Companies Act 2013

1. Companies Act 2013 CA K Raghu The Institute of Chartered Accountants of India

2. Introduction The Companies Act 2013 got assent of the President of the country on 29th August, 2013. 1 The Act comprises of 29 chapters, 470 Sections with 7 Schedules as against 658 sections and 14 Schedules in the Companies Act, 1956 2 A total of 283 sections have been notified as on date 3

3. Issues in the Companies Act 2013 concerning the profession  Rotation of Auditors (Section 139)  Fraud Reporting (Section 143 (12))  Cap on number of Audits (Section 141 (3) (g))  Reporting on Internal Financial Control (Section 143(3) (i))  Harsh Penalties (Section 147)  Prohibited Services (Section 144)  Definition of Relative in the context of Auditor and Independent Director  Inter Company Loans (Section 185 and 186)

4. Rotation of Auditors (Section 139) Issue  Rotation of Auditors was made mandatory for all class of companies excluding one-person companies and small companies.

5. Rotation of Auditors- ICAI Suggestions  Rotation shall be prospective and not retrospective. The Rotation shall be made applicable in staggered manner. The criteria for applicability shall be: a) For Listed Companies only to Sensex and Nifty companies   b) Unlisted Companies whose: • Net worth is greater than Rs 1000 crores or • Borrowings from public and financial institutions are greater than Rs. 500 crores.

6. Rotation of auditors- What is made applicable Rotation of Auditors is made applicable to the following classes of companies excluding one person companies and small companies:- (a) all unlisted public companies having paid up share capital of rupees ten crore or more; (b) all private limited companies having paid up share capital of rupees twenty crore or more; (c) 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.

7. Fraud Reporting (Section 143 (12)) • Issue:  The definition of fraud as provided in explanation to the proviso in Section 447 has been used in very generic sense.  The pith and substance of the fraud reporting is the element of ‘materiality’ which has been completely overlooked. Any fraud reporting should be viewed from the element of materiality, otherwise, for all stakeholders it will be immaterial.  The section casts responsibility only on the auditor by way of reporting; it does not cast any responsibility on the management.  There is a difference between audit and investigation.  Fraud has three dimensions: (1) fraud committed by the management and (2) fraud committed by the employees/officers on the management and (3) fraud committed by the third party on the management. Each element has its own dimensions, verification, investigation, and the section talks the generality of fraud and not so of specific nature which should be material and vital. Otherwise, reporting on fraud will lose its shine and sheen.  While fraud committed by the management may fall within the reporting requirements, fraud committed by the third party will be outside the scope, ambit and responsibility of the auditor.

8. Fraud Reporting- ICAI Suggestions Section 143 (12), shall be kept in abeyance. This Section should be made applicable for the audit of the financial year 2014-2015 onwards.  Audit and Investigation should not be mixed together. If there is scope for further investigation, special audit can be ordered for.  Since Standards on Auditing have been made mandatory, there is in-built mechanism to take care and reporting thereof fraud under respective statement of auditing standards. Fraud Reporting shall be in line with Standards on Auditing issued by ICAI.  Responsibility on reporting on fraud should first be cast on the management and accountability can be laid on the auditor thereafter.  The concept of materiality as mentioned in the auditing standards and some threshold limit (companies having paid up capital of or above Rs. 1 crore or fraud involving 10% of the turnover or fraud which are repetitive in nature) should be the criteria for reporting on fraud.

9. Fraud Reporting- What is made applicable • The concept of materiality and threshold for reporting by the auditors has been brought under the ambit of the Act. Now, the auditor would be required to report fraud above mandated threshold to the Government and below the threshold, fraud should be reported to Audit Committee/ Board. • Further, the amendment also provides for the companies whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, the Board shall disclose the details about such frauds in the Director's responsibility statement.

10. Cap on Number of Audits (Section 141 (3) (g)) Issue It may be noted that under the Companies Act, 1956, an auditor could audit a total of 20 companies which excluded private limited companies. Since the Companies Act, 2013 has introduced new type of companies such as One Person Company, Small Company and Dormant Company, and by implication, the ceiling of 20 companies includes all types of companies in computation of the ceiling on audit assignment by an auditor or partner of a firm.  The requirement of section 141 (3) (g) by further reducing the limit of audit from 30 to 20 companies will only give rise to further problems to the management of companies in the appointment of new auditor(s).

11. Cap on Number of Audits- ICAI Suggestions  It was suggested that, until the section itself is amended, the cap on ceiling on audit assignment (i.e. 20) as stated in the section can be retained, the exclusion of certain companies from the said limit of 20 companies may be as prescribed by the Institute of Chartered Accountants of India.

12. Cap on Number of Audits- What is made applicable With the exemptions provided to the private companies u/s 462 of the Act, the cap of 20 excludes one person companies, dormant companies, small companies, and private companies having paid-up share capital less than one hundred crore rupees.

13. Reporting on Internal Financial Control(Section 143 (3) (i)) Issue While adequacy of internal financial control system can be reported by the auditor but it would be difficult for the auditor to report on the operating effectiveness of such controls.

14. Reporting on Internal Financial Control (Section 143 (3) (i))- ICAI Representation The reporting should be limited to listed companies. ICAI will bring out a Guidance Note on reporting of Internal Financial Control which may be made applicable to comply with the reporting requirements. The reporting requirement should be restricted to the preparation and presentation of the financial statements.

15. Reporting on Internal Financial Control (Section 143 (3) (i))- What is made applicable Reporting on Internal Financial Control u/s 143 (3) (i) of the Companies Act, 2013 has been deferred for one year i.e., upto 31.03.2015. The auditor may voluntarily report for the year from 01.04.2014 to 31.03.2015.

16. Inter Company Loans (Section 185 and 186) Issues:  The new Act completely prohibits loans between interested companies in case of private companies. Private companies may be excluded from this requirement of inter company lending.

17. Inter Company Loans (Section 185 and 186)- ICAI Representation Private companies may be excluded from this requirement of prohibition of inter-company lending. Holding company’s loans to subsidiary has been permitted under the old Act also and needs to be reconsidered.

18. Inter Company Loans (Section 185 and 186)- What was made applicable Amendments for Exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries has been have been passed in the Companies (Amendment) Act, 2015. Also, some exemptions have been provided in the Notification for giving Exemptions to private companies under Section 462

19. Some of the Exemptions provided to private companies on 5th June, 2015 • Now, a big relief to the private companies which will help in the capital formation is that the companies can accept deposits from members which is not exceeding 100 % of aggregate of the paid up share capital and free reserves. • Further, Loan to Directors etc., may be provided by a private company in whose share capital another body corporate has invested any money and if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower, and such a company has no default in repayment of such borrowing subsisting at the time of making transactions under this section.

20. Pending Issues Harsh Penalties (Section 147 and 447)- The penalties provided are very harsh especially those relating liabilities on auditors. The penalty should be commensurate with the responsibilities and consequent liabilities. We are continuously representing for review of penalties.  Prohibited Services (Section 144) Type of Management Services to be done by a CA should be left to ICAI  Definition of Relative in context of auditor and Independent Director (Section 2 (77)) Definition is very wide

21. Constitution of Companies Law Committee • Taking into account further difficulties and practical issues the Ministry has constituted Companies Law Committee to make recommendations to the Government on issues arising from the implementation of the Companies Act 2013

22. Thank You !