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Company Law By Mr. Vinod Kothari

Implementing the Companies Act, 2013, Rules thereof

Vinod Kothari & Company

1006-1009 Krishna 224 AJC Bose Road Kolkata – 700017 Phone 033-22811276/ 22813742/7715

E-mail – [email protected]

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www.vinodkothari.com Email: [email protected]

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• In case of linking, please do give credit and full link

2

About Us • Vinod Kothari &

Company, Company Secretaries in Practice ▫ Based out of Kolkata,

Mumbai

• We are a team of consultants, advisors & qualified professionals having recently completed 25 years of practice.

Our Organization’s Credo:

Focus on capabilities; opportunities follow

3

Quick Overview of Act, 2013

There are lots of materials and articles on the Companies Act, 2013 here:

http://india-financing.com/component/content/article/281.html




Session - Incorporation

5

Expected Coverage – 1/2

• Types of Companies:

• Private companies

▫ Privileges/ Exemptions to private company

▫ Private company which is subsidiary of a public company

▫ Subsidiary of a foreign company

• Small companies

▫ When is it a small company?

▫ Intent of having Small companies

• One Person Company

▫ Definition, Relation between private, small & OPC

▫ Rules - provisions, relaxations, mandatory conversion, ambiguities.

▫ Opt in & Opt out using Section 18 for OPC status, Contract between

OPC and its Member who is also director of OPC

• Comparative of privileges applicable to Small Company and OPC

• Unlimited Company

6


• Memorandum & Articles – Model Tables

• Clauses of Memorandum of Association

▫ Object clause- displays confusion

▫ Alteration of Memorandum

• Articles of Association

▫ Entrenchment provision

▫ Alteration of Articles

• Holding- subsidiary

▫ Definition of holding, subsidiary.

▫ Possibility of having two holding companies

▫ Consolidation in whose books?

▫ Discussion on Layers

Onus of non-compliance on whom?

Illustrations for holding-subsidiary relations

• Annexure

▫ Articles of Association under Act, 2013

▫ Sections enforced

7

Types of Company

Classification of

company

No. of member

Liability

Nature of object

Access to capital market

Control

Private

Public

Small Company

Not small company

Multi person cos

OPC

Not for profit

For Profit

Unlimited

Limited

By shares

By guarantee

Associate

Joint Venture

Subsidiary

Holding

Public

Private

listed

unlisted

unlisted

listed Non convertible Preference share

NCDs

NCDs

Equity

8

Private Companies

• Maximum number of members:

▫ Increased from 50 to 200 – except in case of OPC

• The clause in the former definition prohibiting private companies:

▫ To invite or accept deposits from persons other than its members, directors or

their relatives

not incorporated in the new Act.

Relatives of directors have been dropped from the exclusions in the definition

• Definition has been enforced

▫ However, that won’t have any substantive force.

▫ Requirement of minimum paid up capital removed from the definition.

• A private company may accept deposits from members

▫ Compliance of Sec 73(2) not required in view of exemption notification

By Pvt Companies which accepts not more than 100% of paid up share capital +

free reserves and that files the details of monies with Registrar.

• Exemption granted – Click here

9

http://www.mca.gov.in/Ministry/pdf/Exemptions_to_private_companies_05062015.pdf



Privileges of Private Company – 1/7

Section under

Act, 1956

Particulars Whether available

under Act, 2013?

Section under

Act, 2013

77 Not prohibited from giving financial

assistance for purchasing or

subscribing to the shares of that

company or its holding company.

Yes ( available to

certain class of Pvt

Cos)

67 . 67 (2)

applicable only to

public companies

81 Further issue of Capital.

Partial exemption 62

90 (2) Section 85 to 89 ( share capital and

voting rights) shall not apply.

Yes (provided MoA

or AoA provides so)

43, 47

170 Section 171 to 186 to apply only in

case provisions are expressly made

applicable by Company’s articles.

Shall apply unless

otherwise specified

in articles. Fully

exempt for OPC

101 to 107 & 109

198 Provisions of overall maximum

managerial remuneration payable were

not applicable to private company.

Yes 197 (1)

204 Restriction on appointment of firm or

body corporate to office or place of

profit under a company.

NA

10


Section

under Act,

1956

Particulars Whether

exemption

available under

Act, 2013?

Section under Act, 2013

220 No person other than a member were

entitled to inspect profit and loss of a

private company

NA

224 (1B) Limits of number of companies for

Audits

Partial exemption 141 (3) (g). Only to OPC,

Small cos, dormant cos,

private cos with less than

100 crores paid up.

252 Private company needs to have

minimum 2 directors

Yes 149 (1) (a)

252

(1)proviso

Appointment of small shareholder

directors

Yes 151 ( provided it is not a

listed company)

255,256 Retirement of directors by rotation Yes 152(6)

257 (2) Provisions for appointment of a person

other than retiring director, as director

Yes 160

11


Section

under

Act, 1956

Particulars Whether

exemption

available

under Act,

2013?


259 Increase in number of directors above

maximum permissible did not require

CG sanction

Yes 149 (Available to all

companies)

262 Filling of casual vacancies among

directors was not applicable

Yes

161(4)

263 Appointment of director to be voted

individually was not applicable

Yes

162(1)

264 Consent to act as Director to be filed

with Registrar was not needed

No

152 (5)

269 Appointment of managing or whole

time director or manager was not

required

Partial

Exemption -

196 (4) & (5)

96. 203 (will be applicable

only for listed private

companies)

270 Director holding qualification share

and filing the same with Registrar

NA

12

Privileges of Private Company – 4/7 Section

under Act,

1956

Particulars Whether available under

Act, 2013?

Section under

Act, 2013

274 Has power providing additional grounds

for disqualifications of directors has been

given

Yes

164 (3)

275-279 Directorships held in Private company

which is neither a subsidiary nor a

holding of a public company is not

included in the ceiling of total number of

directorships

Not to Private company

which is a holding

company of a public

company

165(1)

283 Vacating the office of the director

special grounds may be provided

by Private company

Yes

167(4)

292A Audit Committee needs to be constituted Yes ( Unless it a listed

company)

177 read with

Rule 6 –

chapter 12

rules 293 Restrictions on the powers of Board Yes. 180

13


Section under

Act, 1956

Particulars Whether

available under

Act, 2013?


295 Loans to directors etc Yes. Available to

certain class of

companies

185

300

Interested director is not prohibited

from voting or from participating in

any matter relating to his interest

Yes 184(2),can participate after

Disclosure of his interest

303(1)(a)

Entering date of birth in register of

Directors

No 170 [Rule

17(1)(e) of the chapter 11 rules

309,310,311

Increase in remuneration does not

require CG approval

Yes 197 (4) read with

197 (1)

316

Number of companies of which one

person may be appointed managing

director.

Yes ( unless the

private company

is a listed

company)

203 (3)

14


Section under

Act, 1956

Particulars Whether

exemption

available under

Act, 2013?

Section under

Act, 2013

317 Managing Directors not to be appointed

for more than five years at a time

No 196(2)

349 & 350 Determination of net profits No 197 (6) and (8)

read with198

372A Inter corporate loans and investments No 186

386 Restriction on appointment of manager

does not apply to private companies

No 203 Third

proviso

388(a) Remuneration payable to Managers Yes 196 (4), 197 (4)

read with

197 (1)

409 No interference of Company Law

Board in change of Board of Directors

NA

15

Additional Privileges of Private Company

according to Companies Act 2013 – 7/7

16

Section under Act, 2013 Particulars

2 (76) (viii)

117(3)(g)

188 (1)

190(1)

196(4) & 196(5)

Transactions with Holding, subsidiary, associate, fellow subsidiary

will not be regarded as related party transactions for the purpose of

Section 188.

Not required to file MGT-14 for resolutions passed under 179 (3)

A member who is a related party will be able to vote on any such resolution in which he is interested. parties can also vote

A contract of service of Managing director or Whole time Director

is not required to be kept at the registered office.

Appointment of a MD/WTD and Manager will not require the approval by resolution at a general meeting of the company. Further, the provisions of Schedule V will also not apply

Subsidiary of a public company

• Proviso to Section 2(71):

▫ A company which is a subsidiary of a company, not being a private company

shall be deemed to be public company for the purposes of this Act

“It was incorporated as a private company and became subject to the provisions

applicable to a public company when the conditions of section 43A were satisfied”.

Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.,

(1981) 51 Com Cases 743 : AIR 1981 SC 1298

Same principal applies here

Whether subject to only restrictions and vigilance as any other public company or

even privileges?

▫ Such companies will continue to remain:

Private by structure & Public for provisions of the Act

Eg. Section 185 restricts extending loan to a private company in which a director is a

member or director. This will not apply to a private company, which is subsidiary of a

public company.

17

Subsidiary of a foreign company • As per proviso to Section 2(71) - definition of public company

▫ A Company which is subsidiary of a company, not being a private company,

shall be deemed to be a public company for the purpose of this Act

• As per explanation (c) of Section 2(87) – Definition of Subsidiary company

▫ For the purpose for this clause, the expression “company” includes any

body corporate.

• Combined reading of the proviso and explanation:

▫ A subsidiary will be deemed to be a public company, if holding company is

NOT a private company

The holding company may even be a body corporate

• Private companies which are subsidiary of foreign companies will achieve

status of public company

▫ The exemption provided under Section 4(7) of Act, 1956 not longer appears

in Act, 2013

18

When is it a Small Company?

Is it

a public

company?

Is Paid up

capital<=50 lakh

or prescribed

amount of <= 5

crore? and

Is turnover

<=2 crore or

prescribed

amount of <= 20

crore?

No

Yes

No

No

Yes

Yes

No

Yes

Is it a holding/ subsidiary

company?

or

Is it a Section 8 company

or

Is it a company or body

corporate governed by any

special Act?

It is not a Small Company

It is a Small Company

19

One Person Company

• Definition:

▫ “One Person Company” (OPC) means a company

which has only one person as a member. [Clause

2(62)]

• A company may be formed for any lawful purpose by

one person, where the company to be formed is to be

OPC i.e., a private company, by subscribing his

name to a memorandum and complying with the

requirements of this Act in respect of registration

[Clause 3(1)(c)]

20

Relation between Private, Small & OPC

Private Company

Small Company

One Person

Company

21

OPC

• Only a natural person to form an OPC

▫ JJ Irani Committee in 2005 recommended OPC for small traders and businessmen

▫ person may mean- natural or artificial. Limiting it to only natural person may be limiting the benefits of OPC

• A person is eligible to incorporate only 1 OPC ▫ Nominee also to be in only 1 OPC

• OPC to be resident of India

▫ “resident in India”= a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year

• Further, the nominee for the sole member also has to satisfy the said criteria

22

Who can convert into an OPC?

Are you a company?

Are you a partnership

firm?

Are you a proprietorship

concern?

A natural person. But cannot convert into OPC – as more than one

person

No OPC - as no natural person

Yes

No

No

Yes

Yes

Intends to convert into

OPC?

No change in situation still a sole proprietor

No Now it is an OPC

Yes

23

OPC: Mandatory Conversion

• When:

▫ paid up share capital of OPC exceeds 50 lakh rupees, or

▫ its average annual turnover during the relevant period

exceeds 2 crore rupees

• In the above cases, OPC shall within 6 months convert itself

into a public company or a private company with minimum

number of directors and members.

• ‘Relevant period’ means the period of immediately

preceding three consecutive financial years

▫ No voluntary conversion unless 2 years is expired from

incorporation except above cases.

24

Ambiguities in OPC provisions

• The process of transfer has not been laid either under

the Act or the Rules.

• In case of a nominee becoming a member (by virtue

of death or incapacity), the Rule 3.3 provides for

opting out of one OPC, so as to comply with the limit

of 1.

▫ However, this should also be in case of a transfer, there

has to be a change of nominee of the original member

as well.

25

A Comparative of privileges available to Small

company and OPC

Small Companies

• Signing of Annual Return: • by the Company Secretary, or where there is

no Company secretary, by the Director • Board Meetings

• At least one Board Meeting in each half of a calendar year and the gap between two Board meetings is not less than ninety days

• Financial Statement • The financial statement with respect to

Small Company may not include the cash flow statement.

• Appt/ Re-appt of Auditor • Bar on Term of appointment or re-

appointment shall not be applicable to Small Companies [Rule 5 of the Companies (Audit and Auditors) Rules, 2014]

• Merger of two small companies • Fast Track merger process: No need to

follow the provisions specified under Section 230 and 232

OPC

• All those exemptions available to small company

• except fast track merger provision

• Additionally,

• Option to have 1 director

• If yes : No board meeting (BM)

• If No: same as small company

• No convening of AGM

• Also, provisions of Sec 98, sec 100 -111 are not applicable

• Signing of Share Certificate (where shares are not in demat form)

• Every share certificate shall be issued under the seal of the company, which shall be affixed in the presence of and signed by one director or a person authorized by the Board of Directors of the company for the purpose and the Secretary, or any other person authorized by the Board for the purpose

26

Unlimited Company

• Liability of members are unlimited

• Provision of reduction of capital – Sec 66 does not apply

▫ As there is no limit on the extent of liability

▫ Outsiders liability remains unaffected

• Provision of buy-back of securities - Section 68: shall also not

apply

▫ No Capital Redemption Reserve required

▫ Outsiders liability unaffected

• In practical: Subsidiaries of GE – are unlimited companies

27

Objects Clause displays confusion • Significance of the clause:

▫ Unlike a natural person, a company is delimited to its objects. Any business done by the

Company which is not a part of the object is regarded ultra-vires.

• Intention of Section 4(1)(c):

▫ To reduce the hardship of segregation between main and other objects

▫ By incorporating all the objects under this clause, whether to be taken up immediately on

incorporation or later.

• Table A of Schedule I :

▫ Objects to be pursued on incorporation

▫ This once again echoes the so-called main objects clause under the 1956 Act

• Dichotomy between Section 4(1)(c) and Table A

▫ 4(1)(c) talks about: proposed objects – widening the scope by covering all the legal objects

▫ Table A talks about: - Objects to be pursued on incorporation - limiting the scope

• Will this lead to practical inconvenience for companies in registry offices?

▫ As they are much more guided by the format of Table A in the schedule.

▫ May not allow companies to have an ambitious array of objects

• Will the company keep on amending its memorandum- every now and then?

▫ If the object clause is narrow and if the Company wants to expand the same, it may have to

get into the long trail for change of objects

28

Alteration of Memorandum – Sec 13 Name clause

• Special Resolution • CG approval in writing

• Except when only change is by addition/ deletion of word “private”.

• Registrar shall issue fresh COI with new name

Domicile clause

• Special Resolution • CG approval • Registrar shall issue

fresh COI indicating alteration

Objects Clause

• Special Resolution • consent by postal ballot,

in case of companies raising public money by prospectus and having any unutilised amount

• Exit option for dissenting shareholders; newspaper ad

• Registrar will certify the registration

Capital Clause

• Ordinary Resolution may suffice U/s 61

• Payment of stamp duty

Liability Clause

• Special Resolution

Nomination Clause

• Change in the name of nominee shall not be deemed to be an alteration of memorandum

29

Article of Association – Sec 5

• The 2013 Act introduces the entrenchment provision ▫ enables a company to follow a more restrictive procedure than passing a

special resolution for altering a specific clause of Articles of Association. • Entrenchment clause may be made either on formation or by amendment;

▫ By a private company - only if agreed by all its members ▫ By a public company – by passing a special resolution

• Company to file with Registrar as per the Companies (Registration Offices and Fees) Rules, 2014 - ▫ Form No. INC.2 or Form No. INC.7, as the case may be, at the time of

incorporation of the company, or ▫ in case of existing companies, in Form No. MGT.14 within thirty days from

the date of entrenchment of the articles

• Provisions of Section 5 of the ct, 2013 shall not apply to articles of a company registered under any previous Company Law ▫ Unless amended under Act, 2013

30

Alteration of Articles – Sec 14

• Having effect of conversion of ▫ A Private company into public Special Resolution by postal ballot

Not applicable in case of OPC and companies with members upto 50

▫ A public company into private company Special Resolution + NCLT approval

Special resolution by postal ballot not needed in case members are upto 50

• Not having effect of conversion ▫ Entrenchment clause Private company- approval from all members

Public company – special resolution

▫ Any other alteration By passing special resolution

31

Definition of Holding and Subsidiary • “Holding company”, in relation to one or more other companies, means a company of

which such companies are subsidiary companies;

• “Subsidiary company” or “subsidiary”, in relation to any other company (that is to say

the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or

together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not

have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even

if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary

company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled

by another company if that other company by exercise of some power exercisable by

it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to holding company means its subsidiary or subsidiaries.

32

Definition of Subsidiary Company – contd.

• With the enforcement of Section 2 (87) of the Act, 2013 w.e.f. September 12, 2013,

the definition of a ‘subsidiary company’ under the Companies Act, 1956 (‘Act,

1956’) has been overridden

• The trigger is now based on more than 50% of total share capital, rather than 50%

of voting capital

▫ In other words, an entity could hold substantial part of equity, and still not be a

holding company ▫ However, Companies (Specification of definitions details) Rules, 2014 clarify

that total share capital will mean equity share capital and convertible preference share capital

• Note - accounting consolidation is still based on equity shares or voting shares.

▫ Hence, the conflict with the view under AS 21 pertaining to Consolidation of

Financial Statements has been done away by way of Rules

• Shares held in fiduciary capacity shall not be counted to determine holding-

subsidiary relationship

▫ MCA Circular dated December 27, 2013.

33

Possibility of having two holding

companies

C

B A

Holds more than 50% of total capital

Controls the composition of board of directors

C is the subsidiary of both A and B

34

Company A has the

power to appoint or remove all or majority of the

directors ?

Control is established by way of composition of

board of directors

Company A holds more than half of the total share capital of

company B?

Control is established by way

of share capital

Is the company within the

prescribed layers of subsidiaries?

Holding- subsidiary

relationship is not

established

Companies A and B

Holding- subsidiary relationship is

established

Yes

No

No

Yes

Yes

No

Will result in violation.

Establishment of Holding- subsidiary relation 35

Discussion on Layers

• What is meant by layer?

▫ Section 2(87) refers it to mean subsidiary or

subsidiaries of the holding company

▫ The intent of both the sections is to limit the number of

subsidiaries a company can have

• Does the section prescribes any limit on the number

of layers?

▫ The notified Rules are silent on this.

Observing the limit is put at 2, this shall serve as a double

whammy for all Indian corporates - requiring major

restructurings. [Section 186(1) of the Act]

36

Discussion on Layers – Contd.

• What if number of layers is not defined?

▫ No restriction on the number of subsidiaries that a company can have

• Does the layer have to consist of companies only?

▫ No it includes body corporate also

• Is section 2(87) applicable to all companies?

▫ Presently yes.

▫ proviso states: limit shall be on a certain class of holding companies.

▫ Though no such limit stated in the notified Rules.

• What about existing companies? Will they have to reduce the number of

subsidiaries once the limit is notified?

▫ The section is not retroactive and hence the present structure can be

continued.

37

When onus of non compliance is on holding

company

Onus of non compliance is on Holding Company. Holding is vicariously

responsible for its subsidiary.

Is Holding Company an

Indian Company?

Is prescribed layers

breached?

No non compliance on holding. It can have

more than prescribed layers. As foreign

company cannot be governed by Indian

law.

Yes

Yes

No

No There is no non compliance by Holding

Company

38

An Illustration

A

B

C

D

Controls

Controls

Controls

The prescribed layer is two as in case of Section – 186.

RESULT: A and B Holding -Subsidiary A and C Holding - Subsidiary A and D not Holding Subsidiary

39

No restriction on horizontal

propagation: Illustration 1

A

E D C B F

Controls Controls Controls

Controls

Controls

RESULT: A is Holding of B, C, D,E and F : As no restriction on number of subsidiaries – horizontally.

40

No restriction on horizontal propagation: Illustration 2

A

C B

D Controls

Controls Controls

RESULT: A and B Holding -Subsidiary A and C Holding – Subsidiary B and D Holding - Subsidiary C and D Holding – Subsidiary A and D Holding-Subsidiary

Controls

41

No restriction on horizontal propagation: Illustration 3

A

C B

D

27% voting power. Doesn’t control

Controls Controls

RESULT: A and B Holding -Subsidiary A and C Holding – Subsidiary B and D not Holding - Subsidiary C and D not Holding – Subsidiary A and D Holding-Subsidiary

25% voting power. Doesn’t control

42

Definitions enforced

All definitions have been enforced [Section 2

of the Act to be read with the Companies (Specification of definitions details) Rules, 2014

43

New Definitions enforced under the

Act, 2013

• means a company in which that other company has a significant influence (excluding subsidiary company) and includes a joint venture company

• Significant Influence means control of at least 20 percent of total share capital

Associate Company

• Include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner

Control

44

New Definitions enforced – Contd..

• in relation to a company, means— (i) the Chief

Executive Officer or the managing director or the

manager; (ii) the company secretary; iii) the whole-

time director (iv) the Chief Financial Officer; and (v)

such other officer as may be prescribed

• Since as per section 203, KMPs are to discharge

duties on a whole-time basis, no two designations can

be held by the same person.

• CEO defined based on designation, not function

Key Managerial Personnel

• Means a company which has any of its securities listed on any recognized stock exchange

Listed Company

45

Other important Definitions enforced –

Contd.

• means a director appointed to the Board of a company;

• Only Board members can be a director

• Therefore, no person other than a board member should

possess the said designation

Director

• Means a person— (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity

Promoter

46

Other important Definitions enforced –

Contd.

• “subsidiary company” or “subsidiary”, in relation to any

other company (that is to say the holding company),

means a company in which the holding company—

▫ (i) controls the composition of the Board of Directors; or

▫ (ii) exercises or controls more than one-half of the total

share capital either at its own or together with one or more

of its subsidiary companies:

• The trigger is now based on more than 50% of total

share capital, rather than 50% of voting capital ▫ However, Rules now clarify that the meaning of total

share capital will be equity shares and convertible preference shares

47

Session - Issue of Securities


• Introduction:

▫ Meaning of securities under SCRA, 1956

▫ How securities can be issued, Allotment of securities

▫ Kinds of share capital

• Issue of equity shares with differential rights

▫ Eligibility, procedure

• Public Offer

▫ Meaning under the Act, Prospectus in case of public offer, variation in terms

• Private Placements

▫ When can it be a private placement

▫ Compliance checklist

• Further issue of capital

▫ Rights issue, issue to employees, and preferential issue

• Preferential Issue

▫ Compliance checklist

• Section 36

▫ Act, 2013 grants NBFC parity with Banks

49


• Shareholder agreements

▫ Validity and Enforceability

• Rectification of register of members

▫ Revival of Section 155 of Act, 1956

• Issue of Bonus Shares

• Reduction of share capital

• Buyback of securities

▫ Process for buy-back

• Charges

▫ Change in order of priorities

• IEPF

▫ What needs to be transferred and when

• Annexure

▫ Sections enforced

50

How securities can be issued?

Issue of securities

By Further Capitalization

By Public Company

Private Placements

Public Offer

Offer by company

Initial Public Offer

Further Public Offer

Offer by shareholder

Offer for sale

Rights issue

By Private Company

Private Placements

Rights issue

Capitalization of profit

Bonus Issue by public/

private company

51

Allotment of securities Sec - 39 • All sections enforced

• Minimum subscription requirement applicable to all

securities

• In case minimum subscription is not achieved, amount to be

refunded within a period as may be prescribed by SEBI

• The amount payable on application on every security shall

not be less than 5% of the nominal amount of the security

or such other percentage or amount, as may be specified by

the SEBI

• Return of allotment to be filed with the Registrar, within 30

days, for any allotment of securities made by a Company

having share capital in PAS-3.

• Corresponding to section 69 and 75 of Act 1956

52

Kinds of Share Capital

Share Capital

Equity

With differential

rights

Dividend Voting

With voting rights

In proportion to share in

paid-up equity share capital

Preference

With a right to vote on

select resolution

On matters affecting

rights, winding up,

Repayment/ reduction of

Capital

With a right to

vote on all resolutions

If dividend not paid

for 2 yrs or more

53

Power of SEBI to regulate issue &

transfer of securities

Issue & transfer of securities

Non-payment

of dividend

Both listed & Companies intending to get their securities

listed to be administered by

SEBI

Corresponding to Section 55-Aof Act 1956

Section 24- Enforced

54

Deemed Prospectus

• Section 25 enforced

• Any document by which securities are offered to public for,

shall be deemed to be prospectus & will attract all the liability

thereon provided

• Evidence that an allotment was made with a view to offer the

securities for sale to the public

▫ Offer for sale to public was made within six months after

the allotment or agreement to allot, or

▫ At the date when offer was made, the whole consideration

to be received by company. in respect of the securities, had

not been received by it.

• Corresponds to Section 64 of Act, 1956

55

Prospectus of public offer

• Contents of prospectus laid down in the section 26.

• Prospectus ▫ Full prospectus

▫ Abridged prospectus To be accompanied with every application form

• Red herring prospectus ▫ Prospectus containing all other details except quantum

and pricing of the issue

• Shelf prospectus ▫ A prospectus that is supposed to remain on shelf, that

is, alive for a long time, with particulars of changes in financial position filed periodically

56

Offer for sale by members- Sec 28

• Members, in consultation with the Board may offer whole or part

of their holding to the public.

▫ Provisions of public offer shall apply except the following

provisions relating to minimum subscription;

provisions for minimum application value;

provisions requiring any statement to be made by the Board of

directors in respect of the utilization of money; and

any other provision, information about which cannot be gathered by

the offeror, with detailed justifications thereof, of not complying

with such provisions

▫ Dividend for entire year shall be payable to transferees

▫ Prospectus to disclose name of entity bearing the cost of OFS

along with reasons

57

Private Placements- Sec 42

• Meaning: offer of securities to a select group of persons by a company

(other than by way of public offer) through issue of a private placement offer

letter in compliance with this section

• Process of private placements greatly tightened

▫ every offer of securities other than pubic, rights or bonus offer amounts to a private

placement and governed by the section.

• Deemed public offer:

▫ to a number of investors more than 200, in a financial year shall be

deemed to be public offer

▫ Every private placement not complying with the requirements of the

section

• Bombshell

▫ Provisions about private placements applicable to private companies too –

clear from the language of sec 23 (2)

• Shareholders approval by way of special resolution to be obtained for each of

the offers/ invitations.

58

When can it be private placement? Is it a

public

company?

Is it a

public

offer?

Is it a rights/

bonus issue?

Is the

number of

investors >

200?

It can be a private

placement

Is it in

compliance

of section

42?

Yes

It is a private

company

No

Yes

Yes

Yes

Yes

No

No

It is deemed to be a public

offer and is not a private

placement

It is not a private

placement

It is a private placement

No

No

Is it to

selected

group?

It is to public

generally and is

not private

placement

No

Yes

Is it an

NBFC

?

No

Yes

59

Other provisions

• The amendments made in Dec 2011 to Unlisted Public Cos. Preferential Allotment

Rules, 2003 incorporated into the law

▫ This is a huge problem, since the section apparently applies to private companies

as well

• Penalty – amount involved in the offer, or Rs 2 crores – whichever is higher; plus

refund the money within 30 days of order imposing penalty

• Status of NBFCs

• Exemption provided by way of proviso to Sec 67 (3) of Act, 1956 to NBFCs is not

provided in Section 42.

• As per Rules – only part exemption granted to NBFCs registered with RBI from the

provisions of the Rules.

▫ The provisions of clauses (b) and (c) of sub-rule (2) shall not be applicable to

(a) non-banking financial company which is registered with the Reserve Bank of India

under RBI Act, 1934.

(b) housing finance companies which are registered with the National Housing Bank

under National Housing Bank Act, 1987,

• if they are complying with regulations made by Reserve Bank of India or National Housing

Bank in respect of offer or invitation to be issued on private placement basis:

60

Compliance Checklist for Private Placement – 1/3

• Convene a Board Meeting for considering private placement and deciding the offer size;

▫ \Whether the number of previous allottees during the FY, if any, has crossed 200?

▫ Whether allotment with respect to any earlier offer or invitation is pending?

▫ Whether the value of such offer is with an investment size of atleast Rs. 20,000 per person.

• Identification of allottees

▫ Recording names of such persons prior to the invitation to subscribe.

• Valuation of shares from a registered valuer.

• Finalising offer letter ( Form PAS-4)

• Convening general meeting to pass Special Resolution

▫ Explanatory statement to justify the offer price

61

Compliance Checklist for Private Placement – 3/3

• Allotment of securities within 60 days from the date of receipt

of application money.

▫ In case the company is unable to do so, it will redeem the amount in 15

days from the date of completion of 60 days

Failing which the Company shall be liable to pay interest @ 12%

p.a.

• Using of money in bank account either for adjustment against

allotment or refund of application money

• Filing a return of allotment of securities with Registrar in

Form PAS-3, within 30 days from allotment

62

Further Issue of Share Capital- Sec 62

• The Section applies to Private Companies as well ▫ Only Partial exemption in case of rights issue. SR not required in case of ESOPs.

• Any further issue of shares shall ▫ be first offered to the existing equity shareholders ▫ to employees under ESOP subject to special resolution ▫ to any persons, if it is authorised by a special resolution

Either for cash or for a consideration other than cash Price to be determined on the basis of Valuation report of Registered Valuer Notified Rules exempt Listed companies from this requirement.

However, Rules now over-step the Act to say, if authorised by special resolution, shares may be issued u/s 62 (1) (c) in “any manner whatsoever”, as long as it complies with sec 42

▫ “In any manner” may either be interpreted to mean referring only to manner and not pricing, or may be taken to exempt the pricing norm also.

• The exemption available under Section 81 (1) of the Act, 1956 with respect to initial capital raising for period of 2 years from incorporation or 1 year from the first allotment is not included. ▫ So when should the Company start complying?

With every subsequent allotment after incorporation .

63

Rights issue u/s 62 (1) (a)

• Letter of offer needs to be sent atleast 3 days before opening of issue. ▫ Exemption to private companies for lesser period in case 90% of

members grant consent.

• Notice shall specify number of shares offered and timeline for responding accepting the offer ▫ Minimum 15 days – Maximum 30 days from the date of offer Exemption to private companies for lesser period in case 90% of

members grant consent.

• Offer to include right to renounce ▫ Unless AoA provide otherwise

• After expiry of time specified or on intimation being received from shareholder declining the offer, the Board may dispose such shares ▫ In a manner not disadvantageous to the Shareholder and Company Under Act, 1956 - in manner most beneficial to the Company

64

Issue of shares to employees u/s 62(1) (b)

• Under ESOS, subject to SR passed in general meeting

▫ Private companies can pass ordinary resolution.

• Meaning of Employee:

▫ Permanent employee of company, subsidiary, ( in India or outside), or of holding company or of an associate company; excludes employees who is a promoter or belongs to promoter group .

▫ Director, whether WTD or not, of company, subsidiary, (in India or outside), or of holding company or of an associate company ; a director who either himself or through his relative or through any body

corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

• Company whose equity shares are listed on SE, ESOS to be issued as per SEBI guidelines.

• Rule 12 the Companies (Share Capital and Debentures) Rules, 2014 specifies the process for ESOS for other companies.

65

Preferential Issue u/s 62 (1) (c)

Preferential issue

Listed Company

Compliance of Sec 62(1) (c) and

SEBI (ICDR) Reg.

Private Company

By Private placement

To comply with the requirements specified in Section 62 (1) (c) read with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 and

conditions of Section 42 in case of Pvt. Placement

Unlisted Public companies

By private Placement

Issue of equity shares, fully convertible

debentures, partly convertible debentures

or any other securities, which would be

convertible into or exchanged with equity

shares at a later date

66

Issue of Bonus Shares – Sec 63

• Fully paid up bonus shares may be issued to members, in any manner, out of ▫ Free reserves; ▫ Securities Premium account; or ▫ Capital redemption reserve account. ▫ Reserves created by revaluation of assets cannot be utilised

Decision of Supreme Court in Bhagwati Developers versus Peerless Genral Finance has been overridden.

• Cannot be issued in lieu of dividend. • Conditions for issue of fully paid up bonus shares

▫ Authorised by Articles ▫ Authorised in general meeting, on recommendation of Board. ▫ No default in payment of interest or principal in respect of fixed deposits or

debt securities issued. ▫ No default in payment of statutory dues of employees

Contribution to PF, gratuity and bonus

▫ Partly paid up shares, if any outstanding on date of allotment, are made fully paid up

▫ Decision of Board recommending a bonus issue, cannot be subsequently withdrawn [Rule 14 of the Companies (Share Capital and Debenture) Rules, 2014 ]

67

Reduction of share capital Sec-66

• In order to reduce the share capital, Company needs to apply to Tribunal after

passing SR

▫ Company should not be arrears for non payment of any deposit or interest thereon

• Tribunal to give notice of application made to it to CG, Registrar , SEBI (listed cos)

& creditors

▫ Non receipt of any representation within 3 months from date of receipt of notice means no

objection to reduction.

• Application to be sanctioned only if the accounting treatment proposed for such

reduction is in conformity with AS specified under sec 133 & other provisions of

the Act.

• Company to deliver certified copy of the order and minute to the Registrar within

30 days of receipt.

• Officer liable under section 447 for concealing name of creditor etc.

• In case the Company fails to publish order of Tribunal in the manner directed

▫ Company shall be punishable with a fine of Rs. 5 lakh which may extend to Rs. 25 lakhs

• Provisions of Section 66 not applicable to buy back of securities under section 68.

• Corresponding to provisions of Section 100, 101, 102, 103, 104 and 105 of Act,

1956

68

Power of company to purchase its own

securities – Sec 68 • Corresponds to Section 77 A of Act, 1956

▫ Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014 is in line with Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999

• Proviso specifying the limit for buy back drafted ineptly ▫ The intent to limit buy-back of equity shares to 25% of paid up

equity capital does not come out as clearly

• Section 68(11) imposes enormous penalty: ▫ On the company Fine not less than Rs. 1 lakh but which may extend to Rs. 3 lakh and

▫ On every officer of the company who is in default Imprisonment for a term which may extend to 3 years or Fine not less than Rs. 1 lakh but which may extend to Rs. 3 lakh or with both

69

Process for buyback – 1/2

• Convene BM to consider the following:

▫ Whether buy-back is authorised by AoA?

▫ Whether the amount for buy-back is < or = 10% of total paid-up equity + free

reserves?

In case the same exceeds, then approving the notice and explanatory statement to

notice for convening general meeting.

▫ Whether the ratio of debt to paid up capital and free reserves, post buy-back is <

or = 2:1?

▫ Whether shares/securities for buy-back are fully paid-up? ▫ Whether a period of 1 year has elapsed from date of closure of preceding buy-

back offer? ▫ Whether the buy-back is existing security holders on proportionate basis or from

open market or purchasing securities issued to employees ▫ Approving the declaration of solvency and affidavit and Letter of offer

Authorizing two directors, one of whom shall be MD, if any.

• Obtaining approval from members , if needed, through SR by postal ballot. ▫ Filing of Form MGT.14 with the Registrar within 30 days.

• Filing of Letter of offer and declaration of solvency with Registrar and SEBI, in case of listed company (Forms SH-8 & SH-9 respectively)

70

Process for buyback – 2/2

• Despatch of letter of offer within 21 days of filing with the Registrar. • Offer for buy-back to remain open for atleast 15 days and maximum for 30

days from date of despatch of letter of offer • Company to verify the offer received within 15 days from date of closure of

offer ▫ Communication of rejection is made within 21 days from the date of closure of the

offer

• Opening of separate bank account and depositing the consideration payable. • Making of payment to shareholders or security holders

▫ Returning of certificates whose securities were not accepted or part accepted.

• Extinguish and physically destroy the shares or securities within 7 days of completion of buy back.

• Recording in the Register in Form SH-10 ▫ Entry to be authenticated by the CS or authorised person

• Filing of Form SH-11 with the Registrar and SEBI ( if listed company) on completion of buy back .

• No further issue of same kind of shares or securities within a period of 6 months from completion of buy-back ▫ Except by way if bonus issue, or in discharge of subsisting obligations

71

Prohibition for buy-back in certain

circumstances • Section 70 has been enforced • Company cannot buy back its shares/ securities

directly or indirectly: ▫ Through any subsidiary company or ▫ Through any investment company or ▫ if it has defaulted in repayment of deposits or

interest thereon, redemption of debentures or preference shares etc. However, if the default is remedied and a period of 3

years has elapsed after such default cease to subsist, buy back is permitted.

• Corresponding to section 77-B of Act, 1956

72

Definition of charge (s. 2(16))

• Defined to mean:

▫ Any interest or lien on property/assets/ undertaking of the company

▫ Includes a mortgage

• The elaborate list of what qualifies as a charge has been left out, unlike

the draft Rules.

▫ The scenario now is every charge, including a pledge, requires registration. No sanctity in registration of a pledge, as a pledge is a possessory security interest and the asset is already with the lender.

• Unlike section 125 of Act, 1956, which specifically did not require

pledge to be registered with RoC

▫ Act, 2013 does not provide a list of what charge actually means

73

Duty to register charges, etc. (Sec. 77)

• The period for charge registration with payment of additional fees has been extended to

300 days

▫ Rule 4 says that the Registrar may, on being satisfied about the genuineness of the reasons, extend the time for filing.

This also evidently becomes an application-approval process

▫ Directors have to declare that the delayed registration does not prejudice any intervening creditor [already incorporated in the law in third proviso below sec 77 (1)]

• Third proviso to Sec 77 - any subsequent registration of a charge shall not prejudice any

right acquired in respect of any property before the charge is actually registered:

▫ Charge 1 is not registered within the following time limits:

30 days of creation

300 days with payment of additional fees

Time as extended by application for condonation

▫ And in the meantime, charge 2 is created on the same property, then charge 2 will take

priority over charge 1

Basically, priority of charge shall be based on date of registration and not creation

• Charge which is not registered will not be void

▫ It shall not be taken into account by liquidator or any other creditor

74

Punishment for contravention

• Section 86- enforced • Unlike section 142 of Act, 1956, Act, 2013 prescribes

imprisonment or fine for the Company and every officer who is in default ▫ On the Company

Fine – not less than 1 lakh rupees but may extend to 10 lakh rupees

▫ On every officer who is in default

Imprisonment for a term which may extend to 6 months or

Fine – not less than 25000 rupees but which may extend to one lakh rupees or

with both

75

Amount to be transferred to IEPF (sec 125)

Amount in Unpaid Dividend A/c, matured deposits, matured

debentures, application money due for refund – remaining

unclaimed and unpaid for 7 years from due date. Interest accrued

on the said amounts.

Grants from CG, donations from CG, SG, companies or any other

institutions, amount in general revenue account of CG transferred

u/s 205A(5) of Act, 1956 and remaining unpaid or unclaimed

Amount lying in IEPF under Section 205C of the Act, 1956 and

remaining unpaid or unclaimed on commencement of Act, 2013

76

When to Transfer?

Activity Timeline

Declaration of dividend in the general meeting by

shareholders

x day

Transfer of amount declared to a separate bank

account

Within x+5 days

Where divided is declared but not claimed within

30 days from declaration, then transfer unclaimed

/unpaid amount to a Unpaid Dividend Account

Within x+30+7 days

Prepare statement containing details as u/s 124

(Sec. 124 not yet notified. Draft rules state Form

no.8.1 & to be placed on website of the company)

Within x+30+7+90 days

Transfer remaining unclaimed/unpaid in

Unpaid Dividend Account including shares to

IEPF

After (x+30+7)days + 7 years

Transfer shares whose divided is

unclaimed/unpaid

Within (x+30+7)days+7 years +

30 days

77

Acceptance Of Deposits By

Companies


• Prohibition on acceptance of deposits from public

• Acceptance of deposits from public by certain companies

• Deposit Rules,1975 v/s the Companies (Acceptance of

Deposits) Rules, 2014

▫ Inapplicability

• What is not a deposit?

• New Rules for supply of Goods/ services

• What is then included in deposit?

• Meaning under the Companies (Acceptance of Deposits)

Rules, 2014

▫ Regulations applicable

79


• Acceptance of Deposits under the Companies (Acceptance of

Deposits) Rules, 2014

▫ Limit on Acceptance of Deposits

▫ Rate of Interest or brokerage

▫ Deposit insurance

▫ Creation of security

▫ Appointment of Debenture Trustees

▫ Creation of Deposit Repayment Reserve

▫ Premature repayment of deposits

• Consequences of defaulting in payment of interest or repayment of

deposits.

• Provisions applicable based on outstanding loans/ borrowings/

deposits

80

Prohibition on acceptance of deposits

from public (Sec 73) • Subsections (1) and (2) read together give an impression that this section

relates to acceptance of deposits from members only

▫ Private companies are exempted from the requirements of Section 73 (2)

(a) to (e). Clause (f) relating to providing security if any for the due repayment of the amount of deposit or the interest has not been exempted

• For acceptance of deposits from members, following have been prescribed:

▫ Circular to be registered with the Registrar

▫ Maintenance of deposit repayment reserve account

Atleast 15% of amount of deposits maturing during a FY and next FY

▫ Provide deposit insurance

• Section 73 states that sub-section (1) shall not be applicable to:

▫ Banking company

▫ NBFC as defined in RBI Act, 1934

Peculiarly, section 73(2) carries no such exemption

81

Repayment of deposits accepted before

the Act, 2013 • Section 74 requires such companies to;

▫ File with Registrar a statement of all the deposits accepted by the Company and sums remaining unpaid on such deposits, including interest payable. Within 3 months from commencement of Act or due date.

▫ Repay such amounts Within 1 year of commencement or due date, whichever earlier.

• Company may approach Tribunal to allow further time ▫ Till the tribunal is constituted, the power has been delegated to

Company Law Board.

• In case of failure to repay within time stated above or that allowed by tribunal, Section 74(3) imposes enormous penalty: ▫ On the company

Fine of not less than Rs. 1 crore and not more than Rs. 10 crore and

▫ On every officer of the company who is in default imprisonment which may extend to 7 years or with fine of not be less than Rs Rs. 25 lakh but which may extend to Rs.

2 crore, or with both

82

Damages for fraud – Sec 75

• Every officer of the Company accountable will be personally responsible for all damages incurred by the depositor, without any limitation of liability. ▫ Where a company fails to repay within time

specified under Sec 73(1) or allowed by Tribunal and

▫ Fraudulent purpose for acceptance of the deposits has been proved.

• Any suit, proceedings or other action may be taken by persons incurring any loss due to failure to repay the deposits by Company.

83

Acceptance of deposits from public

by certain companies (Sec. 76) Eligible company has been defined under draft

Companies (Acceptance of Deposit) Rules, 2013

• Public company fulfilling the following criteria can

raised deposits from public having:

▫ Net worth of not less than Rs. 100 crore or

▫ Turnover of not less than Rs. 500 crore

and

▫ Has taken prior approval by SR passed in general

meeting.

• Other requirements like credit rating, creation of

security, deposit insurance have also been prescribed

84

Punishment for contravention of

section 73 or section 76 – Sec 76A

• Inserted vide Companies Amendment Act, 2015 w.e.f 29th May, 2015

• Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder; or

• If a Company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder; or

• Fails to repay within such further time as may be allowed by the Tribunal/ CLB under section 73

85

Penalty under Section 76A

• The Company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with ▫ fine which shall not be less than one crore rupees but

which may extend to ten crore rupees; and • Every officer of the company who is in default shall be

punishable with ▫ imprisonment which may extend to seven years or with fine

which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.

• If it is proved that the officer in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities ▫ he shall be liable for action under section 447

86

Management and Administration

Register of members etc- Sec 88

• Registers to be maintained by a Company ▫ Register of members Indicating separately for each class of equity & preference shares held

by member residing in or outside India ▫ Register of debenture holders Separate register for each type of debentures

▫ Register of any other security holders Separate register for each type of other securities

• Entries in the register to be made simultaneously after Board or Committee approves allotment or transfer of shares, debentures or other securities.

• Register to be maintained at registered office ▫ SR may be passed in general meeting authorizing to keep the

register at any other place within the city, town or village in which the

registered office is situated or any other place in India in which more than 1/10th of the total

members entered in the register of members reside

88

Annual General Meeting – Sec 96

• Every Company other than OPC shall hold AGM

▫ First AGM- within 9 months from the close of the first financial year

▫ Subsequent AGM – within a period of 6 months from date of closing financial year.

• Every AGM to be conducted during business hours i.e. between 9. am and 6 p.m. on a day which is not a National Holiday

• Corresponds to provisions of Section 166 of Act, 1956

89

Calling of extraordinary general meeting –

Sec 100

• Section 100

• Provisions are same as section 169 of Act, 1956

• Provision relating to reimbursement of expenses by company and

deduction of such sums from the remuneration paid to directors has

not been enforced.

• As per Rule 17 of the Companies (Management and Administration) Rules,

2014:

▫ Requisition shall be made 21 days prior in writing or electronic mode

▫ Explanatory statement need not be given notice of an extraordinary

general meeting convened by the requisitionists

▫ Company is bound to provide list of members and their registered

address at the expiry of 45 days from date of deposit of requisition.

The list is to be provided as made on 21st day from the date of receipt of

requisition before the expiry of 45th day

90

Notice of meeting – Sec 101

• Clear 21 days notice to be given, either in writing or in electronic mode, for calling a general meeting. ▫ A notice may be sent through e-mail as a text or as an

attachment to e-mail or as a notification providing electronic link/ Uniform Resource Locator (URL) for accessing such notice.

▫ Rule 18 of the Companies (Management and Administration) Rules, 2014 specifies the provisions with respect to sending notice by electronic mode.

• GM may be called by giving shorter notice ▫ if consent is given in writing or by electronic mode by not

less than 95% of the members entitled to vote at such meeting

• Corresponds to provisions of Section 171, 172 of Act, 1956

91

Quorum - Sec103

92

• Public company:

• Private Company – 2 members personally present

▫ Unless the Articles provide for a higher number

• In case of adjourned meeting or change in date, time or place of meeting, then individual notice or newspaper advertisement to be given, not less than 3 days before

• If meeting has been called u/s 100, then it shall stand cancelled if requisite quorum not present.

• Hence, all meetings on or after 12th Sept need to meet the new quorum requirements. It is not a really big change – but still, companies have to observe the new requirement.

No. of members as on date

of meeting

Quorum required

1000 5 members personally present

1000-5000 15 members personally present.

Exceeds 5000 30 members personally present.

No effective change has been made. Corresponding to section 175 of Act 1956

Members personally present to elect among themselves one of their chairman, at show of hands, unless the article otherwise provide

If a poll is demanded, person elected as chairman by show of hands to be the chairman of meeting unless some other person is appointed as a result of the poll.

93

Chairman - Sec 104

94

Proxies - Sec 105

• No substantial change from the provisions under section 176 of Act, 1956

• 3rd and 4th proviso to sub-section (1) which has following effect - enforced w.e.f. 01.04.2014 ▫ In case of section 8 company, proxy has to be a member ▫ No single person shall act as proxy on behalf of members not

exceeding 50 and ▫ In case of a shareholder holding 10% or more of “total share

capital” can only serve as proxy for a single person. • The appointment of proxy shall be in the Form No. MGT.11. • The Rules bring more sanctity to maximum shareholding in

case of proxies. • Officers knowingly issuing invitation to members, specifying

name of person or one of person listed out in invitation as proxy ,shall be punishable with fine which may extend to Rs. 1.00 lakh.

Restriction on Voting Rights – Sec 106

• Company’s articles may restrict a member from

exercising any voting right for shares held in his name if the calls or other sums are not paid or in regard to which company has exercised any right of lien.

• In case of poll taken at meeting, a member or his proxy entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

• This is analogous to existing provisions. No effective change.


95

Voting by Show of hands – Sec 107

• This is analogous to existing provisions 177 and 178. No

effective change

96

• Voting to be carried out by show of hands at any general meeting unless a poll is demanded under Section 109 or voting is done electronically

Show of hands

• An entry in minutes book of declaration by Chairman of passing of resolution or otherwise by show of hands to be conclusive evidence.

Entry in minutes book

Voting through electronic means- Sec 108

• Mandatory for every equity listed company or a company having 1000 or more members to provide to its members, facility to exercise right to vote at general meeting by electronic means. ▫ Companies falling under Chapter XB & XC of SEBI ( ICDR)

Regulations, 2009 dealing with MSMEs are excluded.

• Rule 20 of the Companies (Management and Administration) Rules, 2014 specifies the procedure to be followed by Company to provide the facility ▫ Notice of meeting to be sent to all members/auditors/directors/KMP ▫ Notice to be placed on the website of the Company and that of e-voting

agency. ▫ Newspaper advertisement to be given promptly on despatch of notice ▫ Remote E-voting to remain open for atleast 3 days and shall close 1 day

prior to date of general meeting Cut-off date shall not be earlier than 7 days from the date of General

Meeting. Members as on cut-off date shall be eligible to vote by e-voting or at

general meeting.

97

98

E-voting compliance calendar

Demand for poll – Sec 109

• This section corresponds to sections 179 and 180 of the 1956 Act. ▫ Sec. 109(1) lays down the eligibility criteria for

members to demand the poll. Unlike sec. 179(1) of the 1956 Act, the section lays down eligibility criteria for companies with share capital and without share capital for demanding a poll and not solely on the basis of being private or public.

▫ Sec. 109(3) allows poll to be demanded also for appointment of Chairman rather than only for adjournment of meeting as in sec. 180(1) of the 1956 Act.

99

Postal Ballot – Sec 110

• Company may transact a business by way of Postal Ballot ▫ Other than ordinary business and any business in respect of which directors or

auditors have a right to be heard.

• Following business shall be transacted only through postal ballot by a Company, except OPC and other companies having members upto 200 ▫ Alteration of object clause/ main object of MoA ▫ Alteration of AoA in order to constitute Pvt Company ▫ Change in registered office outside local limits ▫ Change in objects for which a company has raised money from public through

prospectus & has unutilized amt ▫ Issue of shares with differential rights w.r.t. voting or dividend. ▫ Variation in rights of class of shares/debentures/security. ▫ Buyback of shares by a company ▫ Election of a director u/s 151 of the Act ▫ Sale of whole or substantially whole of a company U/S 180 (1) (a) ▫ Giving loans or guarantee or providing security in excess of limit prescribed u/s

186(3). • Courier service will also qualify for postal ballots now.

• Corresponds to Section 192A of Act, 1956.

100

Representation of President and

Governors in meetings – Sec 112

• The person appointed as representative by President

of India or the Governor of a State on being a

member of a Company shall be deemed to be a

member of such a company with all powers that a

member may exercise.

• This is analogous to existing provisions. No effective

change.

• Corresponding to section 187A of Act 1956

101

Circulation of members’ resolutions – Sec 111

• Circulation of members’ resolution is not the same as resolutions

requiring special notice. This is analogous to existing provision

section 188. No effective change.

102

On requisition in writing by such number of members as specified in Section 100, a company shall give notice to members of any resolution and circulate any statement with respect to proposed resolution provided it is submitted at the registered office of the Company with prescribed time.

In case the Central Government, on application made by company or other aggrieved person, declares by order that the rights are being abused, the Company need not circulate any statement.

Ordinary & Special Resolution – Sec

114


change.

• Corresponding to section 189 of Act 1956

• Ordinary Resolution=votes cast in favour of the

resolution exceeds the votes cast against it.

• Special Resolution= when the intention of passing the

resolution as special resolution is duly specified in

the notice and

▫ the votes cast in favour of the resolution is not less than

three times the number of votes cast against it.

103

Resolutions requiring special notice

– Sec 115 • Special notice can be given only by:

▫ Members, holding collectively or individually 1% of total voting power or

▫ holding shares aggregating to not less than Rs. 1 lakh and not more than Rs. 5 lakhs

• Notice to be sent by the members not earlier than 3 months and at least 14 days before the date of meeting

• Company on receipt of notice to give: ▫ Notice to members at least not less than 7 days before the

date of meeting

▫ Where not practicable to give notice, then newspaper advertisement to be given at least 7 days before the date of meeting and be also posted on the website of the company.

• Corresponds to Section 190(1) of Act, 1956

104

Resolutions passed at adjourned

meeting – Sec 116

• Resolution passed at an adjourned meeting of

Company, holders of any class of shares in a

Company or Board, for all purposes, shall be treated

as having been passed on the date on which it was

passed and not any earlier date


change.

• Corresponding to section 191 of Act 1956

105

Minutes of GM & BM – Sec 118 • Provisions are analogous to existing provisions u/s 193

of the Act, 1956. ▫ Section 118 not applicable to Section 8 companies

• Every company needs to observe secretarial standards w.r.t. General and Board meetings specified by ICSI u/s 3 of CS Act, 1980 and approved by CG

• Minutes book shall be preserved permanently. • Section 118(11) imposes penalty for non-compliance

▫ On the Company – penalty of Rs. 25,000 ▫ On every officer of the Company- penalty of Rs. 5000

• Person found guilty of tampering with the minutes of proceeding shall be punishable ▫ With imprisonment for a term upto 2 years and ▫ With fine of not less than 25,000 but which may extend to

Rs 1 lakh

106

General Meetings – new

disclosures

Statement annexed to the notice (Sec 102)

-1/2

• Section 173(2) of Act, 1956 required the explanatory statement to be annexed to notice to state the following: ▫ All material facts concerning each item of

business In particular about the nature of concern or interest

of every director

▫ If any item relates to or affects any other company, then Shareholding interest of director to be set out if not

less than 2% of paid up capital of that other company

108

Statement annexed to notice (Sec 102) -2/2

109

S. 102

Material facts to be disclosed for every

item of special business and the

same has been defined

Other information and facts to enable

members to understand

meaning of item of business to be also

disclosed

If item of business affects any other

company, extent of shareholding interest

of every promoter, director, manager

and of every KMP to be discussed

Material fact means : nature of concern/interest whether

financial or other wise of every director, manager, KMP, their

relative

Disclosure only if extent of shareholding in the other

company is not less than 2%of paid up capital

Understanding of the term

“material fact”

Does not mean stating all facts pertaining to the special business

Facts which may influence the decision of shareholder only to be disclosed

Where there was a ban on sale of property without the SC’s consent, omission to mention the same in the statement to be annexed to notice made the resolution void

When considering proposal for sale, material facts can be reason for sale, its affect on the interest of the company, statutory clearances

110

Consequences of violation of the

section

Benefit to be held in trust

• If due to insufficient disclosure or non-disclosure, any benefit accrues to promoter, director, KMP, manager, then benefit to be held in trust

• Compensate the company to the extent of benefit received

Default

• Every promoter, director, manager, KMP shall be punishable with fine: • Extending to Rs. 50000 or • 5 times the amount of benefit accrued, whichever is

more

111

Revised format for Annual

Return

Annual return (Sec 92)- 1/2 • Annual return is equivalent to Compliance certificate of Act,

1956. Exhaustive disclosures required

▫ Principal business activities of the Company contributing 10% or

more of the total turnover of the company

▫ Particulars of holding, subsidiary and associated companies

▫ Shareholding pattern (almost in line with clause 35 of the LA)

▫ Disclosure of indebtedness

▫ Changes in promoters, directors & KMP

▫ Meetings of members, committee, board and attendance therein

▫ Remuneration of directors and KMP

▫ Penalty or punishment imposed on the company, directors, or

officer, compounding of offences and appeals made

▫ Certification of compliances and disclosures

• Annual return to be prepared containing information as they

stood on the close of the financial year.

113

Annual Return – (Sec 92)- 2/2

To be prepared as on the close of FY and not as on the date of AGM as under Act, 1956

To be signed by Director and CS / PCS

PCS shall certify annual return of listed companies and company having paid-up share capital of Rs. 10 crores or more OR turnover of Rs. 50 crores or more

Extract of annual return to form part of Board’s report

114

Verification vs. Certification

• In case a PCS is a co-signatory of an Annual Return, he shall

only be responsible to the extent of verifying the information

contained in the Annual Return instead of certifying it.

• This has though diminished the liability of a PCS, on the other

hand, the scope has been widened as companies with paid

capital of 10 crores or more and turnover of 50 crores or more

shall require PCS certification.

▫ Nature of certification - that the annual return discloses the facts

correctly and adequately and that the company has complied with

all the provisions of this Act

▫ 2nd Removal of Difficulties Order further says the PCS shall certify

that the company has complied with all provisions of the Act.

115

Compendium of filings by

companies – what and when

Annual filing compliance with time

period -1/3 Particulars Report To Days (within) Section No./

Rule No. in the Act, 2013

Form No.

Adopted financial

statements of OPC.

Registrar of

Companies

180 days from the

closure of financial

year.

137(1) Form AOC-4

Financial Statements. Registrar of

Companies

30 days from AGM. 137 Form AOC-4

Financial Statements

when AGM is not held.

Registrar of

Companies

30 days from the last

date on which AGM

should have been held.

137(2) Yet to be

prescribed

Report of AGM

(For Listed Public

Companies).

Registrar of

Companies

30 days from the

conclusion of the

AGM.

121(2), Rule 31

(1)(c) of the

Companies

(Management and

Administration)

Rules, 2014

MGT-15

117


period -2/3

Particulars Report To Days (within) Section No./ Rule No. in the Act, 2013

Form No.

Annual return Registrar of

Companies

60 days from the date

of AGM or 60 days

from the date on

which AGM was due

92, Rule 11 Form No.

MGT.7.

Filing of statement of

reasons for not holding

AGM on time

Registrar of

Companies

At the earliest, latest

to be filed along with

annual return

92(4) Along with

annual

return

Annual return by foreign

company

Registrar of

Companies


of AGM

384, Rule 7 of the

Companies

(Registration of

Foreign Companies)

Rules,

2014

Form No.

FC.4

118




Form No.

Notice of

appointment of

auditor

Registrar of

Companies


of meeting, in which

auditor is appointed

139 Form No. ADT.1

Statement of

persons whose

dividend is unpaid

or unclaimed

Internal 90 days from the date

of transferring the

amount to Unpaid

Dividend Account

124(2)

-

Return of public

deposit to be filed

by public

companies which

accept deposits.

Registrar of

Companies and

RBI, if applicable

On or before 30th

June of each year

76, Rule 16 of

the Companies

(Acceptance of

Deposit)

Rules, 2014

Form No. DPT-3

119

Regular filing compliance with

time period -1/4 Particulars Report To Days (within) Section No./


Form No.

Creation or modification

of charge

Registrar of

Companies

30 days of creation or

modification

77, Rule 3 of

the Companies

(Registration of

Charges) Rules,

2014

Form No.

CHG-1

Satisfaction of Charge Registrar of

Companies

30 days from date of

payment or satisfaction

in full.

82, Rule 8 of

the Companies

(Registration of

Charges) Rules,

2014

Form No.

CHG-4

Intimation by the

receiver or manager on

his appointment to

manage the secured

property

Company,

Registrar of

Companies

30 days from passing of

the order or of the

making the of

appointment

84, Rule 9 of

the Companies

(Registration of

Charges) Rules,

2014

Form No.

CHG-6

120

Regular filing compliance with



Form No.

Declaration in respect of

members not holding

beneficial interest in any

shares

Company 30 days of from

the date of such

change.

89(1), Rule 9(1) of

the Companies

(Management and

Administration)

Rules, 2014

Form MGT.4

Declaration in respect of

beneficial interest in any

shares not held by such

person

Company

30 days of from

the date of such

change.

89(2), Rule 9(2) of

the Companies

(Management and

Administration)

Rules, 2014

Form MGT.5

Any other declaration

made under section 89

Registrar 30 days from the

date of receipt of

the declaration

89(6), Rule 9(3) of

the Companies

(Management and

Administration)

Rules, 2014

Form MGT.6

121

Regular filing compliance with time



Form No.

Change in Promoter’s holding or

holding of Top ten shareholder’s

in listed companies

RoC 15 days from the date

of such change

93, Rule 13 of

the Companies

(Management

and

Administration)

Rules, 2014

Form

MGT.10

Copy of specified resolutions and

agreements

RoC 30 days from the date

of passing resolution

or making agreement

117, Rule 24 of

aforesaid Rules

Form

MGT.14

Notice for maintaining books of

accounts other than at the

registered office

RoC 7 days of from the

date of Board’s

decision.

128 --

Report of Cost Auditor Central

Government


of receipt of the cost

audit report

148 Yet to be

prescribed

122

Regular filing compliance with time period -

4/4

Particulars Report To

Days (within) Section No./ Rule No. in the Act, 2013

Form No.

Consent to act as director RoC 30 days from the date of

appointment

152(5), Rule 8 of

the Companies

(Appointment and

Qualification of

Directors)

Rules, 2014.

Form No.

DIR-2

Intimation regarding

intimation received from

director about DIN

RoC Within 15 days of receipt

of intimation

157 DIR-3C


resignation of director

RoC 30 days from the date of

receipt of notice of

resignation

168, Rule 15 of the

aforesaid Rules

Form DIR-

12

Particulars and documents of

the directors and Key

Managerial Personnel and their

shareholding

RoC 30 days of appointment

of each of them and

within 30 days from the

change if taking place.

170, Rule 18 of the

aforesaid Rules

Form DIR-

12

123

Event based filing compliance with

time period -1/14 Particulars Report

To Days (within) Section No./


Form No.

Particulars of appointment of

whole time directors,

managing directors, manager

RoC 60 days of from the date

of appointment

196, Rule 3 of the

Companies

(Appointment and

Remuneration of

Management

Personnel)

Rules, 2014.

Form MR.1

Nomination in case of a One

Person Company

RoC At the time of

incorporation; along with

MoA and AoA

Sec. 3 and Rule 4 of

the Companies

(Incorporation)

Rules, 2014

Form INC.2

and consent of

nominee in

Form INC.3

Cessation of Nomination RoC Within 30 days from the

date of change in

membership

Sec. 3 and Rule 4 Form INC.4

Mandatory conversion of

One Person Company

RoC Within 60 days of such

change becoming

applicable

Sec. 18 and Rule 6 Form INC.5

124


time period- 2/14

125

Particulars Report To

Days (within) Section No./ Rule No. in the Act, 2013

Form No.

Application for Reservation of

name

RoC Along with incorporation Section 4(4) and

Rule 8 & 9

Form INC.1

Consent to act as first directors RoC Along with incorporation

documents

7, Rule17 Form DIR-12

Conversion of Section 8

Company into any other kind of

company.

CG/RD Immediately after the

meeting

8(4)(ii),rule 21 Form INC.18

Intimation of change of

registered office

RoC 15 days from the date of

incorporation

12(1) Form INC.22


time period-3/14

126


Form No.

Verification of change in

the address of registered

office

RoC 30 days from the

date of

incorporation

12(2), Rule 27 Form INC.22

Notice of change of

registered office


change

12(4) Form INC.22

Change of registered

office from jurisdiction

of one RoC to another

RoC Within 60 days

from the date of

confirmation by

RD

12(6) and Rule 28 Form INC.23

Change of registered

office from one state to

another

RoC 30 days of receipt

of order copy

13(7) and Rule 30 Form INC.23


time period -4/14 Particulars Report

To Days (within) Section No./


Form No.

Alteration in AoA RoC 15 days from the change 14 and Rule 33 Form INC.27

Change of name RoC 15 days from the date of

change

16 read with

13(2), Rule

29(2)

Form INC.24

File Red Herring

Prospectus

RoC 3 days prior to the

opening of the offer or

Subscription list

32 --

Prospectus containing

details not contained in red

herring prospectus

RoC &

SEBI

Upon closing of the offer 32(4) --

Return of allotment by

company having share

capital

RoC 30 days after allotment 39, Rule 12

and 14

Form PAS.3

Complete information

about private placement

RoC 30 days of circulation of

relevant private

placement offer letter.

42, Rule 14(1) Form PAS.4

127


time period-5/14

128


Form No.

Order of NCLT to

be send by the

Company

NCLT 21 days from the

date of change or

passing if resolution

48 Yet to be

prescribed.

Copy of the order

of the Tribunal


date of the order

48(4) Yet to be

prescribed

Transferee’s

appeal for Refusal

of registration of

the transfer by the

Company


date of notice or

after 60 days from

the date of

instrument of

transmission

58 Yet to be

prescribed

Notice of

alteration of

capital

ROC 30 days of from such

alteration or increase

or redemption

alongwith altered

MOA

64, Rule 15 Form SH-7


time period-6/14

129


Form No.

Copy of order of NCLT

for reduction of capital

RoC 30 days from

alteration

66 --

Return of buy back RoC&SEBI 30 days from the

completion of buy

back

68, Rule 17(13) Form SH-11

Company to file

declaration of solvency

RoC and

SEBI (listed

companies)

Before buy-back 68(6), Rule

17(3)

Form SH-9

Circular for accepting

deposits from its

members

RoC 30 days prior to the

issuance of circular

73, Rule 4 (1

and 2)

Form DPT-1

Execution of deposit

trust deed

Trustee At least 7 days before

issuing the circular

73, Rule 7(2) Form DPT-2

Event based filing compliance and time

period -7/14


Form No.

Passing of special

resolution by Eligible

Company for accepting

public deposit

RoC and

RBI, if

required

Before making

invitation for

acceptance of public

deposit

73(2) --

Notice of situation of

where the foreign register

shall be maintained

RoC 30 days from opening

of any foreign register

88, Rule 7(2) Form MGT-3

Notice for closure of

register of security

holders- for companies

whose securities are listed

SEBI At least 7 days prior to

the date of such closure

91 --

Deposit of challan

evidencing deposit of

amount into IEPF

IEPF

Authority

No time limit

prescribed. May be

done soonest

125(5) --

130




Form No.

Copy of order of NCLT allowing

voluntary revision of financial

statements or board’s report

RoC 30 days of the

date of receipt of

the certified copy

131

Application to Tribunal for

revision of financial statements or

Board’s Report

NCLT -- 131(1), Draft

Rule no. 9.5(1)

Form No.

9.2

Copy of the order of the Tribunal RoC 30 days from the

days of receiving

the order

131, Draft Rule

No. 9.5(4)

Form No.

9.3

Revised financial statements

along with the statement of

auditors or revised report of the

Board

RoC 30 days of the

date of approval

by the general

meeting

131, Draft Rule

no. 9.5(6)

Form No.

9.4

Resignation of auditor along with

reasons

RoC, CAG

in case of

Government

Companies.

30 days from the

date of

resignation

140, Rule 8 Form ADT-

3

131




Form No.

Copy of order of NCLT

regarding scheme of

arrangement

RoC 30 days of the

receipt of the

order

230 --

Draft scheme of merger RoC Before notice for

court convened

meeting is sent

232(2), Draft

rule no. 15.13

Form No.

15.8

Statement of compliance in

mergers and amalgamations


end of each

financial year

232(7), Draft

rule no. 15.20

Form No.

15.11

Certified copy of order for

compromise and arrangement


date of receiving

the order

232(5), Draft

Rule no. 15.15

Form No.

15.9

Copy of order confirming

merger or amalgamation

between two small companies

RoC -- 233 --

132


time period-10/14

133


Form No.

Declaration of solvency RoC Before convening

the meeting of

members and

creditors

233(1)(c), Draft

Rule No. 15.25

Form No.

15.12

Exit option to dissenting

shareholders

Dissenting

Shareholders

2 months after

expiry of 4 months

after making of an

offer

235, Draft rule

no. 15.27

Form No. 15.16

Certified copy of order

regarding oppression

RoC 30 days of order 242 --

Copy of order of NCLT for

company’s name to be

restored in the register of

companies

RoC 30 days of order 252 --


time period -11/14

134


Form No.


appointment of provisional

liquidator

RoC 7 days of passing of

order by NCLT

277 --

Any resolution passed in the

meeting of creditors in case of

voluntary winding up

RoC 10 days of passing

the resolution

306 --

Notice and particulars of

appointment or vacancy of

Company liquidator

RoC 10 days of

appointment or

vacancy

312 --

Quarterly statements prepared

by the Company Liquidator


close of the

314 --


time period -12/14


Form No.

Official Liquidator shall

submit a report on liquidation

Central

Government

30 days of his

appointment

361

Alteration in the documents

filed by the foreign company


alteration

380 Form FC-2

List of all the places of

business established by the

foreign company in India as

on the date of balance sheet

RoC -- 381 Form FC-3

Aggrieved by the order of the

NCLT

NCLAT 45 days from the date of

passing the order, if not

filed timely then NCLAT

may allow another 45

days to file

421

135


period -13/14


Form No.

Aggrieved by the order of

the NCLAT

Supreme Court 60 days from the date of


filed timely then SC may

allow another 60 days to

file

423 --

Aggrieved by the decision

of the CLB

High Court 60 days from the date of


filed timely then SC may

allow another 60 days to

file

434 --

Application for

compounding of offences

Tribunal or RD Before or after institution

of any prosecution

441 --

136

Event based filing compliance and

time period -14/14

137


Form No.

Compounding of offences

RoC 7 days from the date of compounding

441 --

Declaration by dormant company

RoC Filed annually 455 (5), Rule 3 Form MSC-3

Application by dormant company to revive status as active company accompanied with a return

RoC -- 455 (5), Rule 8 Form MSC-4

Types of Audit under Companies

Act, 2013

Statutory Audit

Cost Audit

Internal Audit

Secretarial Audit

138

Obligations of cost auditor and

secretarial auditor [Sec 143(14)] • Little-noted provision in Sec. 143 (14) extends all the provisions of Sec 143, as

may be applicable, to the secretarial auditor and cost auditor • Applying mutatis mutandis principle, following seem applicable to secretarial

auditor • Right of access to books and vouchers – sec 143 (1) • Reporting to members or the board

Sec 204 (1) requires the report to be annexed with the Board report Board has to respond to qualifications

Understandably , therefore, it is a report to members

• Reporting requirements of sec 143 do not apply to the secretarial auditor, as separate reporting contents laid by sec 143

• Reasons for qualifications – 143 (4) – should apply • Sec 143 (9) makes audit standards mandatory – there is no corresponding

requirement in case of secretarial audit standards • 143 (12) –reporting of fraud

Clearly applicable

• Punitive section – 143 (15) – minimum fine Rs 1 lac, maximum Rs 25 lacs • If there are reasons to believe that fraud exists, and we fail to report fraud • This offence is specifically linked to sec. 143 (12) • Generic offence of sec. 143 is dealt with by sec 147

139

Applicability of secretarial audit

Secretarial audit [section 204 and Rule 9 of the Companies Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]

• To be conducted by: • Listed companies • Public company having a paid-up share capital of Rs. 50

crores or more • Public company having a turnover of Rs. 250 crores or more • Secretarial audit report shall be in Form No. MR-3 and to be

annexed to the Board’s report • Any disqualification to be explained in the Board’s report

140

Certification of all laws applicable to the Company

Pursuant to Section 204(1) and Rule 9 the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a Practising Company Secretary(‘PCS’) is required to certify that the Company is in compliance with all the laws applicable to it.

• This however, is an ambiguity of the Act, which expects a PCS to verify compliance of various acts besides Companies Act.

• The auditor shall expressly mention the reason of such non compliance, if any, based on the records and information furnished by the Company.

The intent is to make the certification exhaustive, which of course requires a PCS to exercise due caution.

141

Scope of Secretarial Audit Companies Act,

2013

Securities and Exchange

Board of India Act, 1992

Reserve Bank of India Act,

1934

Securities Contracts

(Regulation) Act, 1956

Depositories Act, 1996

Foreign Exchange

Management Act, 1999

Competition Act, 2002

142

Any other law specifically applicable to the Company (where applicable)

Listing Agreement

Provisions for Secretarial Audit

Verification of:

Composition of Board

Procedure of meetings

Appointment of Managerial Personnel

Appointment of Auditors

Securities Related:

Dividend

Debenture redemption

Transfer & transmission

of shares

Statutory fillings:

MCA filing, returns and

forms

Buy back

Issue & allotment

Financial Transactions:

Inter corporate

Loans, investments & guarantees

Charges

143

Provisions on Secretarial Audit

Frequency of Audit:

Yearly

Manner of conducting

audit

To be devised

Penal Provisions

Company, Officer in default or Company Secretary, Fine amount- Rs 1 lakh to 5 lakh

144

Secretarial audit- the process

Identifying scope and objectives

Obtaining of formal

engagement letter

Framing of Audit Plan

Understanding the nature of

business

Maintaining working papers

Audit Report

145

Accounts of Companies

Sections enforced

Companies Act 2013

Sections covered

Name of the Rules

notified

Sections

enforced till

31.03.2014

Accounts of Companies

Section 128-138

The Companies (Accounts) Rules, 2014. The Companies (Corporate Social Responsibility Policy) Rules, 2014

Except Sec 130

131,132 – Rest

enforced

147

Definitions relevant to Chapter IX

Books and paper

• Include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form • Under Act, 1956, it only included accounts, deeds, vouchers,

writings and documents

Books of account

• Includes records maintained in respect of— • all sums of money received and expended by a company and

matters in relation to which the receipts and expenditure take place;

• all sales and purchases of goods and services by the company; • the assets and liabilities of the company; and • the items of cost as may be prescribed under section 148 in the

case of a company which belongs to any class of companies specified under that section

148

Highlights of accounts and audit

changes

149

• Accounting ▫ Consolidation mandatory ▫ Deviation from accounting standards recognised by

law ▫ Financial year mandatorily uniform ▫ Statutory provision for restatement of accounts

• Disciplinary ▫ Constitution of NAFRA and powers of NAFRA ▫ Concurrent jurisdiction of NAFRA and NCLT in

certain matters • Depreciation

▫ From percentage of value of asset, Schedule II now prescribes depreciation to be calculated on useful life of asset

Books of account, etc to be kept by

company(section 128) • All companies to keep books of account and other relevant books and

papers and financial statements for at least 8 financial year at its registered office ▫ including that of its branch office or offices, if any ▫ Also required to explain the transactions effected both at the registered

office and its branches ▫ Books can be kept on accrual basis and according to the double entry

system of accounting ▫ Such books can be maintained at any other place by giving intimation to

RoC within 7 days of decision • On violation, the officers charged by the Board, MD, WTD, CFO with the

duty of complying with these provisions shall be punishable with: ▫ Imprisonment which may extend to one year or ▫ with fine not less than fifty thousand rupees but which may extend to

five lakh rupees or ▫ with both

Director in charge of finance, CFO, and “any other person charged by the board” brought in list of offenders

Punishment enhanced from 6 months to 1 year

150

Inspection of accounts by directors

(section 128) • Sec 128 (3) corresponds to sec 209 (4):

▫ Inspection by a director has made subject to such conditions as prescribed under rules

Financial information maintained outside by country to be provided to director within 15 days of written request of director.

• Proviso to sec 128 (3) provides for inspection in case of a subsidiary

▫ This seems disconnected with the rest of the section as there is no requirement on the holding company to keep accounting records for the subsidiary

A possible interpretation can be – inspection in case of any subsidiary can be done only by a director authorised by the holding company

However, the law could not intend to take away the inspection rights of directors other than those appointed by the holding company

• The information to be sought only by director – not through his PoA, agent or representative

• Sec 128 (4) – new provision – creates an obligation on officers and employees to assist in inspection by directors

151

Financial statement (section 129)

• Sec 129 requires companies to prepare “financial statements” according to Schedule III ▫ Financial statements: Balance sheet Profit and loss account Cash flow statement Not required for OPC, small company and dormant

company Statement of changes in shareholders equity Notes

▫ SOCE – currently not practised in India as IAS 1 has not been adopted

▫ Sec 129 (3) – consolidation also becomes mandatory for every company having one or more subsidiaries.

152

Audit and Auditors

Sections enforced

Companies Act 2013

Sections covered

Name of the Rules

notified

Sections

enforced

till

01.04.2014

Audit and Auditors

Section 139-148

The Companies (Audit and Auditors) Rules, 2014.

All enforced

154

Appointment of auditors [Sec 139]

• Appointment is to be done once in 5 years

Ratification done every year

The law is casually confusing between “ratification” and

“reappointment” taking these two expressions to mean the

same

• Mandatory retirement after 5 years in case of

individual and 10 years in case of firms

Audit firms having common partners, cannot not be

appointed as auditors in a company for a consecutive term

of 5 years, after the first 5 years have been completed

155

Appointment of auditors [Sec 139] • Provisions applicable to all Listed companies, and companies

of such class as prescribed in Rule 5 of the Companies (Audit & Auditors) Rules, 2014. ▫ unlisted public companies having paid up share capital of 10

crores or more; ▫ private limited companies having paid up share capital of

20 crores or more; ▫ all companies having paid up share capital of below

threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.

[Rules also state that the period for which he has been holding office before the commencement of Act, 2013 shall be taken into account to calculate the period of 5 or 10 years]

156

Rotation of Auditors [Sec 139 (3&4)]

• Optional power to members for rotation of audit partners

▫ Rotation of audit partners mandatory for NBFCs under revised regulatory

framework

• However, Sec 139 (4) permits CG to lay Rules for mandatory

rotation of partners

• As per the notified Rules, whether for an individual or audit firm:

• The period of office held before the commencement of Act, 2013 shall be considered

for calculation of 5 or 10 consecutive years.

• Incoming auditor or audit firm shall not be eligible if it is under the same network of

audit firms or is operating under the same trade mark or brand as the outgoing.

• The provision for mandatory rotation is now applicable only to the following:

▫ All listed companies;

▫ Unlisted public companies having paid up share capital of Rs 10 crores or more;

▫ Private companies having paid up share capital of Rs 20 crores or above;

▫ Other companies, having borrowings from banks, financial institutions or public deposits of Rs 50 crores or above.

157

First Auditors and Casual Vacancies

[Sec 139 (6 & 8)]

• First auditors to be appointed by Board within 30 days of registration –same as sec 224 (5) • However, if the board fails – intimation to be given to

members, who will then appoint the first auditor in EGM within 90 days of failure or intimation by the board

• Such auditors to hold office till conclusion of first AGM

• Casual vacancy (non-CAG companies) ▫ To be filled by the Board within 30 days

▫ However, if caused by resignation, to be approved by members within 3 months of recommendation by Board

No apparent time limit for making recommendation, but understandably, 30 days

Such auditors to hold office till conclusion of next AGM

158

Removal / Resignation of Auditors

[Sec 140] • Removal before expiry of term

• Special resolution and prior approval of CG required • Auditors to be given a chance of being heard

• Removal of retiring auditors at AGM: • For not re-appointing the retiring auditor at AGM, the

law now requires ordinary resolution with a special notice (except where the max. tenure has been completed) • Not sure was this consciously done or crept out of

oversight

• CG approval required and a chance of being heard by way of a representation to be given to the auditor

159

Resignations of Auditors [Sec 140]

• Resignations before completion of term

• Every resigning auditor to file a form with the registrar

and the company within 30 days of resignation

Stating reasons for resignation and “other relevant facts”

Failure to do so is a punishable offence – minimum Rs

50000, maximum Rs. 5 lacs

• Special notice to appoint auditors other than retiring

auditors

• Special notice for appointing anyone other than retiring

auditor applicable as before

Special notice – read with Sec 115

160

Auditor’s Eligibility [Sec 141]

Only CAs are eligible for appointment as auditor i.e. as statutory auditor

Where a firm including LLPs are appointed as auditor, only the partners who are CAs shall be authorized to act and sign on behalf of the firm

161

Disqualification from being appointed

as Auditor [Sec 141(3)] -1/3

162

Disqualification

• Body corporate other than LLPs • Officer of employee of company

Disqualification

• Person who is a partner, or who is in the employment, of an officer or employee of the company

• Person or firm having direct or indirect business relationship with company, its holding or associate company or a subsidiary

Disqualification

• Person whose relative is a director / KMP of the company • Person convicted by court for offence involving fraud • Any person whose subsidiary, associate etc also involved in providing

consultancy and specialised services to the company u/s 144

Disqualification from being appointed

as Auditor -2/3

163

Person or partner holding any securities in the company / holding / subsidiary / associate company / subsidiary of holding company

[Relative of such person holding more than Rs. 1 lakh (as per Rules) Face Value of securities]

If any person or his relative or partner is indebted to the company/subsidiary/holding/associate/subsidiary of holding company in excess of Rs. 5 lakh (as per Rules)

If any person or his relative or partner has given guarantee or provided security in connection with indebtedness of any third person to company/its subsidiary/holding or associate company/subsidiary of holding company in excess of Rs. 1 lakh (as per Rules)

Non Audit Services – Sec 144 -1/2

Following services not to be provided

• 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

• any other kind of services as may be prescribed

Existing engagements

• Existing audit firms to ensure compliance before the commencement of the first financial year from the commencement of the law.

164

Non Audit Services – Sec 144 -2/2

Non- audit services not to be provided to

• not to the company, holding company, or subsidiary

• directly or indirectly

• indirectly includes through relative, connected or associated person, or other entity over which individual has significant influence or control, or whose name or trademark or brand issued by the individual

Can the auditor provide any other service?

• With the approval of board or audit committee

165

Auditors: Civil Liability -1/2

•Criminal liability leads to civil liability ▫ Sec 147 (3) connects with sec 147(2) ▫ That is, if offence of sec 147(2) proved, civil liability also

attaches

•Civil liability for auditors– Auditors, make your pockets deep! ▫ important provision for civil liability of auditor–sec 147(3) says if the

auditor is convicted u/s147(1) offence of any of the provisions pertaining to audit), the auditor will be liable to compensate companies, statutory bodies and persons who have suffered loss this will open flood gates of claims against auditors

•Who all may make compensatory claims:

▫Company ▫Statutory bodies or authorities ▫Or any other person

•For what: for loss arising out of misleading statement off acts or particulars in audit reports

166

Auditors: Civil Liability -2/2 What are the preconditions?

▫There must have been a prosecution u/s 147(2) ▫Who can prosecute NAFRA ‘‘s penal action is not sufficient for this section Conviction has to be done by a criminal court/special

court only •Sec147(4)–central Govt to form a body for recovery of

damages •147(5) ▫Fastens liability to the partner as well as the firm ▫Jointly and severally ▫Clearly conflicting with the LLP Act– Sec27(2) of the LLP

Act confines the liability to the partners of the firm

167

Internal Audit (section 138 and Rule 13 of the

Companies (Accounts) Rules, 2014) -1/2

• According to Rule 13, following companies to appoint internal auditor:

▫ Every Listed Company;

▫ Every unlisted public company having paid up share capital of Rs. 50 Crores or more, or turnover Rs. 250 Crores or more, or outstanding loans or borrowings from banks or PFIs exceeding Rs. 100 Crores or which has accepted deposits of Rs. 25 Crores or more at any point of time during the last financial year.

▫ Every private company having turnover Rs. 200 Crores or more, or outstanding loans or borrowings from banks or PFIs exceeding Rs. 100 Crores at any point of time during the last financial year

• All such companies will require internal audit to be done

168

Appointment and Qualification

of Directors – in brief

Definitions enforced

All sections along with the Companies

(Appointment and Qualification of Directors)

Rules, 2014 enforced w.e.f. 01.04.2014

170

Composition of Board – 1/3 [Sec 149]

171

Minimum number of directors

Minimum 2 if it’s a private

company

Minimum 3 if it’s a public

company

No change in composition of Board required

Scenario 1

Scenario 2

Maximum number of directors

Maximum 15

If more than 15, then a period of

1 year to comply.

If desired to have more than

15, can be appointed with

SR.

Composition of Board – 2/3 [Sec 149]

• As per notified Rules, following classes of companies require a woman director: • Listed companies

• Public Company having paid-up capital of Rs.100 crore or more / turnover of Rs. 300 crores or more

Notified rules only state that a cos. incorporated under the Act has to comply within 6 months of its incorporation. This means for existing cos. the same has to be complied immediately.

• Check if: • Company has atleast one resident director

• Resident = stayed in India for at least 182 days in the calendar year.

172

Composition of Board – 3/3 [Sec 149] • Following classes of companies to have 1/3rd of Board to comprise

Independent Directors. • Listed Public companies

• Government companies exempted

• The Rules require at least 2 independent directors for - • Public companies with paid-up capital of Rs.10 crores or more • Public companies with turnover of Rs. 100 crores or more • Public companies with outstanding loans or borrowings or

debentures or deposits exceeding Rs. 50 crores - Shall be applicable even if the paid-up capital/turnover/borrowings

/deposits fall below the limits

• Existing companies given 1 year from the date of notification of the rules in this regard

• In case the company is wanting to appoint an alternate director for an independent director: • The director should be qualified to become an independent director

173

Independent Directors [Sec 149 (6)]

• Definition included in the Act for the first time

• Means a director other than MD/WTD/nominee director

• Definition narrower as compared to the definition of Clause 49 –

hence may disqualify most of existing independent directors

• No pecuniary relationship – either himself or his relatives

• Clause 49 language is “material pecuniary relationship”

• Clause travels back in time to 2 previous financial years

• Evidently, IDs may have had non material pecuniary transactions over the

past

• The provision will therefore be retroactive and will affect existing

positions

• Bar includes subsidiary, holding and associate companies as

well

174

Independent Directors

• Rules lay additional qualifications

• Now Board’s Report under Section 134 to state that the independent

director possesses appropriate balance of skills, experience and knowledge,

as required

• Required only first time after the appointment of the independent director

• IDs to give declaration to the Board about changes which might

affect its status as ID

• Declaration to be given at the first Board meeting in which he participates

as ID and at the first Board meeting in every FY or whenever there is a

change

• Term of office 5 years

• May be re-appointed by another 5 years on special resolution

• Not beyond that

• Thereafter, may come back on board after a gap of 3 years

• Existing tenure before commencement of Act not to be counted

175

Manner of dealing with existing IDs

• IDs will be non-rotational , appointed for 5 years

• Letter of appointment required

• How will the status of existing IDS be dealt with?

▫ As per MCA clairification, existing IDs under Act, 1956 to be appointed under Act, 2013

176

Independent Directors

Shall abide by the Code of Independent Director under

Schedule IV

Can be held responsible for

omissions attributable through Board process

Not liable to retire by rotation

Not entitled to stock options any more

IDs

177

Code for Independent Directors

[Schedule IV]

178

Professional conduct

Roles and functions

Duties

Manner of appointment

Reappointment

Resignation or removal

Separate meetings

Evaluation mechanism

Code for IDs

Duties of IDs as per Code of Conduct

[Schedule IV] • Schedule IV of the Act lays down a massive code for IDs. • According to the Schedule, duties of IDs are

• IDs should not disclose confidential information, unpublished price sensitive information unless approved by the Board

• Report concerns about unethical behaviour, suspected fraud or violation of company’s code of conduct or ethics policy

• Ascertain and ensure that the company has an adequate and functional vigil mechanism

• Ensure that related party transactions are approved after sufficient deliberations

• Ensure that concerns regarding running or proposed action are sufficiently resolved and to the extent not resolved, are recorded in minutes of BM

• Strive to attend all BMs, committee meetings and GM

179

Performance evaluation as per Code

of Conduct [Schedule IV]

• At a separate meeting of IDs, to be held atleast once in a year:

• Review performance of non-independent directors

• Review performance of Chairperson

• Assess the quality, quantity and timeliness of flow of information

between the company management and the Board

• In case of listed cos. and public cos. with paid up capital of Rs. 25 crores, evaluation of board performance, committees and individual directors as per Rule 8 (sub-rule 4) of the Companies (Accounts) Rules, 2014

• Performance evaluation of IDs:

• Shall be done by entire Board, excluding director being evaluated

• On this basis, decision to extend the term of ID shall be decided

180

Rules on Independent Directors

• Minimum independent directors: While the Act requires only 1/3rd independent directors on company boards, the Rules require at least 2 independent directors.

• Capital requirements for independent directors: Reduced to merely Rs 10 crores.

• Vacancy filling for independent directors: The Rules provide for vacancy in the post of independent directors to be filled within 3 months. Obviously, the Rules are completely oblivious of what Schedule IV, VI, item 2 provides. ▫ The Schedule to the Act provides a time frame of 6 months to fill

casual vacancies.

181

IDs Listing agreement viz-a-viz

Companies Act, 2013 - 1/2 Aspect covered Clause 49 The Companies Act,

2013

Appointment of

Independent directors by

minority shareholders

No provision

Voluntary appointment of

director by small

shareholder. Such director is

deemed to be independent

director.

Formal letter of

appointment

Required Required

Formal training of

independent directors

Familiarization programme No provision

Treatment of nominee

director as Non-

Independent Director

Nominee directors appointed

by public financial

institutions are deemed

independent directors

Any nominee director

excluded from the definition

of independent director.

Minimum and maximum age

for Independent Directors

Minimum age – 21 years No provision

Maximum tenure Non-mandatory requirement

– 9 years

Single term of 5 years.

Maximum 2 consecutive

terms

182

IDs Listing agreement viz-a-viz

Companies Act, 2013 - 2/2 Aspect covered Clause 49 The Companies Act, 2013

Disclosure of

reasons of

resignation

No provision Reasons to be disclosed in the

intimation to Registrar.

Remuneration To be fixed by the Board of

directors with the previous

approval of shareholders.

Limits on stock options may be

specified in the resolution.

Sitting fees, reimbursement of

expenses for participation in the

Board and other meetings and

profit related commission as

may be approved by the

members. Stock options cannot

be granted.

Lead Independent

Director

No provision No provision

Separate meetings

of Independent

Directors

At least once a year At least once a year

Restriction on the

number of

independent

directorships

IDs in max 7 listed companies.

In case, ID is WTD is any listed

company, then can act as ID in

3 listed companies.

Maximum 10 public companies

for any director

183

Appointment of Directors [Sec 152]

184

• Presently, a person may obtain

DIN after appointment

A person to have DIN before appointment as

director

• In case of IDs, statement to be annexed to notice to include that in the opinion of the Board he fulfils the criteria of appointment

Director to give consent to appointment

which is filed by the company with RoC

within 30 days

Exemption from Section 152

• Section 152 (2) pertaining to consent to Act as director not applicable to government company.

▫ Where appointment is done by CG or SG

• Section 152 (5) not applicable to Section 8 companies

185

Right of persons other than retiring director to

stand for directorship [Sec 160]

He / person proposing him to give a notice in writing at least 14 days before general meeting along with a deposit of Rs. 1 lakh, which shall be refunded either: -- if he gets elected as director; or -- gets more than 25% of the total valid votes cast

Presently Rs. 500 was the deposit to be made -- Such a huge increase in deposit would ensure limiting of the number of frivolous notices for standing for directorship

As per Rules:

-- Company to give individual notice to members, about such candidature atleast 7 days before the general meeting

-- Else advertise such candidature in newspapers

186

Additional and Alternate Directors

[Section 161]

• Additional Directors may be appointed by Board

• Should be a person other than one who fails to get appointed

as director in GM

• Shall hold office upto the date of next AGM or last date on

which AGM was to be held, whichever is earlier

• Sub-section enforced

• Alternate Director to be appointed in place of a director

who is not present in India for more than 3 months

• Should not be a person who is already an alternate to some

other director of the Company.

• Alternate to an ID should also be qualified to be

independent under the Act

187

Disqualification of directors

[Sec 164]

188

• Additional disqualifications imposed • Person convicted with any offence and imprisoned for 7 years

or more shall be disqualified to be appointed as director in any company • Restriction is lifelong

• Persons convicted for offence involving related party transactions under section 188 during preceding 5 years

• Person appointed as director without DIN

• Person disqualified under section 164(2), which corresponds to section 274(1)(g), cannot be eligible for appointment as director in any other company for a period of 5 years • Previously the restriction was limited to only public

companies

No. of Directorships [Sec 165]

189

Number of directorships – Max. 20 companies

• Includes alternate directorship

• Out of which max. 10 in public companies

• directorship in private companies that are either holding or subsidiary

company of a public company shall be included

• Special Resolution for determining a lesser number •Section not applicable to Section 8 companies vide exemption

notification.

Companies given 1 year to comply

• Choose and resign from companies exceeding the number

• Intimate the companies and RoC

• Penalty – Rs. 5,000 – 25,000 for every day of default

Duties of directors [Sec 166]

• The law lays statutory duties of a director

• Important duties • act in accordance with the articles of the company

• due and reasonable care, skill and diligence and to exercise independent judgment

• act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the stakeholders (company, employees, shareholders, etc.)

• Avoid conflict of interest (with that of the Co.)

• not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates

• not assign his office and any assignment so made shall be void

• Penal Provision: Minimum fine of Rs. 1 lakh, extendable to Rs. 5 lakh.

190

Vacation of office of Director

[Sec 167]

• Vacation of office occurs even by virtue of disqualifications under • This means that disqualification incurred under section 164(2),

corresponding to section 274(1)(g) of the old Act, shall result in the director vacating his office.

• Presently such disqualification did not result in vacation

• Vacation of office for not attending board meetings has been extended • With or without leave of absence; and • Irrespective of the no. of Board meetings held during the 12 months • Presently vacation occurred if the director did not attend 3

continuous Board meetings / from all meetings for a consecutive period of 3 months, whichever is earlier, without obtaining leave of absence

• Criminal liability for contravention • Imprisonment extending upto 1 year / fine from Rs. 1,00,000 – Rs.

5,00,000 / with both

191

Resignation of Director

[Sec 168] -1/2

192

Resignation letter is mandatorily placed before the board

-- Resignation effective from date on which letter is received or date mentioned in the letter, whichever is later

Board to now mandatorily note such resignation

-- Fact of such resignation to be placed in the Boards’ Report

The board and the director to intimate the Registrar

-- Time for intimation by director – within 30 days of resignation

-- Time for intimation by company – within 30 days of receipt of resignation (As per Rules)

Resignation of Directors -2/2

Director shall remain liable even after resignation for offences which occurred during his tenure

In case of resignation of all directors of a company / vacation of office as under section 167:

-- Promoter / CG to appoint the required no. of directors who shall hold office till directors are appointed by shareholders in general meeting

193

Punishment [Sec 172]

• For no specific punishment under this Chapter:

• Penalty of Rs. 50,000 – Rs. 5,00,000

• On company and every officer in default

194

Provisions on Board Meetings in

brief

Sections enforced

196

All sections along with The Companies

(Meetings of Board and its Powers) Rules,

2014 enforced w.e.f. 01.04.2014

Meetings of Board [Sec 173]

Requirement of Statutory Meeting has been done away with

Minimum 4 meetings a year:

-- not more than 120 days gap between two consecutive meetings;

-- Exemption to Section 8, small companies, OPC and dormant companies.

Directors can participate through video conferencing or any other audio visual means

-- The requirement to attend at least one BM in a FY personally according to draft Rules, has been removed

At least 7 days notice shall be given

-- shorter notice possible only when at least one independent director is present in the meeting.

Penalty for failure to give notice is Rs 25000/-

Corresponding to section 285 and 286 of Act 1956

197

Nuances of calling meeting by

Video Conferencing

• Items negative listed for VC [Rule 4 of MBP Rules]: ▫ Approval of annual financial statements, Board’s report,

prospectus. ▫ Audit committee meetings for consideration of financial

statement including consolidated. ▫ Amalgamation, merger, demerger, takeover, acquisition

• Security of the procedure

• Safekeeping of recording mechanism

• From which all places can VC be held?

• When does the Director need to intimate the Company about his participation?

• Who will bear the cost?

• Drafting of the Minutes and relevant timelines

198

Matters which cannot be dealt in

meeting through VC or any other

audio visual means

• approval of the annual financial statements;

• approval of the Board’s report;

• approval of the Prospectus;

• Audit Committee Meetings for consideration of financial

statement including consolidated financial statement;

and

• approval of the matter relating to amalgamation, merger,

demerger, acquisition and takeover.

199

Resolution by Circulation [Sec 175]

200

Even a committee of directors can pass

resolutions by circulation

-- (Same as before)

Resolution in draft to be circulated to all directors or members of the committee and not just those in India;

- This is a shift from Act 1956

Such draft resolution to be sent at registered addresses in India by hand delivery / post / courier / electronic

means (such as fax or email – Rules)

If 1/3rd directors wants

same resolution to be

passed in a meeting,

Chairman to put the

resolution at the board

/ committee meeting;

Ensure resolution

passed shall be noted

in the next meeting

and also made a part

of minutes.

Powers to be exercised in Board Meeting [Sec 179] – 1/2

• Powers to be exercise in board meetings increased substantially to include: • Issue of securities, and not only debentures, within or outside India • To borrow monies

• “Otherwise than on debentures” in the clause has been done away with

• Approve financial statement and Board’s report • Diversify business • Approve amalgamation, merger or reconstruction • Takeover a company, acquire substantial or controlling stake in another company

• Powers which can be delegated to committee, MD, manager or principal officer of branch office are: ▫ Section 186 (5) mandates unanimous consent of Board. • borrow money, • invest funds, • grant loans or give guarantees

• Additional restrictions can be placed in general meeting to impose restrictions and conditions on exercise of any power by the Board.

• Corresponding to section 291 and 292 of Act, 1956

201

Powers to be exercised in board meeting

[ Sec 179] – 2/2

• Other powers as per Rule 4 are:

▫ to make political contributions;

▫ to appoint or remove key managerial personnel (KMP);

▫ to take note of appointment(s) or removal(s) of one level below the Key Management Personnel;

▫ to appoint internal auditors and secretarial auditor;

▫ to take note of the disclosure of director’s interest and shareholding;

▫ to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company;

▫ to invite or accept or renew public deposits and related matters;

▫ to review or change the terms and conditions of public deposit;

▫ to approve quarterly, half yearly and annual financial statements or financial results as the case may be.

• Omitted by the Companies (Meetings of Board and its Powers) Amendment Rules, 2015w.e.f. 18-03-2015

202

Restrictions on powers of Board

[Sec 180] – 1/2

203

Board to exercise the following powers only after passing special resolution

Invest otherwise in trust securities the amount of compensation

received by it as a result of any merger or amalgamation

To remit, or give time for the repayment of, any debt due from

a director.

Sell, lease or dispose undertaking

---- Undertaking means in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates 20% of the total income of the company during the previous financial year;

To borrow money, where

--- Money to be borrowed+ money already borrowed > aggregate of its paid-up share capital + free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business

Restrictions on powers of Board

[Sec 180] – 2/2

204

MCA on 25.03.2014 issued clarification u/s 180 of Act, 2013

OR already passed before 12.09.2013 and under S. 293, are valid only for

1 year from 12.09.2013.

Earlier ordinary resolution was required

for these matters.

Provisions exempted to Private companies

Corresponding to section 293 of Act 1956

Prohibitions and restrictions regarding

political contribution(Sec 182)

• Companies can contribute not more than 7.5% of average net profits during 3 immediately preceding financial years by passing a board resolution. ▫ Earlier the percentage was 5%.

• In contravention of the provisions of the section ▫ The company shall be liable to a fine which may extend to 5 times

the amount so contributed

Earlier it was 3 times the amount

▫ Every officer who is in default shall be punishable with imprisonment which may extend to 6 months and with fine which may extend to 5 times the amount so contributed

Earlier the term was 3 years and amount of fine was not prescribed.

• Corresponding to section 293A of Act 1956

205

• Directors’ interests – ▫ Unlike existing sec 297 where consent of the CG is required for

contracts with directors’ interests, sec 184 merely requires disclosures

▫ Provision of section 299(6) retained. Where the director of the one company or two or more of them

together holds or hold not more than 2% of the paid-up share capital in the other company.

▫ As per Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014, disclosure of interest to be disclosed at the meeting held immediately after the date of notice. This shall be the obligation of the director

▫ Notices to be retained for 8 years from the end of the FY to which it relates.

• Director shall be punishable with imprisonment which may extend to 1 year or with fine of minimum 50000 rupees and extend to 1 lakh rupees or both.


206

Disclosure of interest by directors

(Sec 184)

Committees of Board

Committee under the Act, 1956

S. 292A

• Audit Committee required for companies with paid up capital of more than Rs. 5 crores

Schedule XIII

• If any unlisted company intends to pay exceeding limits under Para C of Part II of Schedule XIII, then mandatory constitution of Remuneration Committee

S. 314

• Constitution of Selection Committee if monthly remuneration is more than Rs. 2.5 lakhs for remuneration falling under S. 314(1B)

Under the Listing Agreement, Audit Committee and Share Transfer Grievance Committees were

the only 2 mandatory committees

208

Audit Committee and Establishment of

Vigil Mechanism [Sec 177]

209

Audit Committee for the following companies

• Every listed company; and

• As per notified Rules -- Every public company having :

• paid up capital of 10 crore or more; or

• turnover of one hundred crore rupees or more; or

• in aggregate outstanding loans and borrowings, debentures or deposits exceeding 50 crore or more.

Shall have min. 3 directors with majority of ID ( reqt not applicable to Section 8 cos)

• It does not matter whether Chairman is executive or non- executive director.

• Majority of members, including Chairman, shall be able to read and understand financial statements.

Shall act as per its terms of reference

• Mandatory inclusions specified in the

section

Matters to be referred to Audit

Committee -1/2 Appointment of auditors, including filing of casual vacancy

Rendering of any other service apart from non-audit services u/s 144

Matters covered u/s 177(4) of Act, 2013

Complaints under vigil mechanism to the Chairman of Audit Committee

210

Matters to be referred to Audit

Committee -2/2 Auditor may report fraud to the Audit Committee

Formulation of scope, functioning, periodicity and methodology of vigil mechanism

Appointment of registered valuer

Related party transactions

- require prior approval as per Revised clause 49

211

Nomination and Remuneration Committee and

Stakeholders Relationship Committee [Sec 178]

212

• Every listed company; and

• As per Rules - Every public company having :

• Paid up capital of 10 crore or more; or

• Turnover of 100 crore or more

• Aggregate outstanding loans & borrowings/ debentures / deposits exceeding 50 crore.

Following companies to have Nomination and

Remuneration Committee

• The Chairperson of the company (executive or not) can be appointed as a member, but not as the chairman of the committee.

• Shall formulate a policy relating to remuneration for directors, KMP and other employees

Shall have 3 or more non-executive directors out of which half shall be ID

• A company having more than 1000 shareholders, debenture holders, deposit holders and any other security holders at any time during a FY

• This Committee shall consider and resolve the grievances of security holders

• Chairman of the Committee shall be Non- executive

• Strength can be decided by the Board

Stakeholders Relationship Committee

Non cash transactions (Sec 192)

• New restrictions • “Non-cash” does not mean consideration is not in cash solely

▫ Can be credit ▫ It mean consideration is in kind or other than in cash

• Any non-cash transactions with directors: ▫ acquisition of any asset by the company from the director, or vice versa, ▫ for consideration other than cash

• Requires prior general meeting resolution ▫ In case director or associated person is a director of holding company,

approval in general meeting of holding company also required • Section covers transactions with associates, subsidiary, connected

persons ▫ Connected persons – not defined, may be read as related person

• Related points: ▫ Spargo rule will still apply whereby mutual settlement is allowed ▫ Payment and Settlement Systems Act, 2007

213

> Section enforced

Insider Trading (Section 195)

• This is presently applicable to all companies

• No person including director or KMP to enter into insider trading

• What is insider trading?

▫ Act of subscribing, buying, selling, dealing or agreeing to do all of these or if director/ KMP/any other officer of company if they are reasonably expected to have access to non-public price sensitive information

▫ Act of counseling about procuring or communicating directly or indirectly any non-public price sensitive information to any person

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Section has been enforced w.e.f. 12.09.2013 The applicability of this section to private companies is peculiar and a notification exempting private companies is expected

Corporate Social Responsibility

Quick snapshot CSR applicability

On the basis of net worth or net profit or turnover

CSR committee

Minimum 1 ID in a committee of 3

directors

CSR policy

To be formulated by CSR committee and also monitored by it

CSR spending

At least 2% of average profits of preceding 3

FYs

CSR activities

- Schedule VII lays down activities that can be undertaken

- Activities for the welfare of employees or their relatives shall

not classify

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Corporate Social Responsibility

(CSR) in general

• This was highlighted as if it was the key feature of the Act, 2013

• Section 135 deals with CSR – has 3 important elements

▫ CSR Committee

▫ CSR policy CSR Policy to be framed by the Board and put on the website of

companies

▫ CSR spending

At least 2% of average profits for last 3 financial years to be spent on CSR

Company shall give preference to the local areas and areas around where it operates for spending the ear- marked CSR spending

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When is CSR mandatory? • Every company with either of these 3

▫ Net worth of Rs 500 crores or more

▫ Turnover of Rs 1000 crores or more during preceding 3 financial year

▫ Net Profit of Rs 5 crores or more during Preceding 3 financial year

Lots of issues left gray – net profit is profit before tax or after tax?

However, as turnover and profits get known only upon preparation of financial statements, the requirement triggers in the next financial year

▫ CSR Committee to have at least 3 directors, of which at least 1 independent

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Contents of the CSR policy?

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CSR Philosophy

A list of CSR Projects

Surplus arising out of the projects

will not form part of

business profit

Process of Monitoring the projects

listed

Related Party contracts, loans to

directors, loans and investments

Highlights of RPTs

Scope has been widened to include the following:

• KMP or their relatives

• Private Company in which the manager or their relative is member or director

• Firm in which manager or his relative is a partner

Cash at prevailing market price has now been substituted with ‘arm’s length transaction’ which has been defined in the section

The 2013 Act has widened the ambit of transactions by covering leasing of property of any kind, appointment of any agent for purchase and sale of goods, material, services or property.

Transactions entered into with related parties now to be included in the board’s report along with justification for entering into such contracts and arrangements.

Only non-interested shareholders can vote in GM on any RPT. This was also proposed in “consultative paper on review of corporate governance norms in India” issued by SEBI

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Definition of Related Party – Enforced -1/2

• Related Party- with reference to a company, means—

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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 or his relative is a member or director;

Public company in which a director or manager is a

director and holds along with his relatives, more than 2%of

its paid-up share capital

Definition of Related Party –

Enforced -2/2

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any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

any person on whose advice, directions or instructions a director or manager is accustomed to act:

any company which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

Such other person as may be prescribed – Rules prescribe that a director ( excl. ID) or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

Related Parties and Related Party

Transactions (Sec 188) – 1/4

• Definition becomes very wide indeed.

▫ Definition similar to accounting standard

Includes family members of HUF

• Related party transactions under the law are subject to serious restraint

• Most transactions that a company may have with “related parties” require approval of Board

• However, in the general meeting the member or his related party shall not vote

▫ MCA clarified that related party who is a party to the contract shall not vote.

• CG approval dispensed with

• All transactions with related parties though not covered by section 188, shall require approval of Audit Committee

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Transactions (Sec 188) – 2/2

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Section 2(76) defines “related party”

• By way of Companies 1st (Removal of Difficulties) Order, 2014, the lacuna in drafting of section 2(76)(iv) and (v) has been rectified to now read as:

• Private company in which a director or manager OR HIS RELATIVE is a member or director

• public company in which a director or manager is a director AND holds along with his relatives, more than two per cent. of its paid-up share capital

• The apprehension about companies having common IDs being classified as a related party has been mitigated

Rule 3 of the Companies (Specification of definitions details) Rules, 2014 also defines ‘related party’

• Harmonizing sec. 2(76) with the Rules -

• Director ( excl. IDs) , KMP or relatives of holding company shall be deemed as related party


Transactions (Sec 188) – contd.

• As per Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014, company shall not enter into a contract or arrangement with related party for the following without prior approval of company by Resolution :

▫ a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into –

as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188 with criteria, as mentioned below –

sale, purchase or supply of any goods or materials directly or through appointment of agents > 10% of turnover or Rs. 100 crore whichever is lower.

selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents > 10% of net worth or Rs. 100 crore whichever is lower.

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Transactions (Sec 188) – contd.

leasing of property of any kind > 10% of the net worth or 10% of the turnover or Rs. 100 crore whichever is lower.

availing or rendering of any services directly or through appointment of agents > 10% of the turnover or Rs. 50 crore whichever is lower.

appointment to any place of profit in the company, its subsidiary or associate company at a monthly remuneration > Rs. 2.5 lakhs

remuneration for underwriting the subscription of any securities or derivatives thereof of the company > 1% of the net worth

The turnover or net worth referred in the above sub rules shall be on the basis of the Audited Financial Statement of the preceding financial year

Note: any transaction entered into ordinary course of business or transactions on ‘arm’s length basis’ shall not require any approval through OR.

[‘arm’s length’ transaction would mean a transaction between two related parties that is conducted without any conflict of interest]

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Transactions covered under Sec 188

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Sale, purchase or supply of any goods or materials;

The Act, 1956 included services in the above. However,

now its has been included separately covering supply as well as availing of services

Selling or otherwise disposing of, or buying,

property of any kind;

Leasing of property of any kind

Availing or rendering of any services

Appointment of any agent for purchase or sale of

goods, materials, services or property

Underwriting the subscription of any

securities or derivatives thereof, of the company

Such related party's appointment to any office

or place of profit in the company, its subsidiary company or associate

company

Sequence of approvals required u/s 188

• Contract in Ordinary Course of business and on arm’s length basis ▫ Only Audit Committee approval

Need not be prior approval. Clause 49 mandates prior approval

Audit committee u/s 177 can grant omnibus approval.

Inserted vide Companies Amendment Act, 2015 – yet to be enforced.

• Contracts in Ordinary Course of business not on Arm’s Length basis ▫ If falling within exemption limits –> Board + Audit Committee approval

needed

Need not be prior approval

▫ If NOT falling within exemption limits –> Board + Audit Committee approval + Prior approval by shareholder needed

If approval of Board or prior approval of S/H not obtained

Needs to be ratified within 3 months from date.

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Yes

Yes

Contract with Related

parties?

provisions

of Section

188 NA

No

No

Approval by Board Resolution only

Does it qualify under Specified

transaction?*

•NA – Not Applicable

•Specified transaction under 1st proviso to Section 188(1) read with Rule 15

(a) as contracts or arrangements w.r.t. sec.188 (1) with criterias (i) to (iv) (refer rule)

(b) relates to appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration

exceeding 2.5 lakh rupees

(c) ) is for a remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of net worth

Yes

Approval by Board Resolution and

Prior approval by Resolution

Audit Committee Approval

(need not be prior approval) Yes

In ordinary course of

business on arms’ length

basis?

No

No

Voidable at

the option of

Board

Whether Consent

obtained. OR ratified

within 3 months?

Criminal liability of

director/employee +

Disqualification

Yes

If authorised by any

director/ if with a

related party to a

director

Indemnification by

director/employee

No

No

Valid Contract

Interested director?

Whether Disclosed

interest? & Did

not participate?

Interested director

provisions NA

Yes

No

Voidable at the

option of

company

Criminal

liability of

director Yes

No

No

provisions of

Section 188 NA

Does the RPT fall under Sec 188 (1) (a) to (g)

Yes No

Yes

Related Party – Illustrations -1/2

KMP in A

KMP in B

A & B are Related Party (only if KMP

of A is a MD/WTD of B or vice versa)

KMP in A & Director in B

If KMP is MD/WTD/Manager

in A

A & B are related Party

If KMP is CEO (who is not a

director) ? CS/CFO

A & B are not related party

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Related Party – Illustrations- 2/2

SMP in A

SMP in B

A & B are not Related Party

SMP in A

Director in B

A & B are not Related Party

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As per the notified Rules, SMPs are anyway out of the purview of related party

The relation between Sec. 188 and

Sec. 164

• Thus, a director can compound his violation u/s 188 and

not end up getting convicted at all.

▫ So, the director may never attract the provisions of s. 164(1)(g) of Act, 2013

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Section 164(1)(g) of Act, 2013 which pertains to “disqualification of directors” reads as follows:

he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years

S. 188 on the other hand prescribes punishment for violation by way of imprisonment or fine

Section 441(6) of Act, 2013 allows compounding of offences punishable with imprisonment or with fine or with both

Loans to directors and related

entities

Loans to directors etc. [Sec. 185] – 1/2

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A company shall not give loan (including book debt), provide security,

guarantee to any director or other person in whom he is interested

● Directly or indirectly

● Exemption to :

- Loan to MD/WTD as part conditions of service to all employees and pursuant to a scheme approved by an SR

- In the ordinary course of business where interest charged not less than RBI Bank rate i.e. by a loan/banking company

● “any other person in whom the director is interested” has been defined (next slide)

● No CG approval required anymore

●Rules & Sections state loans/guarantees/security provided to wholly owned subsidiaries has been exempted

Guarantees/security for loan availed from bank or FI by any other subsidiary also exempted

Fine for contravention

● Company -- Rs. 5 lakh to Rs. 25 lakhs, and

● the director or the other person to whom any loan is advanced or guarantee or security is given or provided shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than Rs. 5 lakhs but which may extend to Rs. 25 lakhs, or with both

Loans to directors (Sec. 185) – 2/2 • “Any other person in whom director is interested” shall

mean: ▫ any director of the lending company, or of a company which

is its holding company or any partner or relative of any such director;

▫ any firm in which any such director or relative is a partner; ▫ any private company of which any such director is a

director or member; ▫ any body corporate at a general meeting of which not less

than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

▫ any 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.

236

Exemption under Section 185 • Not applicable to Government companies

▫ in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the Company, or as the case may be, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section

• Not applicable to Private Companies- ▫ which have borrowings from banks or financial institutions or

any bodies corporate not more than twice of their paid up share capital or Rs. 50 crore, whichever is lower; and

▫ in whose share capital no other body corporate has invested any money; and

▫ such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section

237

Scope of Sec. 185

Restricts giving of loans, guarantee provided in connection with the loan

Also includes book debt (sec. 296 of Act, 1956 has been subsumed into sec. 185 of Act, 2013)

Section enforced w.e.f 12.09.2013

Few exemptions as under S. 295 has been retained

238

Sec. 185 – compared with Sec. 295

The contents of s. 185 are similar to section 295

Disparity between the two sections is that section 185 does not exempt private companies. It however, exempts loans provided in ordinary course of business, loans to MD or WTD as a part of condition of service

Further, the proviso brings out following segregation to

exemption allowed to subsidiaries -

* Loans/Guarantees/Security provided to wholly owned

subsidiaries has been exempted

* Guarantees/security for loan availed from bank or FI by any

other subsidiary also exempted

(Provided such loans should be utilized in the principal business

activities of the subsidiary)

S. 186 only lays down the amount of loan/guarantee that can be provided. It is not a conflict of interest provision. So, s. 185 and 186 can be applicable to a particular case even if s. 185 starts with “save as otherwise provided in this Act”

239

Some clarifications

• As regards Guarantees/ securities

▫ If given in respect of Wholly Owned Subsidiary (WOS)

Fully exempted

▫ If given in respect of partly owned subsidiary for loans availed from Banks/FIs

Exempt from 1st April, 2014 but not from 12th Sept, 2013 to 31st March, 2014

▫ If given to persons other than Banks/FIs

Not exempted

240

Some clarifications

• As regards Loans

▫ If given in respect of WOS

Fully exempted

Exempt from 1st April, 2014 but not from 12th Sept, 2013 to 31st March, 2014

▫ If given to others - which includes partly owned subsidiaries

Not exempted

241

Sec. 185 – a few thinkers -1/4

What is meant by “ordinary course of business” in proviso to S. 185(1)

• The phrase does not mean ‘principal business’ , ‘main objects’

• Also, does not mean what is ‘extra-ordinary’ in the ordinary course of business. What is extra-ordinary is classified under the head “extra-ordinary” items in the balance sheet.

• Any business which is carried on with regularity and frequency can be taken to be ‘ordinary course of business’

• If say any manufacturing company has a separate treasury department dedicated to giving loans to directors, if such loans are forwarded only for financial accommodation of directors and not as a separate line of business, then not covered.

Are deposits covered?

• The section does not make any separate distinction as such.

• Going by the case laws in this case, loans are different than deposits

• The line of difference is thin and circumstantial

• Thus, deposits are not covered by the section

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Are advances covered?

• Advances are money advances against some due which is to be become due at a later period.

• It is a pre-payment against goods or services

• So, advances are not covered.

Does the section apply to book debts?

• Section is applicable only if loan or ‘loan in substance is advance.

• This intent was also discussed in point 12.65 of the Standing Committee’s on Finance’s report on Companies Bill, 2009

• S. 296 of Act, 1956 made reference to book debts

• If a book debt is prolonged beyond the usual credit period, so as to allow more time to a debtor, such a debt may also amount to a loan.

243


If A is WOS of B, will S. 185 be applicable?

The relevant Rules stating exemptions were notified from 01.04.2014; how will the transactions entered during 12.09.12 to 01.04.14 be dealt with??

In case of holding-subsidiary relationship, can “accustomed to act”

be assumed?

No. This being not defined is purely circumstantial and upto the person alleging the same to prove

If it can be proved that instructions were given consistently and the board of the subsidiary applied such instructions without analysing the rationale, then “accustomed to act” can be established

244


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If loan is extended to private company in which relative of a director is director, will S. 185 be applicable?

• No. Section will be attracted if director is director or member in the private company

If the director exercises more than 25% of total voting power in LLP and loan is extended to it, will S. 185 be applicable?

• Yes, by virtue of explanation (d) to S. 185(1).

• Since, the explanation envisages “body corporate”, company incorporated outside India will also be covered

Is the section applicable to WOS?

• Before the final rules were issued, one would say yes at the first blush looking at explanations (d) and (e).

• Rules anyhow have put such speculations to rest.

Speak to Us Vinod Kothari & Company

Kolkata Office: 1012 Krishna

224 AJC Bose Road

Kolkata – 700017

Ph: 91-33-22817715/ 1276/ 3742

Mumbai office: 601C, Neelkanth,

98, Marine Drive,

Mumbai-400002

Phone: 022-22817427

E-Mail to: [email protected]; [email protected]

Our Websites: www.vinodkothari.com;

www.india-financing.com

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