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Companies Act, 2013Companies Act, 2013Impact on subsidiaries of foreign
companiescompaniesOrganiser
ASAASA
♣presented by
September 13, 2013
presented bySundeep Gupta FCA, DISA(ICA) - Partner
Parveen Kumar FCA - Partner
ASA & Associates chartered accountants www.asa.in
FLOW OF THE PRESENTATION
Enactment and background
F k Framework
Significant Changes Significant Changes
ENACTMENT AND BACKGROUND
ENACTMENT
August 29, 2013 would be remembered as a historic day forAugust 29, 2013 would be remembered as a historic day forCorporate India. For, on this very day the Honourable President ofIndia gave his assent on the much-awaited, the much-needed, amodern and contemporary company law. This was notified in Gazetteode a d co te po a y co pa y a s as ot ed Ga etteof India on August 30, 2013 and replaces the Companies Act, 1956
Rules are now in public domain for opinion. To be notified laterp p
Applicability of the Act to be from a notified date in future
THE NEED
Transformed national and international economic environmenteconomic environment
Lessons from bad corporate Lessons from bad corporate governance
Why was there a
need for Changes in stakeholders’ expectation
need for new Law ?
Manifold increase in number of companies
Year No. of Companies1956 30,000 approx2013 1,100,000 approx
THE JOURNEY
Companies Bill,2008 introduced
Report of SCF onCompanies Bill, 2009 was
Companies Bill, 2012 asamended was approved2008 introduced
on 23.10.2008 introduced in Lok Sabhaon 31.08.2010
by Lok Sabha on18.12.2012
2008 2009 2010 2011 2012 2013
Lapsed due to dissolution of LokS bh C i Bill 2011 Passed by Rajya SabhaSabha;reintroduced on 03.08.2009 asCompanies Bill, 2009.Bill referred to SCF*
Companies Bill, 2011introduced in LokSabha on 14.12.2011
Passed by Rajya Sabhaon 08.08.2013President’s assent on29.8.2013
*[SCF] Standing Committee on Finance
FRAMEWORK
THE FRAMEWORK
Companies Act, 1956
Companies Act, 2013
Parts – 13 Sections – 658Schedules – 15
Chapters – 29 Sections – 470Schedules – 7Schedules 15
Definitions - 67Schedules 7
Definitions - 95
The Companies Act, 2013 give substantial powers to the Government & hencemajor prescriptions would be in the form of Rules to be notified separately
SIGNIFICANT CHANGES
SIGNIFICANT CHANGES
Definitions increased
New classifications - One Person Company, Small Company, Dormant Company
Governance - Women Directors, Resident Directors, limits, Key Managerial Persons
Financial statements
R l d P i id d Related Parties – scope widened
SIGNIFICANT CHANGES
Foreign Company deemed to be Indian Company Foreign Company deemed to be Indian Company
Corporate Social Responsibility
New regulatory bodies to be set up
Stricter governance for private companies listed Stricter governance for private companies, listed companies
M & A i i h d l Mergers & Acquistions - methodology
DEFINITIONS
KEY NEW INSERTIONS
Section/Clause
Particulars
2 (6) Associate Company – Control of 20% or more of total share 2 (6) Associate Company Control of 20% or more of total share capital or business decisions
2 (13) Books of account – to include electronic form
2 (18) Chief Executive Officer – designated as such by Board
2 (19) Chief Financial Officer – appointed as CFO
2 (27) Control – inclusive definition ; right to appoint majority directors, control the management or policy decisions; directly or indirectly
2 (42) Foreign company – existing definition expanded; has a business place in India itself or through an agent and business activity in place in India itself or through an agent and business activity in India
2 (51) Key Managerial personnel – specifically defined; CEO, CS, Whole time director, CFO and any other prescribed person
KEY NEW INSERTIONS
Section/Clause
Particulars
2 (52) Listed company – listing of any security2 (52) Listed company listing of any security
2 (60) Officer in default – significantly expanded to include persons under the immediate authority of Board or KMP*
2 (62) O P 2 (62) One Person company
2 (69) Promoter – specifically defined now
2 (85) S ll C2 (85) Small Company
* Key Managerial Personnel
NEW CLASSIFICATIONS
ONE PERSON COMPANY
To be mentioned as such under the company name To be mentioned as such under the company name
Private company formed with only one shareholder
Shareholder to be a natural person and Indian citizen
Shareholder to also nominate another natural person ; Shareholder to also nominate another natural person ; written consent of such nominated person
Such a company provided relief from various provisions
ONE PERSON COMPANY
Not required to hold AGM
Board meeting: 1 per calendar half year gap between meetings to be at least 90 daysgap between meetings to be at least 90 days If only 1 director, then no meeting required ; merely
intimation to company by the director
Such a company provided relief from various provisions
SMALL COMPANY
Should not be a public company
Paid up share capital of <= INR 5 million or such amount as may be prescribed but <= INR 50 million ; or
Turnover <= INR 20 million or such amount as may be prescribed but <= INR 200 million
Does not apply to holding / subsidiary company
Such a company provided relief from various provisions
ASSOCIATE COMPANY
Company in which that company has a significant influence* but whichCompany in which that company has a significant influence , but whichis not a subsidiary company of the company having such influence. Italso includes a joint venture company.
*control of at the least twenty per cent of total share capital, or ofy p p ,business decisions under an agreement;
DORMANT COMPANY
Formed for the purpose of: Future project or holding an asset or intellectual property ;
and Has no significant accounting transactions
Inactive company: Not been carrying on any business or operation ; or No significant accounting transaction in last 2 years ; or Not filed financial statements and annual returns in last 2
years
Significant accounting transactions defined and includes payments for maintenance of office and records
PRIVATE COMPANY – MEMBERS LIMIT
Limit of members now increased to 200 Limit of members now increased to 200
Certain relaxations available earlier, now withdrawn
GOVERNANCE
DIRECTORS
At least one director to be resident in India – 182 days or more
Presence of woman director to prescribed* class of companies
Maximum – 15 in any company ; can be increased by special resolutionp
Minimum 1 in case of OPC 1 in case of OPC 2 in case of Private company 3 in case of Public company
A person to be a director in maximum 20 companies ; only 10 public companies
DIRECTORS
Independent directors – for listed companies
Power to prescribe class of public companies to have independent directors
Code of conduct for independent directors laid down
Duties of directors now specifically include “exercise his duties with due and reasonable care, skill and diligence” and “independent judgment”and independent judgment
Resignation by director to be filed with authorities
KEY MANAGERIAL PERSONNEL
Specifically defined under the new ActChi f E ti Offi Chi f Fi i l Offi C Chief Executive Officer, Chief Financial Officer, Company Secretary, Managing Director, Manager, Whole time director
f h ff Power to notify any other officer as KMP
Included in definition of officer in default
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
mandatory for all companies, except OPC, Small company, dormant company:dormant company:
Cash flow statement Statement of changes in equity
Consolidated financial statements ; statement of salient features of subsidiary, including associate company / JV
Depreciation methodology now on useful life of assets instead of SLM / WDV rates ; concept of low value items dispensed with
FINANCIAL STATEMENTS
Financial year be March 31 for all companies: holding / subsidiaries of foreign companies may follow a
different year with permission of National Company Law different year with permission of National Company Law Tribunal
Alignment with financial year to be done within 2 years Alignment with financial year to be done within 2 years
Provisions for voluntary re-opening of financial statements:Prior approval of Tribunal Prior approval of Tribunal
Maximum upto 3 preceding years
Re opening by court / Tribunal order if mismanagement or Re-opening by court / Tribunal order if mismanagement or fraudulent accounts
RELATED PARTIES
RELATED PARTIES
Scope widened to include: KMP or their relatives Private company in which the manager is a member Private company in which the manager is a member
/director Firm in which manager / his relative is a partner
Related party transactions to require Board approval
Now shareholders’ approval for companies having Now shareholders approval for companies having prescribed* paid up capital (earlier Central Government)
Interested shareholders not to vote h t d l ith Interested shareholders not to vote - how to deal with contracts between holding and subsidiary company ?
* Not yet prescribed
FOREIGN COMPANY
FOREIGN COMPANY
has a place of business in India whether by itself or through an agent, physically or through electronic mode
conducts any business activity in India in any other manner
Deemed to be an Indian Company
Have to comply with Indian regulatory compliances like conductingaudit, filing return with ROC
CORPORATE SOCIAL RESPONSIBILITY
CORPORATE SOCIAL RESPONSIBILTY
APPLICABILITYCompany which satisfies any one of the following conditionp y y gNet worth of INR 5 billion or more; orTurnover of INR 10 billion or more; orNet profit of INR 50 million or more:during any financial year*Activities separately specified
COMMITTEECOMMITTEEMandatory to constitute CSR committee of the BoardConstitution :At least 3 Directors;At least 3 Directors;At least one director shall be an independent director
Role of CSR Committee :Formulate and monitor the CSR policy; andFormulate and monitor the CSR policy; andRecommend the expenditure to be incurred on such activities
Board Role and responsibility :Disclosure of CSR committee and contents of policy in reportp y pCompliance with CSR policy At least 2% of average net profits during 3 immediately preceding years on CSR activitiesIn case of failure, Board to give reasons in report
NEW REGULATORY BODIES
NEW REGULATORY BODIESNEW REGULATORY BODIES
NATIONAL COMPANY LAW TRIBUNAL
NATIONAL FINANCIAL REPORTING AUTHORITYREPORTING AUTHORITY
SERIOUS FRAUD INVESTIGATION INVESTIGATION
AUTHORITY
STRICTER GOVERNANCE
STRICTER GOVERNANCE
Not to commence business unless: Registered office is verified Subscribed capital is received Subscribed capital is received
Directors’ Report to include: Extract of Annual return Extract of Annual return Number of Board meetings Declaration by independent directors Details of loans guarantees investments Details of loans, guarantees, investments Details of contracts with related parties Such other matters as may be prescribed
STRICTER GOVERNANCE
Annual return to contain information up to financial year (instead of till AGM) and to include:
Ch f / KMP i i fi i l Changes of promoters / KMP since previous financial year Meetings of Board / shareholders with attendance Remuneration of Directors / KMPs
Penalties / p nishments imposed on compan Penalties / punishments imposed on company
Audit committee to be constituted by every listed company ib d l f ior prescribed class of companies
Nomination and Remuneration Committee: For every listed or prescribed class of companies To recommend appointment and removal of directors Carry out performance evaluation of directors
STRICTER GOVERNANCE
Stakeholders relationship committee: Mandatory for every company with > 1000 shareholders,
debenture holders or any other security holdersdebenture holders or any other security holders
Quorum now based on number of shareholders
Voting through electronic means permitted
S i l d d f b d / h h ld i Secretarial standards for board / shareholders meetings now mandatory (earlier recommendatory); as specified by ICSI
Minimum 7 days notice to hold Board meeting ; quorum to be 1/3 of total strength/ g
STRICTER GOVERNANCE
Loans given in excess of prescribed limits: Extended to “any person” (earlier only corporates) Rate linked to government securities based on tenure of Rate linked to government securities based on tenure of
loan (earlier prevailing bank rate) Made applicable to private companies Relaxation to loans given by holding company to subsidiary Relaxation to loans given by holding company to subsidiary
company dispensed with
MERGERS AND ACQUISITIONS
PARTICULARS COMPANIES ACT, 2013 COMPANIES ACT, 1956
Merger of Indian Co into • Permitted Not permittedgForeign Co
• Prior approval of the RBI required beforeany foreign company merges with an Indiancompany or vice versa
p
Merger or amalgamationbetween smallcompanies or between
Proposed new process of merger/amalgamation of small companies or groupcompanies involves the approval of
No such provision
holding companies and aWOS or prescribedCompanies
a. shareholders holding at least 90% ofthe shares of the company
b. RoCc. Official liquidatord. Central Government
PARTICULARS COMPANIES ACT, 2013 COMPANIES ACT, 1956
Auditors Certificate Auditor to certify accounting No such provisiony gtreatment in the scheme is inconformity with the ASprescribed under Clause 133of the Act
p
END OF SESSION 1
Accounting Standards and A di i S d dAuditing Standards
FINANCIAL STATEMENTSFINANCIAL STATEMENTSFINANCIAL STATEMENTS…FINANCIAL STATEMENTS…
FinancialFinancial Position
OBJECTIVES Performance
Cash Flows
48
Provide information ……useful to wide range of users….economic decisions
Investor
CustomerCreditor
USERSEmployeePublic
RegulatorLender
Underlying AssumptionsUnderlying AssumptionsUnderlying Assumptions…Underlying Assumptions…
Going Concern
AccrualConcern
ConsistencyConsistency
Clause 22, 23, 24 of the Framework
FrameworkFrameworkFramework…Framework…
Understandabilityy
Relevance
Qualitative Reliability
Substance Over QCharacteristics Form
Comparabilityp y
Prudence
Completeness
Example:Example:-A Listed Indian Companies having listed subsidiaries in US, Europe etc
R T tiRegroup Transactions& Report as per USGAAPFor SEC.
Regroup Transactions& Report as per Indian GAAPFor ROC and SEBI.
Regroup Transactions& Report as per IFRS
Major Challenges:-a) Huge Cost and Resource Requirment
52
& Report as per IFRSFor Europe.
b) Comparability
To achieve the Global Objective – IASB - Introducedj
IFRS (International Financial Reporting Standards) (earlier also knows as IAS)(earlier also knows as IAS)
Group Transactions
USIndia Europe
Transactions& Report as per IFRS Only
53Understanding Financials Across Boundaries ….
Challenges…Challenges…Challenges…Challenges…
54
Challenges…Challenges…Challenges…Challenges…
55
India works on a multi-regulator model
Reserve Bank (RBI) MCA State RegistrarOf Chit Funds
NationalHousing
BankIRDA SEBI
NBFCs RBI regulates deposittaking activity
CCCCHFC SBC MF
…FC AAA.C XXXXXX ZZZZ
LC..C
XXXNidhi
ZZZZChit Fund C. General
Insurance ABC
XX co.YY
Infrastructure
Tax Cost
To Help User
Tax Standards
Cost Standards
IFRSAS
To Help User Take Decisions
IndAS
Regulators –RBI, SEBI, IRDA…. AS
(Schedule VI)
Financial Statements
New Concepts and Disclosure New Concepts and Disclosure RequirementsRequirements
Accounting Standards Auditing Standards
58
g g
Current Structure of auditing standards In IndiaCurrent Structure of auditing standards In India
• Standard on Quality Control – 1 ‐ Quality control for firms that perform audit SQC & reviews
• Standards of Auditing (SA 200 to 810) – applicable for the auditors while SAs conducting the audit of historical financial information
• Standards on Review Engagement (SAEs 2000 and 2699) ‐ to be applied fro SREs review of historical financial information
• Standards on Assurance Engagement (SAEs 3400 and 3402) ‐ applicable on all SAEs assurance engagement dealing on other than historical financial information
• Standards on Related services (SRSs 4400 and 4410) – applicable in case of SRSs
( ) ppengagement for agreed procedures and compile financial information
59
Title Auditor’s Report-Addressee
Introductory Para
pContents
y
Mgt Responsibility for FS Para
Adobe Acrobat Document
Auditor’s Responsibility Para
Auditor’s Opinion
Other Reporting Responsibilities
Signature of the Auditor
Date of the Auditor’s Report
Place of Signature 60
Inte nal A ditInte nal A ditInternal AuditInternal Audit
• Prescribed companies will appoint an internal auditor to conduct internal• Prescribed companies will appoint an internal auditor to conduct internal audit of the functions and activities of the company.
• Internal auditor will either be a chartered accountant or a cost accountant, or such other professional as may be decided by the board.
• The Central Government, may, by rules, prescribes the manner and the intervals in which the internal audit shall be conducted and reported to the Board.
IssuesIssuesIssues…Issues…
ActStandardsStandards
CASE STUDY 1CASE STUDY - 1
What if departure from standard is allowed by the regulatorthe regulator
AS – 15
• Feb 9, 2011 ‐ RBI issued circular (DBOD.BP.BC.80/21.04.018/2010‐11) on reopening of Pension Option to employees of Public Sectorreopening of Pension Option to employees of Public Sector Banks and Enhancements in Gratuity limits.
• In terms of this circular the bank may amortize this expense over a period of 5 years p y
This is departure from requirements of AS 15
AS – 15• ICAI Announcement
– Since the accounting treatment for such expenditure is prescribed under prudential regulatory framework of the Regulator, the auditors need not qualify their audit report on this account
– As per Standard of Audit (SA) 706 – the matter should be brought out by way of “Emphasis of Matter Paragraph” in the audit report
“Without qualifying our opinion….
CASE STUDY 2CASE STUDY - 2
Whether two or more views are possible in Accounting StandardsAccounting Standards
AS – 15
• Airlines X allows its employees to purchase i i k i l iair tickets at concessional price
• Scheme allows an employee to purchase p y pmaximum 10 tickets in a yearThi ill b bj t t il bilit f t i• This will be subject to availability of seats in the relevant flight and with prior reservation
Evaluate whether it needs to fair value the tickets provided to the employees and recognize the difference as employee cost under AS 15
View• Clause 4 of AS 15 – Employee benefit also includes non monetary
benefits such as medical care housing, car and free or subsidized goods • So provision of air tickets at concessional price is covered under AS 15
AS 15 generally talks about measurement of benefits as “The Cost” of the benefits –g yhence the measurement are based on difference between cost and amount charged.
Since no specific guidance on measurement of such benefits, an alternative view also seems possible. The management may measure the cost of benefits byalso seems possible. The management may measure the cost of benefits by reference to Fair Value of the goods.
CASE STUDY 3CASE STUDY - 3
Whether error corrections allowed in Accounting StandardsAccounting Standards
LISTED COMPANYIncome Tax to SCH XIV
Dep Rate Changed from past
IncreasedIncreased Profits of 109+ cr rp
ose
ProperDisclosures
109+ crAS-6 Pur
AS-1AS-5
Your View………???????
Change in Policies (AS 5)Change in Policies (AS 5)
S Ch Eff t
Change in Policies (AS 5)Change in Policies (AS 5)
S. No
Changes Effect
1 Change in Accounting Policies
Retrospective
2 Change in Estimates Prospective
3 P i P i d It R t ti 3 Prior Period Items Retrospective
71
CASE STUDY 4CASE STUDY - 4
Whether Accounting Standards have a role....
Case Study – Private Limited Company
As per Local office
Rs. Million
As at March 31, 2010
Capital 500
Loans from Headoffice to Subsidiary
‐
Creditors 100
Stock 500
Debtors 600
Case Study – Private Limited Company
As per Local office As per Head
Rs. Million
office at Japan
As at March 31, 2010 March 31, 2010
Capital 500 100Capital 500 100
Loans from Headoffice to Subsidiary
‐ 400
Creditors 100 100
Stock 500 500
D b 600 600Debtors 600 600
Collecting Evidence Audit wasCollecting Evidence ‐ Audit was..
Planned
m
File
According to Standards
Recording significant
items for future emen
t tea
ting en
gag
Basis for conclusion
As per regulatory
requirements
Assist
Law
75
requirements
RECAP … New Companies Act 2013RECAP … New Companies Act 2013pp
Responsibilities FlexibilityResponsibilities
Compliances
Penalties
???Mergers
One man company
Rules???
IFRS Compatible
CSRCompatible
Class suit actionwww.asa.in