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Companies Act 2013 Understanding New Provisions. Dhinal Shah Chartered Accountant. Agenda. Key changes relating to financial statements Key changes relating to audit Additional liabilities and action against the auditor Enhanced corporate governance measures

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companies act 2013 understanding new provisions

Companies Act 2013Understanding New Provisions

Dhinal Shah

Chartered Accountant

  • Key changes relating to financial statements
  • Key changes relating to audit
  • Additional liabilities and action against the auditor
  • Enhanced corporate governance measures
  • Key changes relating to Directors R
  • Related party transactions
  • Acceptance and repayment of deposits
  • Inter-corporate and other investments and loans
  • Mergers and amalgamations
  • Other key changes
financial year
Financial year
  • All companies to follow uniform financial year, i.e., 1 April to 31 March
  • Transitional period
    • Existing companies required to align its financial year within 2 years of commencement of new law
  • Exception/ exemption
    • Holding/ subsidiary of a company incorporated outside India and required to follow different financial year for consolidation of financial statements outside India
    • Tribunal’s approval required
financial statement
Financial statement

No AS deals with preparation of SOCIE – Guidance needs to be provided

Format for cash flow statement or SOCIE not prescribed

Remaining format of Financial Statements (Balance Sheet, Profit and Loss, Notes) to remain exactly the same as Revised Schedule VI

new depreciation schedule overview
New depreciation schedule: Overview
  • Prescribes useful lives of various assets instead of SLM/ WDV rates
  • Rates for tangible assets only : no prescription for Intangible Assets
    • Applicable Accounting Standards to govern the same
  • Three classes of companies
    • Class I: Prescribed class of companies which comply with prescribed AS
      • Can adopt different useful lives/residual values if an appropriate justification is given for the same
    • Class II: Companies regulated by other law, e.g., electricity companies
      • Depreciation rate for assets as prescribed by regulatory body to prevail
    • Class III: Other companies
      • Assets cannot have useful life longer than that prescribed
  • No separate rate for double/ triple shift; depreciation to be increased by
      • 50% for the period of double shift use
      • @100% for the period triple shift use
new depreciation schedule component accounting
New depreciation schedule: Component accounting
  • Depreciation is defined as systematic allocation of depreciable amount of an asset over its useful life.
  • Depreciable amount is defined as cost of the asset or other amount substituted for cost, less its residual value
  • Useful life is:
    • Period over which an asset is expected to be available for use, or
    • Number of production/ similar units expected to be obtained from its use by the entity
  • Useful life of part of an asset to be determined separately
      • If its cost is significant vis-à-vis total cost of the asset
      • Its useful life is different from the remaining parts

Thus, each such significant part must be depreciated over its respective useful life.

  • Transitional provisions
    • Carrying amount to be depreciated over the remaining useful life as per Schedule II
    • If remaining useful life is nil, depreciable amount to be adjusted with retained earnings
new depreciation schedule key impacts
New depreciation schedule: key impacts
  • Companies falling in the first category may choose to adopt higher/ lower useful life if the same can be justified
    • Depreciation across companies may vary even within the same industry
  • For revalued assets, full depreciation charge on the revalued asset may impact profit and loss
    • Currently, depreciation on revalued amount can be recouped from the revaluation reserve
  • Companies may follow any suitable method of depreciation
    • It may be possible to follow the unit of production method which is currently specifically prohibited
  • Principles of component accounting introduced
    • AS-10 and AS-6 may need to be revised accordingly
control vs subsidiary
Control vs. Subsidiary
  • “Control” is defined to include:

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

  • “Subsidiary” is defined to mean a company in which the holding company:
    • Controls the composition of the Board of Directors, or :
    • 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

One may have to look beyond board control and share ownership to decide “control”.

But it is not clear whether a company being controlled by another by virtue of shareholder agreement, voter agreement or other means (but with less than 50% total share capital) will always become a “Subsidiary”.

consolidated financial statements cfs
Consolidated financial statements (CFS)
  • Preparation of CFS mandatory for all companies having subsidiaries
    • Currently, unlisted companies are not required to prepare CFS
  • All requirements pertaining to preparation, adoption and audit will also apply to CFS
  • For preparation of CFS, subsidiary includes associate and joint ventures
    • Companies without any subsidiary but having associates and/or joint ventures will need to prepare CFS unless clarified otherwise
  • Central Government may provide for the manner of consolidation of accounts
consolidated financial statements cfs1
Consolidated financial statements (CFS)
  • Statutory format for preparing standalone financial statements mandated for CFS as well
  • Following additional disclosure required in CFS:
    • Amount and percentage of net assets and profit/ loss of each subsidiary/ associate and JV vis-à-vis consolidated net assets and profit
      • Indicating Indian and foreign subsidiary, associate and JV separately
  • Statement containing prescribed salient features of financials statements of subsidiaries, associates and Joint Ventures to be attached
national financial reporting authority nfra
National Financial Reporting Authority (NFRA)
  • Central Government to setup a central regulatory authority for various accounting and auditing matters under the Act
    • Chairperson/ full-time members to be independent of audit/consultancy firms during appointment and upto 2 years thereafter
    • To be headed by an eminent expert appointed by Central Government
  • Role/ responsibilities:
    • Make recommendations to the Central Government on formulation of accounting and auditing standards and policies
    • Monitor and enforce compliance with accounting and auditing standards
    • Oversee the service quality of professions associated with ensuring compliance with such standards and suggest measures for improvement
    • Provide consultation to the Central Government on ordering additional matters to be included in the Auditor’s Report
re opening of accounts
Re-opening of accounts

Under Order of Court/Tribunal

  • Re-opening of accounts may be ordered by Court/Tribunal only on application by the Central Government, Income-Tax Authorities, SEBI, Other Regulatory Body or Authority and where :
    • Accounts were prepared in a fraudulent manner
    • Company’s affairs were mismanaged casting a doubt on reliability of financial statements
  • Representations of the aforesaid body/authority concerned need to be considered before passing such order

Voluntary Revision

  • Voluntary revision of financial statements/ board report permitted for any of the 3 preceding financial years
    • Detailed reasons required to be disclosed in the board report
    • Company needs to obtain specific approval from Tribunal for restatement
    • Representations of the Central Government and Income-Tax Authorities need to be considered by Tribunal before passing such order
    • Central Government to make rules including those relating to auditor’s functions for revisions
utilization of securities premium
Utilization of securities premium

The above restrictions for prescribed class of companies will bring their accounting treatment in line with AS.

dividend declaration
Dividend declaration
  • Transfer to Reserve Rules relaxed
  • Currently, dividends can be declared only after certain specified percentage of profits are transferred to Reserves
  • New Bill allows companies to decide the percentage to be transferred
  • New rules to be framed for declaring dividends out of accumulated profits earned in earlier years and transferred to reserves
  • Restrictions imposed on Interim Dividend

Interim dividend can be declared :

    • From Surplus in the Profit & Loss Account as well as Profits for the current financial year
    • In case of YTD loss at quarter end, rate of dividend cannot exceed last 3 years’ average dividend
  • No dividend can be declared on failure to comply with provisions relating to acceptance and repayment of deposits under the new Bill
bonus issue
Bonus issue
  • Bonus Shares can be issued only from free reserves, securities premium and capital redemption reserve
    • Bonus Shares cannot be issued by capitalizing revaluation reserve
    • Currently allowed for unlisted companies based on the Supreme Court judgment
  • Pre-conditions introduced for bonus issue:
    • Articles of Association authorise bonus issue
    • Authorisation through General Meeting
    • No default in payment of interest or principal on fixed deposits or debt securities issued
    • No default in payment of statutory dues of employees
    • Any partly paid shares outstanding on the date of allotment are made fully paid-up
    • Any additional conditions prescribed
qualification and remuneration
Qualification and remuneration
  • Who can be appointed
    • Only Chartered Accountant is eligible for appointment as auditor
    • A firm with majority of partners practising in India may be appointed as auditor
      • The existing law requires all partners to be practisingin India
    • Where limited liability partnership is appointed, only partners who are chartered accountants authorized to act and sign as auditors
  • Auditor remuneration
    • To be fixed in general meeting or in a manner determined therein
    • In addition to audit fee, it will also include :
      • out of pocket expenses
      • cost of facilities extended to him
independence issues
Independence issues
  • Auditors’ independence requirements significantly widened
    • May result in ineligibility in a large number of cases
  • A person is not eligible for appointment as auditor if the person or, his relative or partner :
    • Holds any security or interest in the company, its subsidiary, holding, associate or fellow subsidiary
      • Relative may hold security/interest not exceeding a prescribed amount
    • Is indebted to the company or its subsidiary, holding, associate or fellow subsidiary in excess of the prescribed amount
    • Has given guarantee or provided any security in connection with the indebtedness of any third person to the company or its subsidiary, holding, associate or fellow subsidiary in excess of the prescribed amount
  • “Relative” is defined to include spouse, member of HUF or as may be prescribed
    • Very restrictive since does not exclude financially independent relatives
independence issues1
Independence issues
  • Persons not eligible for appointment as auditor also include :
    • Person or firm having business relationship of prescribed nature with the company or its subsidiary, holding, associate, fellow subsidiary or subsidiary of associate company whether directly or indirectly
      • Could lead to practical difficulties unless arm’s length business relationship is permitted
    • Person whose relative is a Director or employed as Key Managerial Personnel in the company
      • Apparently, this restriction will not apply to an audit firm
    • Person who is in full-time employment elsewhere
independence issues2
Independence issues
  • Persons not eligible for appointment as auditor also include :
    • Person or partner of a firm holding appointment as auditor of more than 20 companies at the date of appointment or re-appointment
      • Restriction applies to private companies as well
      • More clarity required : If a partner is holding appointment as auditor in his individual capacity of more than 20 companies whether the restriction will apply to his audit firm?
    • Person convicted by a court of an offence involving fraud and 10 years have not elapsed from the date of conviction
      • Ineligibility applies even if court order is subjected to appeal in a higher court
    • Person whose subsidiary or associate or any other form of entity is engaged on the date of appointment in providing services that an auditor is prohibited to render
independence issues auditor not to render certain services
Independence issues – Auditor not to render certain services
  • Auditor cannot render following services to the auditee company, either directly or indirectly:

Accounting/ Book keeping; Internal Audit; Investment Banking Services; Design & Implementation of Financial Information System; Outsourced Financial Services; Actuarial Services; Investment Advisory Services; Management Services; Any other prescribed services

    • Many of these terms are not well-defined and may include services which auditors could provide without compromising their independence
    • Restrictions apply to auditee’sholding and subsidiary companies as well
    • “directly or indirectly” is defined to include :

Firm or any of its partners, parent, subsidiary, associate or any other entity in which the firm/its partner(s) has significant influence or control or whose name/trade mark/brand is used by the firm/its partner(s)

  • Transitional provision
    • Compliance to be ensured before closure of first financial year after commencement of the new law
removal resignation of auditors
Removal/ resignation of auditors
  • Auditor appointed may be removed from his office before expiry of his term:
    • By a special resolution of the company, and
    • After obtaining prior approval of the Central Government
  • An auditor who has resigned from the company:
    • To file a statement indicating reasons and other facts with regard to his resignation within 30 days
removal resignation of auditors1
Removal/ resignation of auditors
  • Tribunal may direct change of auditors, if it believes that :
    • Auditor has acted in a fraudulent manner, or
    • Abetted or colluded in any fraud by/in relation to the company, or its directors or officers
    • Tribunal may pass the order suo-moto, or on application of Central Government or any person concerned
    • Auditor against whom an order is passed by Tribunal
      • Cannot be appointed auditor of any company for 5 years from order date
      • May be imprisoned for upto 10 years and fined upto 3 times the amount involved
  • It is clarified that where the auditor is a firm, liability will be of the firm as well as that of every erring partner
tenure and rotation of auditors
Tenure and rotation of auditors
  • 5 years tenure introduced instead of current requirement of annual appointment at every AGM
    • Audit Committee recommendations to be considered for all auditor appointments
  • Listed companies/ prescribed class of companies cannot appoint
    • An individual as auditor for more than 1 term of 5 consecutive years
    • An audit firm as auditor for more than 2 terms of 5 consecutive years
  • Ratification of appointment by members required at every AGM
  • After completion of the above term :
    • Cooling-off period of 5 years
    • Newly appointed audit firm and the retiring firm cannot have any common partner
  • Existing companies to comply with the above requirement within 3 years of commencement of the new law
tenure and rotation of auditors other aspects
Tenure and rotation of auditors – other aspects
  • Where no auditor is appointed or re-appointed at any AGM, the existing auditor will continue to be the auditor
    • Currently, non-appointment of auditor at AGM results in vacancy which the Central Government is required to fill
  • Members of the company are empowered to require
    • Auditing firm to rotate the auditing partner and his team at such intervals as resolved by them, OR
    • Joint audit
  • Central Government may prescribe the manner in which listed/ prescribed class of companies will rotate their auditors
additional reporting responsibilities
Additional reporting responsibilities
  • The audit report will state :
  • Details of information and explanations necessary for the audit which he has not been able to obtain and their effect on financial statements
    • Apparently, every such information/explanation need not be reported where its necessity for the audit is satisfied through alternative evidence or audit procedures
  • Any observations or comments on financial transactions or matters which have any adverse effect on the functioning of the company
    • Matters adversely affecting the company’s functioning have not been restricted to only those impacting financial statements
  • Any qualification, reservation or adverse remark relating to maintenance of accounts and on matters connected therewith
      • Scope of reporting on “matters connected” with maintenance of accounts is too broad and has not been defined
additional reporting responsibilities1
Additional reporting responsibilities
  • The audit report to also include :
  • Whether the company has adequate internal financial controls systems in place and the operating effectiveness of such controls
      • Currently, reporting over internal control is limited to purchase of inventory and fixed assets and sale of goods and services
      • New law requires reporting over the entire financial controls system
      • Reporting on operating effectiveness of controls required irrespective of their impact on financial statements or the presence of mitigating factors
    • Any other matter as prescribed
      • CARO may be replaced by a new Order
  • Auditor to report to Central Government immediately
    • If during the course of audit has any reason to believe that fraud is committed against the company
      • No exemption with regard to materiality of amount involved
      • Penal consequences of uptoRs. 25 lacs on failure to report
additional responsibilities for cfs
Additional responsibilities for CFS
  • CFS Audit Report to include:
    • All newly introduced reporting requirements, as well as
    • All matters currently reported upon u/s 227(3) of Companies Act
  • Records of subsidiaries
    • Auditor of holding company to have access to records of all of its subsidiaries to the extent required for consolidation
    • No clarification for subsidiaries where the auditor is different and his work is relied upon
    • No clarification for overseas subsidiaries not bound by Indian laws
      • The above may indirectly result in greater obligation on the parent company’s auditor
other duties
Other duties
  • Attendance at AGM made mandatory for the auditor
    • Absence permitted only if exempted by the company
    • Attendance permitted through authorized representative qualified to be an auditor
    • Right of being heard on matters concerning him as auditor
on contravention of law
On contravention of law
  • Auditor may be subjected to all of the following liabilities on contravention of any related provision of the new law:
    • Fine upto Rs. 5 lacs
    • In case of willful default with an intention to deceive the company or its shareholders, creditors, tax authorities :
      • Imprisonment upto 1 year and fine upto Rs. 25 lacs
    • Refund of remuneration received
    • Payment of damages to the company, statutory body/authorities or any other person for loss arising from incorrect or misleading statement in audit report
    • Where abetment or collusion in any fraud is proved, liability shall be of
      • the audit firm, as well as
      • every erring partner
under class action suit
Under class action suit
  • Members or depositors may seek damages or suitable action from or against the auditor in connection with any of the following :
    • Any improper or misleading statement in audit report
    • Any fraudulent act or conduct
    • Any unlawful or wrongful act or conduct
      • No distinction has been made between willful or grossly negligent acts and errors caused unintentionally
  • Tribunal’s order would be binding on the company, all its members, depositors, auditor or any other person associated with the company
  • Where the auditor is a firm, liability shall be that of
    • the audit firm, as well as
    • every erring partner
prosecution by nfra
Prosecution by NFRA
  • NFRA may investigate, on its own or on reference by Central Government, matters of professional or other misconduct by any member/firm of Chartered Accountants
      • ICAI cannot initiate or continue proceedings in such cases
  • If proven guilty, NFRA order may impose :
    • In case of individual : Minimum penalty of Rs. 1 lac extending upto 5 times the fee received
    • In case of firm : Minimum penalty of Rs. 10 lacs extending upto 10 times the fee received
    • On individual or firm : Restriction on practice for upto 10 years
  • Appellate Authority to be setup by Central Government for hearing appeals arising out of orders of NFRA
limited liability partnership llp
Limited Liability Partnership (LLP)
  • The Chartered Accountants Act has been amended to allow audit firms to function as LLPs
  • Liability of a partner in an LLP is generally limited to agreed contribution and only to his own wrongful acts or omissions
  • Under the new law, the audit firm is often held responsible jointly and severally with the erring partners
  • Based on such liability provisions, benefits of the LLP form of partnership may not be available to audit professionals
corporate social responsibility csr
Corporate social responsibility (CSR)
  • Constitution of CSR committee mandatory for company having
    • Net worth of `500 crore or more
    • Turnover of `1,000 crore or more
    • Net profit of `5 crore or more
  • To comprise of at least 3 directors with one independent director
  • Role of CSR committee
    • To formulate, recommend and monitor CSR policy, including activities to be undertaken
    • To recommend amount to be spent
  • To spend minimum 2% of its average net profit during 3 immediately preceding financial years on CSR activities
    • Local areas where company operates to be preferred for expenditure
    • Explanation required in Board Report if such amount is not spent
enhanced role of audit committee and board
Enhanced role of Audit Committee and Board
  • Audit Committee entrusted with additional responsibilities:
    • Review and monitoring of auditor independence, performance and effectiveness of the audit process
    • Approval or any subsequent modification of related party transactions
    • Scrutiny of inter-corporate loans and investments
    • Valuation of undertaking or assets of the company, if required
    • Evaluation of internal financial controls and risk management systems
    • Monitoring the end use of funds raised through public offers and related matters
  • Stakeholders Relationship Committee (SRC)
    • Companies having more than 1000 security holders of any type (including deposit-holders) to setup SRC to resolve their grievances
additional disclosures
Additional Disclosures
  • In the Board Report, on :
    • Development and implementation of risk management policy
    • Particulars of all contracts or arrangements with related parties (as defined) with justification for entering into such contract/arrangement
    • For listed and prescribed companies, formal evaluation by the Board of its own performance and that of its committees and individual directors
  • In the Director’s Responsibility Statement of Board Report, on:
    • Proper systems were devised by directors to ensure compliance with all applicable laws and were adequate and operating effectively
    • For listed companies, declaration that Internal Financial Controls were laid down by the directors and are adequate and operating effectively
  • In Company Website and Board Report, on CSR policy and initiatives
secretarial and cost audit
Secretarial and cost audit

Secretarial compliance

  • All companies to comply with secretarial standards issued by ICSI for conducting board and general meetings
  • Secretarial audit mandatory for listed and other specified companies
  • Board to explain any qualification, adverse remark or disclaimer in the secretarial audit report

Cost audit

  • Cost auditor to comply with cost auditing standards issued by ICWAI
internal audit
Internal audit
  • Compulsory Internal Audit introduced for books of account of certain companies as may be prescribed :
    • Internal auditor may be a CA, ICWA or other professional as decided by the Board
    • Central Government may make rules prescribing :
      • Manner of conducting internal audit
      • Reporting intervals
serious fraud investigation office sfio
Serious Fraud Investigation Office (SFIO)
  • Central Government (CG) to establish SFIO to investigate frauds relating to a company as assigned to it by CG order
  • No government investigating agency can investigate or proceed with cases assigned to SFIO
  • SFIO empowered to arrest offenders in certain cases who may be released on bail only upon fulfillment of specified conditions
  • SFIO to submit its investigation report to CG
  • SFIO to initiate prosecution against the company, its employees or any other person connected with the company’s affairs, directly or indirectly, as directed by CG
  • SFIO report for framing charges would be treated as a police report under Code of Criminal Procedure, 1973
independent directors
Independent directors
  • Listed companies to have minimum 1/3rd independent directors
    • Government may prescribe minimum number for other public companies
  • May be appointed from databank maintained by a central agency
  • Independent director qualifications vis-à-vis Clause 49 of Listing Agreement
    • Key additional requirements in the Bill include
      • Person of integrity and possesses relevant expertise/ experience
      • Not a chief executive of an NGO receiving atleast 25% of its fund from company, its promoters/ directors, holding, subsidiary or associate
      • Transactions/ position of relatives to be considered in deciding independence
      • Government may prescribe additional qualifications
    • Nominee director cannot be regarded as independent director
      • Currently, director nominated by institution which has invested in/lent to the company is deemed to be an independent director as per Clause 49
independent directors1
Independent directors
  • Maximum tenure restricted to 5 years subject to a maximum of 2 such terms and with cooling off period introduced for 3 years thereafter
    • Clause 49 prescribes a maximum aggregate tenure of 9 years
  • Independent directors not to get ESOP
    • Conflicting with Clause 49 which allows granting of stock options
    • May receive fees, reimbursement of expense and profit linked commission subject to specified limits
  • Independent directors to abide by a detailed and prescribed code of conduct
    • Includes holding of at least one annual meeting (without presence of non-independent directors and management), for evaluating:
      • Performance of board
      • Performance of chairperson of the company
      • Flow of information between management and Board
other key changes
Other key changes
  • Every company to have at least one woman and one resident director
    • Transition period of 1 year for compliance
  • Maximum number of directors in public co. increased from 12 to 15
    • More directors may be appointed through special resolution without Central Government approval
  • Maximum number of directorships of an individual in a public company reduced from 15 to 10
    • Limit includes a private co. which is holding or subsidiary of a public co.
  • Mandatory to appoint following Key Managerial Personnel (KMP) for prescribed class of companies : MD/CEO/WTD, CS and CFO
  • Independent/non-executive directors (excluding promoter / KMP) are liable only for acts of commission or omission which occur
    • with their knowledge, attributable to board processes, and
    • with their consent, connivance or where not acted diligently
other key changes1
Other key changes
  • Directors duties specifically prescribed including to act in good faith and in best interest of the company
  • 1/3 of total number of directors may require any resolution sought to be passed through circulation to be decided at a board meeting only
  • Video conferencing and other audio-visual means permitted for conducting board meetings
    • Central Government may prescribe matters to be addressed only at a physically convened board meeting
  • Minimum 7 days advance notice required for holding board meeting
    • Shorter notice allowed if at least one independent director attends such meeting or,
    • Decisions at such meeting are circulated to all directors and ratified by at least on independent director
  • Provisions relating to resignation of a director and manner of tendering resignation also specifically provided
related party definition
Related party definition
  • The term “Related Party” in relation to a company has been defined to mean :
    • a director or his relative
    • key managerial personnel or his relative
    • a firm, in which a director, manager or his relative is a partner
    • a private company in which a director or manager is a member or Director
    • a public company in which a director or manager is a director or holds along with his relatives, more than two per cent of its paid-up share capital
    • 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 *
    • holding, subsidiary or associate company, or subsidiary of a holding company to which it is also a subsidiary
    • any other person prescribed

* Except in professional capacity

comparative analysis
Comparative Analysis
  • Currently, sanction of the Board is required for contracts in which the following are interested :

Director, Relative of the Director, Firm in which the Director or his relative is a partner, any other Partner in such a firm , Private Company in which the Director is a member or Director

  • New Bill requires Board approval for contracts with any of the related parties
  • Currently, requirement pertains to following transactions only :
    • Sale, purchase or supply of any goods, material or services
    • Underwriting the subscription of company’s shares or debentures
  • The New Bill extends the restriction additionally to:
    • Buying or selling property of any kind
    • Leasing of property of any kind
    • Appointment of agent for purchase or sale of goods, materials, services or property
    • Such related party's appointment to any office or place of profit in the company, its subsidiary or associate company
approval exemption
  • Apart from prior consent of the Board:
  • Currently, prior approval of Central Government is required in case the paid-up capital exceeds Rs.1 crore
  • Under New Bill, prior approval of the company is required through a special resolution where company’s paid up capital or transactions exceed a prescribed amount
    • No member can vote on such special resolution if he is a related party
  • Existing law exemptsthe following transactions only:
    • Purchase/sale of goods and materials for cash at prevailing market prices
    • Purchase/sale of goods and materials or services cost of which does not exceed Rs. 5000 in any year during the contract period
    • Any transaction of banking/insurance company in such company’s ordinary course of business
  • The New Bill exempts any transaction entered in the ordinary course of business, except transactions which are not on arm’s length basis
  • No company (excluding Banking/NBFC) is permitted to accept deposits, except from its members and only if it meets the following conditions:
    • Deposit insurance is provided in the manner prescribed
    • Security is provided for due repayment of the amount of deposit with interest thereon
      • Unsecured deposits to be so quoted in any form of invitation or acceptance of deposits
    • At least 15% of deposit amount maturing in current and subsequent financial year is deposited in a separate scheduled bank account
      • Cannot be used for any purpose other than deposit repayment
      • Not clear whether any minimum balance needs to be maintained
    • Certificate of nil default in repayment of deposits and interest
      • Not clear who shall issue the certificate for this purpose
  • Other conditions:
    • Approval of members in a general meeting
    • Other prescribed rules are complied with
  • Transitional Provision
    • Companies which have accepted deposits before commencement of the new law to repay deposit and interest thereon within 1 year
  • Additional conditions to be met for accepting deposits from public:
    • Company should be a public company with minimum prescribed net worth or turnover
    • Rating by recognised credit rating agency every year
    • Creation of charge on its assets of an amount not less than the amount of secured deposits accepted
deposits draft rules
Deposits - Draft Rules
  • The word “Borrowing” has been removed from sub rule 2 compared to existing rules u/s. 58A.
  • As per draft rules exemption available for:
    • Deposit accepted from any other company
    • Share application (upto 60 days)
    • Deposit by private company from directors or shareholders (the exemption from relatives is withdrawn)
    • Advances towards goods or services upto 180 days only (except for long term projects and supply of capital goods)
    • Amount received towards secured debentures or fully convertible debentures (no clarity on OCD)
  • Public company having net worth > 100 crores or turnover > 500 crores only would be allowed to raise funds through public deposits
inter corporate and other investments and loans1
Inter-corporate and other investments and loans
  • Shareholders’ approval through special resolution will also be required for the following inter-corporate transactions beyond specified limits:
    • Investment, loan or guarantee/security given by a private company
    • Investment, loan or guarantee/security given by a holding company to its wholly owned subsidiary
    • Guarantee relating to any inter-corporate loan given in exceptional circumstances
    • Loan given to any person or guarantee/ security given in his favour
  • Exemption from the above granted to:
    • Acquisition by NBFCs, whose principal business is acquisition of securities, pertaining to investing and lending activities
inter corporate and other investments and loans2
Inter-corporate and other investments and loans
  • Other conditions for such transactions:
    • Rate of interest on any loan given by the company to any person or body corporate, beyond specified limits, cannot be lower than prevailing yield on government securities
      • Current law prohibits any loan below bank rate
    • Financial statements to disclose full particulars including purpose of investments, loans and guarantee/security provided
  • Companies now prohibited from making investments through more than 2 layers of investment companies, except for:
    • Acquisition of foreign companies having multiple layers
    • Meeting the requirements of any other law
  • No transitional provision for existing companies
accounting standards compliance
Accounting standards compliance
  • Currently, SEBI requires listed companies to obtain certificate from their Auditors on compliance with AS in a court scheme
  • There is no such requirement for an unlisted company
  • Regional directors need to ensure compliance with AS for schemes involving unlisted companies
    • No statutory responsibility on the company/ its auditors
  • New Bill requires all companies to obtain such certificate
treasury shares
Treasury shares

Current position

  • A parent may merge wholly/partially owned subsidiary with itself
  • It issues equity shares to all shareholders of subsidiary
  • For shares held by the parent itself, it allots shares to a trust
  • Trust will hold shares for the benefit of the parent
  • A perusal of FS of few companies having such shares indicate:
    • Presentation of shares held as an investment/asset in the balance sheet
    • Gain/loss on sale/impairment is recognized in profit or loss
    • Dividend income is recognized in profit or loss

Companies Bill 2012

  • Transferee companies prohibited from holding own shares issued on merger
    • Directly or through a trust on behalf of such company, or its subsidiary or associate company
    • Such shares will mandatorily have to be extinguished or cancelled
  • Buy-back through scheme of arrangement will need to comply with buy-back provisions
fast track mergers
Fast track mergers
  • Simplified procedure for amalgamation/ demerger/ reconstruction/ capital reduction introduced for:
      • Two or more small companies
      • Holding and its wholly owned subsidiary
      • Other class of companies as may be specified
    • No need for approval of Tribunal
    • Approvals required
      • Members holding 90% shares
      • Creditors representing 90% value
      • Registrar and Official liquidator
    • Central Government however has power to require Tribunal approval
debt restructurings and cross border mergers
Debt restructurings and cross border mergers
  • In corporate debt restructuring, a company needs to disclose
    • Safeguards for the protection of dissenting creditors
    • Valuation report on its shares and all its assets
    • Report by auditor that its fund requirements after restructuring will conform to liquidity test based on estimates provided by the Board
  • Cross border mergers
    • Indian companies will be permitted to merge with companies in prescribed foreign jurisdictions
      • Central government to make rules in consultation with RBI
    • Merger with other foreign companies to require prior approval of RBI and shall be subjected to provisions of other laws
      • Consideration may be either in cash or depository receipt
other key changes2
Other key changes
  • Objections to compromise/ arrangement can be made only by persons:
    • Holding 10% shares or more, or
    • Having 5% or more of total outstanding debt
  • Merger of listed company with unlisted company
    • Merged company will continue to be unlisted till it is listed
    • Exit option available to shareholders of listed company
    • Exit price will not be less than that under SEBI regulations

Capital reduction

    • Prohibited in case of arrears in repayment of deposits or interest thereon
    • Auditor to certify conformity of accounting treatment with all provisions of the law apart from accounting standards compliance
  • Private Placement of securities restricted to 50 persons in One FY (excluding QIB and ESOP) and subject to prescribed conditions
  • Preference shares may be issued for more than 20 years for infrastructure projects without any upper limit
    • Prescribed percentage to be redeemed annually at holders’ option
  • Consolidation or division of shares resulting in changes to voting percentage to require Tribunal approval
  • Provisions for further issue of shares extended to private companies
    • Shares to be mandatorily valued by a registered valuer
  • Norms introduced for prohibition of insider trading
  • Norms introduced for prohibition of forward dealing of securities
  • No shares can be issued at a discount except sweat equity
  • Alteration, at any time, of objects of a prospectus or terms of any contract mentioned therein to require:
    • Special resolution
    • Publication of notice in newspapers
    • Exit option is given to dissenting shareholders as per regulations to be prescribed by SEBI
  • Private companies can have upto 200 members
  • Public defined to include private company which is a subsidiary of a public company
  • Status of private company which is a subsidiary of a foreign company not addressed
    • Currently regarded as subsidiary of public company in certain cases
  • Postal ballot provisions to also apply to unlisted companies
  • Members of prescribed companies may vote by electronic means
  • Annual returns to additionally include:
    • Particulars of holding, subsidiary and associate companies
    • Remuneration of directors and KMPs
    • Details of FIIs and shares held by them or on their behalf
    • Matters relating to compliances and disclosures as prescribed
      • Current requirement of separate compliance certificate withdrawn
  • CS in practice to mandatorily certify annual return for:
    • Listed companies
    • Companies with prescribed paid-up capital and turnover
    • Such certificate to cover compliance with all provisions of the new law
  • Listed companies to file report on AGM proceedings
managerial remuneration
Managerial remuneration
  • For companies having adequate profits
    • Central Government approval replaced by shareholders’ approval in general meeting for paying remuneration exceeding prescribed limits
  • For companies having inadequate profits
    • Threshold for obtaining Central Government approval significantly enhanced
  • For exclusion of services rendered in professional capacity
    • Board of Directors/Nomination or Remuneration Committee’s opinion to suffice instead of Central Government’s opinion regarding qualification of director concerned
  • Listed companies to disclose every director’s remuneration ratio with respect to average employee remuneration
other changes
Other changes
  • Prescribed class of companies may issue Shelf Prospectus
    • Currently applies to PFI, Public Sector or scheduled bank only
  • Members and depositors empowered to file class action suit to:
    • Restrain company or its directors from certain actions
    • Claim damages from any person for fraudulent or wrongful act or omission or any misleading statement
    • Seek any other remedy
  • ‘Officer in default’ defined to include share transfer agents, registrars, merchant bankers to the issue; CEO and CFO
    • Directors aware of or consenting to any contravention also included
sick company
Sick company
  • Criteria of accumulated losses for determination of a sick company withdrawn under the new law
  • Any secured creditor of the company can apply to Tribunal for declaration as sick company where:
    • Secured creditors representing 50% or more of its outstanding debt have demanded repayment, and
    • Company has failed to either
      • Repay its debt within 30 days of being demanded, or
      • Secure or compound it to the satisfaction of creditors
serious fraud investigation office sfio1
Serious Fraud Investigation Office (SFIO)
  • Central Government (CG) to establish SFIO to investigate frauds relating to a company as assigned to it by CG order
  • No government investigating agency can investigate or proceed with cases assigned to SFIO
  • SFIO empowered to arrest offenders in certain cases who may be released on bail only upon fulfillment of specified conditions
  • SFIO to submit its investigation report to CG
  • SFIO to initiate prosecution against the company, its employees or any other person connected with the company’s affairs, directly or indirectly, as directed by CG
  • SFIO report for framing charges would be treated as a police report under Code of Criminal Procedure, 1973
winding up strike off
Winding up / Strike off
  • Tribunal may additionally order winding up in the following cases and if justified in its opinion:
    • Company’s affairs were conducted in a fraudulent manner
    • Persons concerned with the company’s formation or management are guilty of fraud, misfeasance or misconduct
  • Non-operational companies may attract strike-off from register of companies if:
    • Company is not carrying on operations for 2 financial years, and
    • Company has not applied for dormant status during such period