Study of newly enacted Company Act, Act, 2013
INTRODUCTION The recently enacted Companies Act 2013 (the ‘2013 Act’ is a landmar! le"islation and is li!ely to ha#e far$reachin" conse%uences on all companies operatin" in &ndia' hile a part of the 2013 Act has already )ecome effecti#e'
2 0 2 0 2 0 2 0 2 0 2 0 An attempt has )een made to reduce the content of the su)stanti#e portion of the related law in the Companies Act, 2013 as compared to the Companies Act, 1*+ (1*+ Act' &n the process, much of the aforesaid content has )een left, ‘to )e prescri)ed’, in the -ules (3.0/ which are
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Study of newly enacted Company Act, Act, 2013
yet to )e finalised and notified' notified' As of the date of this pu)lication, pu)lication, 22 sections sections and 3 -ules ( which includes recently notified rule on 03'11'201. ha#e )een notified and a few circulars ha#e )een )een issued clarifyin" clarifyin" the the applica)ility applica)ility of of these'
otification otification of -ule -ule is still continue continued d
e#en after passin" the Act in Au"ust Au"ust 2013' This important le"islation, that has )een in the ma!in" for o#er 10 years, started off as an effort in 200. )y the then "o#ernment "o#ernment to ma!e chan"es chan"es in &ndian corporate corporate law in the contet contet of the chan"in" economic and )usiness en#ironment and to ma!e &ndian corporate en#ironment more transparent, transparent, simple simple and and "lo)ally "lo)ally accepta)l accepta)le' e'
Since then, then, as this this le"islation le"islation has has ta!en final
shape, it has )een influenced si"nificantly )y other recent de#elopments in the corporate sector, especia especially lly thos thosee where where sta!e sta!ehol holder der inte interest restss seemed seemed to )e )e compro compromi mised' sed'
The The erstwh erstwhile ile
Compan Companies ies Act 1*+ 1*+ (the (the ‘1*+ ‘1*+ Act’, Act’, which which had )een in eisten eistence ce for o#er o#er fifty fifty years, years, appeared to )e somewhat ineffecti#e at handlin" some of these present day challen"es of a "rowin" industry and the interests of an increasin" class of sophisticated sta!eholders'
earnin" from these eperiences, the 2013 Act promises to su)stanti#ely ‘raise the )ar on "o#ernance’ and in a comprehensi#e form purports to deal with rele#ant themes such as in#estor protection and fraud miti"ation, inclusi#e a"enda, auditor accounta)ility, reportin" framewor!, director responsi)ility and efficient restructurin"'
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Study of newly enacted Company Act, Act, 2013
yet to )e finalised and notified' notified' As of the date of this pu)lication, pu)lication, 22 sections sections and 3 -ules ( which includes recently notified rule on 03'11'201. ha#e )een notified and a few circulars ha#e )een )een issued clarifyin" clarifyin" the the applica)ility applica)ility of of these'
otification otification of -ule -ule is still continue continued d
e#en after passin" the Act in Au"ust Au"ust 2013' This important le"islation, that has )een in the ma!in" for o#er 10 years, started off as an effort in 200. )y the then "o#ernment "o#ernment to ma!e chan"es chan"es in &ndian corporate corporate law in the contet contet of the chan"in" economic and )usiness en#ironment and to ma!e &ndian corporate en#ironment more transparent, transparent, simple simple and and "lo)ally "lo)ally accepta)l accepta)le' e'
Since then, then, as this this le"islation le"islation has has ta!en final
shape, it has )een influenced si"nificantly )y other recent de#elopments in the corporate sector, especia especially lly thos thosee where where sta!e sta!ehol holder der inte interest restss seemed seemed to )e )e compro compromi mised' sed'
The The erstwh erstwhile ile
Compan Companies ies Act 1*+ 1*+ (the (the ‘1*+ ‘1*+ Act’, Act’, which which had )een in eisten eistence ce for o#er o#er fifty fifty years, years, appeared to )e somewhat ineffecti#e at handlin" some of these present day challen"es of a "rowin" industry and the interests of an increasin" class of sophisticated sta!eholders'
earnin" from these eperiences, the 2013 Act promises to su)stanti#ely ‘raise the )ar on "o#ernance’ and in a comprehensi#e form purports to deal with rele#ant themes such as in#estor protection and fraud miti"ation, inclusi#e a"enda, auditor accounta)ility, reportin" framewor!, director responsi)ility and efficient restructurin"'
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Study of newly enacted Company Act, Act, 2013
OBJECTIVES •
To understand understand the new 4ro#isions of Company Act 2013
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To understand understand the difference difference )etween pro#isions pro#isions of Company Company Act 1*+ and Company Company Act 2013'
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To understand how new Company can )e formed for med and its operation' To understand the )enefits of Companies Act and its Cons' To understand understand effect of Company Act on 5usiness en#ironment
RESEARCH METHODOLOGY The study focuses on etensi#e study of Secondary data collected from #arious )oo!s, ational 6ournals (&CA& 7 &CS&, "o#ernment reports, pu)lications from #arious we)sites which focused on #arious aspects of Company Act, Act, 2013'
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Study of newly enacted Company Act, 2013
NEW CONCEPTS One-person compn!"
The 2013 Act introduces a new type of entity to the eistin" list i'e' apart from formin" a pu)lic or pri#ate limited company, the 2013 Act ena)les the formation of a new entity a ‘one$person company’ (84C' An 84C means a company with only one person as its mem)er 9section 3(1 of 2013 Act:' Pr#$%e compn!"
The 2013 Act introduces a chan"e in the definition for a pri#ate company, inter$alia, the new re%uirement increases the limit of the num)er of mem)ers from +0 to 200' 9section 2( of 2013 Act:' Sm&& compn!
A small company has )een defined as a company, other than a pu)lic company' (i 4aid$up share capital of which does not eceed +0 la!h &- or such hi"her amount as may )e prescri)ed which shall not )e more than fi#e crore &- (ii Turno#er of which as per its last profit$and$loss account does not eceed two crore &- or such hi"her amount as may )e prescri)ed which shall not )e more than 20 crore &-; Dormn% compn!"
The 2013 Act states that a company can )e classified as dormant when it is formed and re"istered under this 2013 Act for a future pro
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Study of newly enacted Company Act, 2013
-8C in such manner as may )e prescri)ed for o)tainin" the status of a dormant company' 9Section .++ of 2013 Act: C&ss Ac%#on S'#%
A class action or a class suit is a lawsuit that allows a lar"e num)er of people with a common interest in a matter to sue or )e sued as a "roup' The concept is common in de#eloped countries such as the =S, => and Sin"apore )ut has till now, not eisted in the &ndian aw' The pro#ision of class suit "i#es sta!eholders an ed"e in retrenchin" their ri"hts' Mer(ers n) c*'#s#%#ons
The 2013 Act has streamlined as well as introduced concepts such as re#erse mer"ers (mer"er of forei"n companies with &ndian companies and s%uee?e$out pro#isions, which are si"nificant' The 2013 Act has also introduced the re%uirement for #aluations in se#eral cases, includin" mer"ers and ac%uisitions, )y re"istered #aluers' Corpor%e soc#& respons#+#%!
The 2013 Act ma!es an effort to introduce the culture of corporate social responsi)ility (CS- in &ndian corporates )y re%uirin" companies to formulate a corporate social responsi)ility policy and at least incur a "i#en minimum ependiture on social acti#ities' O,,#cer
The definition of officer has )een etended to include promoters and !ey mana"erial personnel 9section 2(+* of 2013 Act:'
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e! mn(er#& personne&
The term ‘!ey mana"erial personnel’ has )een defined in the 2013 Act and has )een used in se#eral sections, thus epandin" the scope of persons co#ered )y such sections 9section 2(+1 of 2013 Act:' Promo%er
The term ‘promoter’ has )een defined in the followin" ways;@ A person who has )een named as such in a prospectus or is identified )y the company in the annual return referred to in Section *2 of 2013 Act that deals with annual return or @ who has control o#er the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise or @ in accordance with whose ad#ice, directions or instructions the 5oard of Birectors of the company is accustomed to act' The pro#iso to this section states that su)$section (c would not apply to a person who is actin" merely in a professional capacity' 9section 2(* of 2013 Act: In)epen)en% D#rec%or
So far only listed pu)lic companies were re%uired to appoint independent directors under the listin" A"reement'
Companies Act, 2013 etend such re%uirement to co#er )i" pu)lic
companies also' The term’ &ndependent Birector’ has now )een defined in the 2013 Act, alon" with se#eral new re%uirements relatin" to their appointment, role and responsi)ilities' urther some of these re%uirements are not in line with the correspondin" re%uirements under the e%uity listin" a"reement 9section 2(.D, 1.*(+ of 2013 Act:'
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Secre%r#& A')#%
The companies Act 2013 pro#ides for compulsory Secretarial Audit )y Certain class of companies and annein" the same with the 5oard -eport' ith the introduction of Secretarial Audit, the scope of already eistin" compliance certificate stands widened'
The 5oard of
Birectors also has to eplain in its 5oard report to e#ery %ualification, reser#ation or ad#erse remar! or disclaimer made )y the Company Secretary in his Secretarial Audit -eport'
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IMPORTANT CHANGES .HIGHLIGHTS O/ COMPANY ACT0 1234 ollowin" are some of important chan"es E hi"hli"hts of Company Act, 2013' 1' Settin" up of a company 2' Share capital and de)entures 3' -eportin" ramewor! (Annual Accounts .' Fi"her Auditor’s -esponsi)ility +' ider Birector and Gana"ement -esponsi)ility ' Corporate social responsi)ility D' &n#estor 4rotection ' Compromises, arran"ements and amal"amations *' -e#i#al and reha)ilitation of sic! companies
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Study of newly enacted Company Act, 2013
Settin" up of a company •
The 2013 Act specifies the mandatory content for the memorandum of association which is similar to the eistin" pro#isions of the 1*+ Act'
Fowe#er, as a"ainst the eistin"
re%uirement of the 1*+ Act, the 2013 Act does not re%uire the o)
•
The 2013 Act introduces the entrenchment pro#isions in respect of the articles of association of a company' An entrenchment pro#ision ena)les a company to follow a more restricti#e procedure than passin" a special resolution for alterin" a specific clause of articles of association' A pri#ate company can include entrenchment pro#isions only if a"reed )y all its mem)ers or, in case of a pu)lic company, if a special resolution is passed'
•
here a company has chan"ed its name in the last two years, the company is re%uired to paint, affi or print its former names alon" with the new name of the company on )usiness letters, )ill heads, etc' Fowe#er, the 2013 Act is silent on the time limit for which the former name needs to )e !ept'
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The 2013 Act mandates inclusion of declaration to the effect that all pro#isions of the 1*+ Act ha#e )een complied with, which is in line with the eistin" re%uirement of 1*+ Act' Additionally, an affida#it from the su)scri)ers to the memorandum and from the first directors has to )e filed with the -8C, to the effect that they are not con#icted of any offence in connection with promotin", formin" or mana"in" a company or ha#e not )een found "uilty of any fraud or misfeasance, etc', under the 2013 Act durin" the last fi#e years alon" with the complete details of name, address of the company, particulars of e#ery su)scri)er and the persons named as first directors'
The 2013 Act further prescri)es that if a person furnishes
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false information, he or she, alon" with the company will )e su)
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The eistin" pro#isions of the 1*+ Act as set out in section 1.* which pro#ide for re%uirement with respect to the commencement of )usiness for pu)lic companies that ha#e a share capital would now )e applica)le to all companies;
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The 2013 Act imposes additional restriction on the alteration of the o)
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The 2013 Act includes a new section to ena)le the issue of depository receipts in any forei"n country su)
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The 2013 Act includes a new section under which mem)ers of a company, in consultation with the )oard of directors, may offer a part of their holdin" of shares to the pu)lic' The document )y which the offer of sale to the pu)lic is made will )e treated as the prospectus issued )y the company' The mem)ers shall reim)urse the company all epenses incurred )y it'
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Study of newly enacted Company Act, 2013
•
The pro#isions of 2013 Act re"ardin" #otin" ri"hts are similar to the eistin" section D of the 1*+ Act' The only chan"e noted in the 2013 Act is the remo#al of distinction pro#ided )y the 1*+ Act with respect to the entitlement to #ote in case the company fails to pay di#idend to its cumulati#e and non$cumulati#e preference share holders'
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The 2013 Act restricts the application of securities premium for a certain class of companies if they fail to comply with the accountin" standards' The 2013 Act continues to state that securities premium amount can )e utilised for purpose of writin" off preliminary epenses'
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Companies would no lon"er )e permitted to issue shares at a discount' The only shares that could )e issued at a discount are sweat e%uity wherein shares are issued to employees in lieu of their ser#ices'
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The 2013 Act reiterates the eistin" re%uirement that a company cannot issue preference shares with a redemption date of )eyond 20 years' Fowe#er, it "i#es an eemption for cases where preference shares ha#e )een issued in respect of infrastructure pro
•
The eistin" re%uirement of section 1 of the 1*+ Act in re"ard to further issue of capital would no lon"er )e restricted to pu)lic companies and would )e applica)le to pri#ate companies also' urther, the 2013 Act pro#ides that a ri"hts issue can also )e made to the employees of the company who are under a scheme of employees’ stoc! option, su)
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The 2013 Act includes a new section that pro#ides for issue of fully paid$up )onus shares out of its free reser#es or the securities premium account or the capital redemption reser#e account, su)
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Study of newly enacted Company Act, 2013
articles, appro#al in the "eneral meetin" and so on' Fowe#er Section 23 does not permit pri#ate companies to issue )onus shares'
-eportin" ramewor! (Annual Accounts Mn)%or! re*'#remen% ,or Conso)%e) /#nnc#& S%%emen% 5C/S6
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The 2013 Act mandates preparation of consolidated financial statements for all companies that ha#e one or more su)sidiaries' These would )e in addition to the separate financial statements and are re%uired to )e prepared in the same form and manner as the separate financial statements' or the purpose of this re%uirement, the word su)sidiary would include associate companies and
=nder the 1*+ Act, companies are "enerally not permitted to re#ise or restate financial information presented in their financial statements' Gaterial misstatements in the accounts related to pre#ious years, whether due to occurrence of fraud or error are reported as a ‘prior period ad
/#nnc#& Yer %o +e 'n#,orm
The 2013 Act also re%uires all companies to adopt a uniform financial year of 1 April to 31 Garch with limited eception to a company which is a holdin" company or su)sidiary of a
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Study of newly enacted Company Act, 2013
company incorporated outside which may )e re%uired to follow a different financial year for consolidation outside &ndia' C7n(es #n Deprec#%#on re('&%#on
Schedule && to the 2013 Act re%uires systematic allocation of the deprecia)le amount of an asset o#er its useful life unli!e Schedule I&J of the Act (which specifies minimum rates of depreciation to )e pro#ided )y a company' The deprecia)le amount is defined as the cost of an asset, or other amount su)stituted for cost, less its residual #alue'
‘=seful life’ may )e
considered as a period o#er which an asset is a#aila)le for use or as the num)er of production or similar units epected to )e o)tained from the asset )y the entity' Amortisation of intan"i)le assets should )e in accordance with notified accountin" standards and is not specified in the 2013 Act' Mn)%or! In%ern& A')#%
ClassEclasses of companies to )e prescri)ed in this )ehalf to mandatorily appoint an internal auditor who shall )e a chartered accountant or a cost accountant or such other professional as may )e decided )y the 5oard' The o)
In%ern& ,#nnc#& con%ro&s repor%#n(
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Study of newly enacted Company Act, 2013
The 2013 Act also re%uires the Birectors -eport for listed companies and Auditors -eport for all companies to comment on whether the company has ade%uate internal financial controls system in place and operatin" effecti#eness of such controls' O%7er Impor%n% Pro$#s#ons
Companies permitted to !eep )oo!s of account or other rele#ant papers in electronic mode in the prescri)ed manner' The draft rules add that such electronic )oo!s shall remain accessi)le in &ndia for future reference' Annual financial statements of e#ery company (ecept one person company, small company or dormant company to include a cash flow statement also' The eistin" re"ulatory re"ime "o#ernin" transfer of a specified percenta"e of profits to reser#es )efore declarin" di#idends dispensed with' Fowe#er, declaration of di#idends out of reser#es to )e su)
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A')#%or Appo#n%men% n) Ro%%#on
As per the 2013 Act, instead of the present pro#ision of appointment from one AKG to the net, indi#idual or a firm to )e appointed as auditor for a fi#e$year term' Chan"e of auditors )efore the fi#e year term would re%uire special resolution after o)tainin" the pre#ious appro#al of the Central Ko#ernment' urther the auditor concerned would ha#e to )e "i#en a reasona)le opportunity of )ein" heard' Fowe#er the appointment has to )e ratified at e#ery AKG' &f the appointment is not ratified, it appears that the process for chan"e of auditor would ha#e to )e followed' isted companies or companies )elon"in" to such class of companies as may )e prescri)ed cannot appoint or reappoint an audit firm (includin" an 4 as auditor for more than two consecuti#e terms of fi#e years each (in case of an indi#idual there would )e one term of fi#e years' Non-')#% ser$#ces
Company Act, 2013 pro#ides 4rohi)ition on auditor renderin" specified non$audit ser#ices to the auditee companyE its su)sidiaryEholdin" company e'"' accountin" and )oo! !eepin" ser#ices, internal audit, desi"n and implementation of any financial information system, in#estment ad#isory ser#ices, in#estment )an!in" ser#ices, mana"ement ser#ices etc' A')#%ors8 repor%
The reportin" re%uirements ha#e )een etended' urther, the Central Ko#ernment, in consultation with ational inancial -eportin" Authority, may direct inclusion of specified matters for specified classEdescription of companies' As per the Act, the auditor has to report; @ here the company has failed to pro#ide any information and eplanations, the details of the same and their effect on financial statements'
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@ hether the company has ade%uate internal financial controls in place and the operatin" effecti#eness of such controls' @ 8)ser#ations or comments on financial transactions or matters which ha#e any ad#erse effect on the functionin" of the company' @ Any %ualification, reser#ation or ad#erse remar! relatin" to the maintenance of accounts and other matters connected therewith (this is in addition to the assertion relation to maintenance of proper )oo!s of account' Repor%#n( on /r')
&f in the course of performance of his duties as auditor, the auditor has reason to )elie#e that an offence in#ol#in" certain fraud is )ein" or has )een committed a"ainst the company )y officers or employees, the matter should )e reported to the Central Ko#ernment within the prescri)ed time and manner' A')#%#n( s%n)r)s
Auditin" standards ha#e )een "i#en le"al reco"nition under the Act which re%uires that e#ery auditor shall comply with the auditin" standards notified )y Central Ko#ernment' The Central Ko#ernment may prescri)e the standards of auditin" as recommended )y the &nstitute of Chartered Accountants of &ndia (&CA&, in consultation with and after eamination of the recommendations made )y the ational inancial -eportin" Authority N%#on& /#nnc#& Repor%#n( A'%7or#%!
An independent authority, #i?' ational inancial -eportin" Authority (-A to )e constituted to ma!e recommendations to Central Ko#ernment on formulation and layin" down of accountin" and auditin" policies and standards, monitor and enforce compliance therewith and
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o#ersee the %uality of ser#ice of rele#ant professions' -A has )een #ested with %uasi
ider Birector and Gana"ement -esponsi)ility •
The 2013 Act increases the limit for num)er of directorships that can )e held )y an indi#idual from 12 to 1+ 9section 1.*(1 of 2013 Act:'3' 8ne director to )e resident in &ndia' H#ery
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company shall ha#e at least one Birector who has stayed in &ndia for a total period of not less than 12 days in the pre#ious calendar year'
•
&n prescri)ed class or classes of companies, there should )e 1 women director'
•
8ne of the si"nificant aspects of the 2013 Act is the effort made towards incorporatin" some of the salient re%uirements mandated )y the SH5& in clause .* of the listin" a"reement in the 2013 Act itself' To this effect, the 2013 Act re%uires e#ery listed pu)lic company to ha#e at least one$third of the total num)er of directors as independent directors'
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The 2013 Act includes Schedule &J ‘Code for &ndependent Birectors’ (Code which )roadly prescri)es the conduct for independent directors'
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&n order to discoura"e inappropriate practices, the 2013 Act states that any person who fails to "et elected as a director in the "eneral meetin" can no lon"er )e appointed as an additional director )y the )oard of directors
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The re%uirements relatin" to audit committees was first introduced )y the Companies (Amendment Act, 2000' As per the 2013 Act, the audit committee should ha#e ma
Chairman of the audit committee need not )e an independent
director' A ma
•
Company Act, 2013 pro#ides for mandatory constitution of omination and -emuneration Committee and Sta!eholders’ -elationship Committee for prescri)ed companies'
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The 2013 Act prescri)es similar re%uirements with respect to the disclosure of interest )y the director as contained in the eistin" section 2** of the 1*+ Act' The only chan"e that could )e identified is where a contract or arran"ement entered into )y the company without
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disclosure of interest )y director or with participation )y a director who is concerned or interested in any way, directly or indirectly, in the contract or arran"ement, shall )e #oida)le at the option of the company'
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H#ery company )elon"in" to such class of description of companies as may )e prescri)ed shall ha#e GB or CH8 or Gana"er and in their a)sence, a TB and a Company Secretary' &ndi#idual not to )e the Chairman of the Co' as well as the GB or CH8 of the Co' at the same time'
•
The 2013 Act pro#ides for mandatory appointment of followin" whole time !ey mana"erial personnel for e#ery listed company and e#ery other company ha#in" a paid$up share capital of fi#e crore &- or moreL; (i Gana"in" director, or chief eecuti#e officer or mana"er and in their a)sence, a whole$time director (ii Company secretary (iii Chief financial officer
Corporate social responsi)ility •
The Ginistry of Corporate Affairs (GCA had introduced the Corporate Social -esponsi)ility Joluntary Kuidelines in 200*' These "uidelines ha#e now )een incorporated within the 2013 Act and ha#e o)tained le"al sanctity' Section 13+ of the 2013 Act, see!s to
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pro#ide that e#ery company ha#in" a net worth of +00 crore &-, or more or a turno#er of 1000 crore &- or more, or a net profit of fi#e crore &- or more, durin" any financial year shall constitute the corporate social responsi)ility committee of the )oard'
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As per Section 13+ of the Act, companies with a specified net worth or turno#er or net profit are re%uired to mandatorily spend 2 percent of a#era"e net profits of last 3 years to )e spent on CS- acti#ities, otherwise reason for not spendin" to )e "i#en in 5oardMs -eport'
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=nder the draft CS- rules, net profit is defined to mean ‘net profit )efore ta’ as per )oo!s of accounts and shall not include profits arisin" from )ranches outside &ndia'
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H#ery %ualifyin" company needs to constitute a CS- committee of the 5oard consistin" of 3 or more directors'
•
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The mandate of the said CS- committee shall )e;
To formulate and recommend a CS- policy to the 5oard
To recommend amount of ependiture to )e incurred on CS- acti#ities
To monitor the CS- policy of the company from time to time'
The 5oard of e#ery %ualifyin" company is re%uired to hold followin" responsi)ilities;
To appro#e the CS- policy recommended )y the CS- committee and disclose the contents of such policy in its report and place it on company’s we)site
To ensure the CS- acti#ities are underta!en )y the company
To ensure 2 percent spendin" on CS- acti#ities
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To report CS- acti#ities in 5oard’s report and disclose non$compliance (if any with the CS- pro#isions'
The draft CS- rules pro#ide the format in which all %ualifyin" companies shall report the details of their CS- initiati#es in the Birector’s report and in the company’s we)site
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Acti#ities which may )e considered as eli"i)le CS- spend are pro#ided in Schedule J&& of the Act' The specified acti#ities are as under;
Hn#ironment sustaina)ility
Hmpowerin" women and promotin" "ender e%uality
Hducation
4o#erty reduction and eradicatin" hun"er
Social )usiness pro
-educin" child mortality 7 impro#in" maternal health
&mpro#ement of health
&mpartin" of #ocational s!ills
Contri)ution towards Central 7 State Ko#ernment funds for socioeconomic de#elopment and relief
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Such other matters as may )e prescri)ed
The companies shall "i#e preference to the local area and area around it where it operates for spendin" the amounts earmar!ed for CS- acti#ities'
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•
CS- pro
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CS- acti#ities shall not include acti#ities eclusi#ely for the )enefit of employees and their family mem)ers'
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Companies may also colla)orate or pool resources with other companies to underta!e CS- acti#ities'
&n#estor 4rotection •
The Companies Act, 2013 has made si"nificant amendments #is$N$#is related party transactions ma!in" this a si"nificant focus area' The responsi)ilities are rather onerous with strict conse%uences in cases of non$compliance'
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The transactions of a company with its related parties which are not in the ordinary course of )usiness and which are not arm’s len"th would re%uire the consent of the 5oard of Birectors of the Company'
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The scope of related 4arties transactions has widened which now includes leasin" of property, appointment of a"ent for the sale or purchase, related party’s appointment to any office or place of profit in the company, its su)sidiary or associate company'
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4ro#isions relatin" to caps on inter corporate loans and in#estments etended to include loan to any person' The rate of interest on inter corporate loans not to )e lower than the pre#ailin" yield of one year, three year, fi#e year or ten year Ko#ernment security closest to the tenor of the loan'
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oans (as also "uaranteesEsecurities in respect thereof and in#estments )y a pri#ate company or )y a holdin" company to or in its wholly owned su)sidiary would also )e co#ered )y the pro#isions'
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The concept of class action suits introduced empowerin" a specified num)er of shareholders and depositors to ta!e le"al action in case of any fraudulent action )y the company or if the affairs of the company are )ein" conducted in a manner pre
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Specific definition of fraud has )een introduced'
raud includes any act, omission,
concealment of any fact or a)use of position committed )y any person, with intent to decei#e, to "ain undue ad#anta"e from, or to in
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shareholders or its creditors or any other person, whether or not there is any wron"ful "ain or wron"ful loss'
Compromises, arran"ements and amal"amations •
The 2013 Act features some new pro#isions in the area of mer"ers and ac%uisitions, apart from ma!in" certain chan"es from the eistin" pro#isions' hile the chan"es are aimed at simplifyin" and rationalisin" the procedures in#ol#ed, the new pro#isions are also aimed at
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ensurin" hi"her accounta)ility for the company and ma
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The section dealin" with compromises and arran"ements, deals comprehensi#ely with all forms of compromises as well as arran"ements, and etends to the reduction of share capital, )uy$)ac!, ta!eo#ers and corporate de)t restructurin" as well' Another positi#e inclusion within this section is that o)
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The current procedural re%uirements in case of a mer"er and ac%uisition in any form are %uite cum)ersome and comple' There are no eemptions e#en in the case of mer"ers )etween a company and its wholly owned su)sidiaries' The 2013 Act now introduces simplification of procedures in two areas, firstly, for holdin" wholly owned su)sidiaries and secondly, for arran"ements )etween small companies (section 233 of the 2013 Act' Small companies is a new cate"ory of companies, introduced within the 2013 Act, with defined capital and turno#er thresholds, which has )een "i#en certain )enefits, includin" simplified procedures'
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The 1*+ Act, allows the mer"er of a forei"n company with an &ndian company, )ut does not allow the re#erse situation of mer"er of an &ndian company with a forei"n company' The 2013 Act now allows this flei)ility, with a rider that any such mer"ers can )e effected only with respect to companies incorporated within specific countries, the names of which will )e notified )y the central "o#ernment' ith prior appro#al of the central "o#ernment, companies are now allowed to pay the consideration for such mer"ers either in cash or in depository receipts or partly in cash and partly in depository receipts as a"reed upon in the scheme of arran"ement' (section 23. of the 2013 Act' These new pro#isions can )e "reatly
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)eneficial to &ndian companies which ha#e a "lo)al presence )y pro#idin" them structurin" options which do not eist currently'
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The 2013 Act has introduced new pro#isions for ena)lin" the ac%uirer of a company (holdin" *0O or more shares )y way of amal"amation, share echan"e, etc to ac%uire shares from the minority holders su)
-e#i#al and reha)ilitation of sic! companies •
Chapter I&I of the 2013 Act lays down the pro#isions for the re#i#al and reha)ilitation of sic! companies' The chapter descri)es the circumstances which determine the declaration of a company as a sic! company, and also includes the reha)ilitation process of the same' Althou"h it aims to pro#ide comprehensi#e pro#isions for the re#i#al and reha)ilitation of Page | 27
Study of newly enacted Company Act, 2013
sic! companies, the fact that se#eral pro#isions such as particulars, documents as well as content of the draft scheme in respect of application for re#i#al and reha)ilitation, etc' ha#e )een left to su)stanti#e enactment, lea#es scope for interpretation'
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The co#era"e of Sic! &ndustrial Companies Act, 1*+ (S&CA is limited to only industrial companies, while the 2013 Act co#ers the re#i#al and reha)ilitation of all companies, irrespecti#e of their sector' The determination of whether a company is sic!, would no lon"er )e )ased on a situation where accumulated losses eceed the net worth' -ather it would )e determined on the )asis whether the company is a)le to pay its de)ts' &n other words, the determinin" factor of a sic! company has now )een shifted to the secured creditors or )an!s and financial institutions with re"ard to the assessment of a company as a sic! company'
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The 2013 Act does not reco"nise the role of all sta!eholders in the re#i#al and reha)ilitation of a sic! company, and pro#isions predominantly re#ol#e around secured creditors' The fact that the 2013 Act reco"nises the presence of unsecured creditors, is felt only at the time of the appro#al of the scheme of re#i#al and reha)ilitation' &n accordance with the re%uirement of section 2+3 of the 2013
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Act, a company is assessed to )e sic! on a demand )y the secured creditors of a company representin" +0O or more of its outstandin" amount of de)t under the followin" circumstances;
The company has failed to pay the de)t within a period of 30 days of the ser#ice of the notice of demand
The company has failed to secure or compound the de)t to the reasona)le satisfaction of the creditors
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To speed up the re#i#al and reha)ilitation process, the 2013 Act pro#ides a one year time period for the finalisation of the reha)ilitation plan'
SF8-TC8G&KS & TFH H C8G4A&HS 5& After more than 10 years of discussions, draftin" and delays, and fi#e different ministers headin" it, the "o#ernment has )een a)le to replace the +D$year$old law with new definitions and a host of other thin"s' Fowe#er, there are certain shortcomin"s in the ew 5ill which can )e read as follows;
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Study of newly enacted Company Act, 2013
39 In)epen)en% )#rec%ors" There are pitfalls in the pro#ision of &ndependent Birectors for three
reasons' irstly, how independent can &ndependent Birectors )e when they are appointed and paid for )y the promotersP ill promoters appoint truly independent people on )oardsP Secondly, are there enou"h persons a#aila)le to )e appointed as &ndependent BirectorsP 8nce the prospecti#e person is told a)out the responsi)ilities he will ha#e to )ear, the actual num)er of competent and willin" &ndependent Birectors diminishes' Gost &ndependent Birectors diminish in fact, end up adornin" corporate )oards without the time or commitment to wor! in the interests of shareholders' Third, if eli"i)le &ndependent Birectors end up ta!in" up 20 directorships each, how can they really ser#e each of those companies’ shareholders dili"entlyP To sum it up, althou"h the concept of &ndependent Birectors is "ood, corporate "o#ernance will need to ha#e a hea#y dose of re"ulation'
19 Corpor%e soc#& respons#+#%!" The ew Companies 5ill ma!es no effort whatsoe#er to
define CS-' The only o)li"ation is to set aside the funds, form a committee, formulate a CS- policy, and spend the cash' &f mem)ers don’t spend the money, they will ha#e to eplain the reason for not doin" it in the annual report'
49 E:cess#$e +'re'crc!" &n order to ma!e directors accounta)le, the new Companies 5ill
mandates that e#ery director shall re"ister himself or herself with the "o#ernment and o)tain a Birector &dentification um)er (B&' i!e the =&B, which is supposed to "i#e e#ery &ndian resident a uni%ue identity and pre#ent fraud, the B& will ena)le the "o#ernment to monitor the num)er of directorships any person holds and also hisEher trac! record' Considerin" &ndia’s trac! record, where )ureaucratic super#ision of corporate affairs more
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often than not leads to corruption and )ri)ery, how many directors will want to ris! )ein" on the "o#ernment’s watch listP ill B& discoura"e more competent people from ta!in" up directorships or encoura"e themP
;9 C&ss c%#on s'#%s" The )est new pro#ision in the Companies 5ill is the ena)lin" of tort
action and class action suits' The most important point is whether shareholders of "o#ernment$owned companies can sue the "o#ernment for s%uashin" minority interests' &t is worth recallin" that Coal &ndia has )een sued )y a minority shareholder (The Children’s &n#estment und for followin" the "o#ernment’s di!tat to lower coal prices in 2012' There is plentiful scope for class action suits a"ainst 8KC, 8il &ndia and KA&, which are su)sidi?in" losses in the oil mar!etin" companies' Class action suits ha#e to )e filed )efore the ational Company aw Tri)unal first, )ut )an!in" companies are ecluded from such action'
C8C=S&8 The new Companies Act 2013 is a welcome step' &t is more strin"ent and re%uires strict compliance )y corporate sector' The non compliance or irre"ularity in compliances may attract hea#y penalties' The Companies Act, 2013 mar!s a paradi"m shift in &ndia’s corporate
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law re"ime, and has far reachin" implications for )oth domestic &ndian companies and o#erseas in#estors with a presence in &ndia' Some pro#isions, howe#er, continue to remain inoperati#e and are li!ely to )e made effecti#e )y the &ndian "o#ernment in due course' This piece ma!es it easier to understand the chan"es in the 2013 Act that affect multinational corporations ha#in" &ndian companies or those loo!in" to ma!e in#estments in &ndia'
-HH-HCHS Felps from GEs' An!it Cho!shi 7 Co', A Chartered Accountant irm e)site of Ginistry of Corporate Affairs
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