. 250 cr or more but less than Rs. 500 cr

holding, subsidiary, joint venture or associate companies of above mentioned Cos.

Audit Report

Apart from reporting items as per sec- 143, other imp items to be disclosed Impact of pending litigations on financial

position material foreseeable losses, if any, on long

term contracts including derivative contracts

Delay in transferring amt to IEPF

Annual Return

Other Imp contents Principal business activities along with % to total

turnover of the Company Total turnover and networth Details of promoters, directors, key managerial

personnel along with changes therein since the close of the previous financial year15. Details of all board & committee meeting along with details of attendance

Details of attendance of all directors in board and committee meetings

Annual Return

Details of remuneration of whole-time & managing directors, manager and key managerial personnel in terms of Salary & perquisites Stock option and sweat equity Commission

Details of remuneration of other directors in terms of Sitting fee commission

Amount spent on Corporate Social Responsibility Limits under sections 186 i.e. Loan and investment by

company and section 180 (1)(c) i.e. Restrictions on powers of board

Directors Report

Other Imp contents Extract of Annual return Statement on declaration given by Independent directors

as per section 149(6)] Related party transaction as per section 188 A statement indicating development and implementation

of a risk management policy for the Company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company

Details of Deposits

Directors Report

Details of significant and material orders passed by the Regulators or courts or tribunals impacting the going concern status and company’s operations in future Disclosures in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates (67(3)(c)

Issue of equity shares with differential rights ( Rule 4(4) of chapter Share Capital and Debentures) 2014

Provision of money by company for purchase of its own share by employees or by trustees for the benefit of employees. ( Rule 16(4) of chapter Share Capital and Debentures) 2014

Other Important Matters

Change in Financial Year Alteration of Articles of Association of

the Company Updation of Statutory Registers Writing date of entering minutes in

minute book Various Policies to be adopted by the

Companies Mandatory Forms filing with ROC

List of Forms to be filed with ROC DPT 4 – Deposit MGT 14 – For MBP 1 / Loan / Investment / Borrowing MGT 14 – For special resolution for AOA alteration /

Borrowing in excess of cap + reserves / appt of MD / WTD

MGT 14 – adoption of accounts / directors report ADT 1 – Appointment of Auditor 23 AC /23 ACA – Balance Sheet / Profit and Loss 20B – Annual Return MR 1 – appointment of CS / CFO / MD DIR 12 - appointment of CS / CFO / MD

Change in approach…Change in Solutions Change in Approach Shift from shareholder protection to

stakeholder protection Strengthening of doctrine of constructive

notice Change in Solutions More capital intensive companies? Self sufficient companies? All transactions at arms length? Strict AND Timely Compliances

Actions Required for Pvt. Co.

Actionable for Private company Printing of CIN, website, mail id, phone, fax,

registered office on letterhead and official publication

Induction of new directors Appointment of CS (?)/ MD / WTD Appointment of Internal Auditor Policy for related party transaction Articles of Association needs revision Borrowing in excess of paid up capital + reserves

require special resolution to be filed with ROC Repayment of deposit in 1 year

Actionable for Private company Every borrowing / loan / investment requires prior board

resolution and interest to be charged Private Company can not give loan/ guarantee / security

to another entity in which Director is interested Minutes/ Registers / Share Certificates to be maintained Statutory Registers to be maintained in new format [since

incorporation] ROC filing to be maintained up to date without any delay Every Director to mention his DIN / Address etc in

correspondence Constitute CSR Policy and Spend 2% of avg. profits

THANK YOU.Lets help industry to be better governed