Companies Act, 2013 - Rules - Grant Thornton...

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Companies Act, 2013 - Rules

Transcript of Companies Act, 2013 - Rules - Grant Thornton...

Companies Act, 2013 - Rules

Companies Act, 2013: Rules

The Companies Act, 2013 ("2013 Act") was enacted on 29 August 2013 on accord of Hon'ble President's

assent, and has the potential to be a historic milestone as it aims to improve corporate governance, simplify

regulations, enhance the interests of minority investors, and for the first time legislates the role of whistle-

blowers. The new law replaces the nearly 60-year-old Companies Act, 1956 ("1956 Act").

The 2013 Act provides an opportunity to catch up and make our corporate regulations more

contemporary, as also potentially to make our corporate regulatory framework a model to emulate for

other economies with similar characteristics. The 2013 Act is more of a rule-based legislation containing

only 470 Sections, which means that the substantial part of the legislation will be in the form of Rules.

There are over 180 Sections in the 2013 Act where Rules have been prescribed.

To facilitate the ease of implementation, a phased approach is being followed by the Ministry of Corporate

Affairs ("MCA"). Accordingly, 282 sections have been notified and are in force as of 1 April 2014. Final

Rules for 19 chapters have also been released by the MCA, which are also applicable with effect from 1

April, 2014. The Rules for the remaining chapters are in draft stage.

This publication summarises the final and the draft Rules, wherever issued on the key chapters/ sections

of the 2013 Act.

"Having rules outside the 2013 Act provides a great opportunity for the Companies Act to focus

on principles, and the Rules to stay relevant and be revised without the need to go back to

Parliament. The notification of 282 sections and final Rules in key areas reaffirms the

commitment of the MCA to make the 2013 Act a reality as soon as practicable. These are exciting

times for us to participate in the implementation of the landmark legislation that will change the

rules of the game for corporate India."

– Vishesh C Chandiok

National Managing Partner

Grant Thornton India LLP

Governance (Final Rules) • Threshold for having one woman director on the Board defined - listed companies and other public

companies with share capital of Rs 100 crore or more; or turnover of Rs 300 crore or more from the

commencement of its charging section

• Threshold for having independent directors on the Board defined for other public defined- public

companies with share capital of Rs 10 crore or more, turnover of Rs 100 crore or more or aggregate

outstanding loans/ deposits exceeding Rs 50 crore, as per the latest audited financial statements

• Requirements and procedures for conducting a Board meeting through video conferencing and other

visual means prescribed

• Matters compulsorily to be dealt with in a physically convened meeting prescribed - approval of the

annual financial statements and the Board’s report, approval of the prospectus, Audit Committee

meetings for consideration of accounts; and approval of the matters relating to amalgamation, merger,

demerger, acquisition and takeover

• Requirement to constitute an Audit Committee and Nomination and Remuneration Committee

applicable for listed companies and other public companies with share capital of Rs 10 crore or more or

a turnover of Rs 100 crore or more or aggregate outstanding loan/borrowings/debentures/deposits

exceeding Rs 50 crore, as per the latest audited financial statements

• Establishment of vigil mechanism mandated for listed companies, deposit accepting companies and

companies with borrowing from banks and public financial institutions exceeding Rs 50 crore

• Sitting fee payable to a director for attending meetings may be as decided by the Board or the

Remuneration Committee and shall not exceed Rs 1 lakh per meeting

• Board report to contain detailed disclosures of the remuneration paid to each director and a comparison

to the remuneration paid to employees. Disclosures include:

- the ratio of the remuneration of each director to the median remuneration of the employees of the

company for the financial year

- percentage increase in remuneration of each director and Chief Executive Officer ('CEO') in the

financial year

- explanation on the relationship between average increase in remuneration and company's

performance

• Every listed company and every other company having a paid-up share capital of Rs 10 crore or more

shall have the following whole-time key managerial personnel:

- Managing Director or CEO or Manager and in their absence a whole-time director

- Company Secretary; and

- Chief Financial Officer

• Every listed company or a company having 1,000 or more shareholders may provide to its members

facility to exercise their right to vote at general meetings by electronic means

• Databank for independent directors posted on the MCA website shall be publicly accessible at the

specified website

Governance (Final Rules) • A person shall act as proxy on behalf of members not exceeding 50 and holding in the aggregate not

more than 10% of the total share capital of the company carrying voting rights

• Formal annual evaluation to be made by the Board of its own performance and that of its committees

and individual directors in case of every listed company and every other public company with share

capital of Rs 25 crore or more, calculated as per the latest audited financial statements

• Related parties to include step relationships and exclude second generation lineal ascendants and

descendants.

• No contract or arrangement with related party to be entered except with prior approval by special

resolution in case of:

- companies with share capital of Rs 10 crore or more; or

- transaction/(s) to be entered into:

• with threshold amount determined as percentage of turnover /net worth as per the latest

audited financial statements (threshold varies depending on the nature of related party

transactions)

• relating to appointment to any office or place of profit at a monthly remuneration exceeding Rs

2.5 lakh

• for a remuneration for underwriting the subscription of any securities or derivatives thereof of

the company exceeding 1% of the net worth

• Any loan, guarantee or security provided by a holding company to its wholly-owned subsidiary

company is exempted from the prohibitions contained in section 185 of the 2013 Act, provided such

loans are utilised by the subsidiary company for its principal business activities

• Similarly, with respect to Loan/ guarantee/ security given/ provided by a company to its wholly owned

subsidiary company or a joint venture company, the requirement of section 186 (3) would not apply.

That means, if these loans etc. exceed the specified limit as per this section, the prior approval by

means of a special resolution at a general meeting is not required

Accounts, Audit and Auditors (Final Rules) • Listed companies and public companies, with net worth more than Rs 10 crore, given a choice of

sending financial statements to members by electronic mode

• The annual return to be certified by a Company Secretary in practice for listed companies or a company

with paid-up share capital of Rs 10 crore or more and turnover of Rs 50 crore or more

• Auditor rotation is mandatory for the following class of companies, excluding one person companies

and small companies:

- unlisted public companies with share capital of Rs. 10 crore or more

- private companies with share capital of Rs. 20 crore or more

- all companies with borrowings from bank/public financial institution or public deposit of Rs. 50

crore or more

Accounts, Audit and Auditors (Final Rules) • Rotation requirement applies retrospectively i.e. period prior to the commencement of the 2013 Act,

included in computing 5/10 consecutive years. The Rules also provide examples for explaining the

transitional provisions in different situations

• For auditor’s disqualification with respect to business relationships, the term ‘business relationships’

defined to construe any transaction entered into for a commercial purpose, except for the transactions

in the ordinary course of business at arm's length price or in the nature of professional services

permitted for auditors under the 2013 Act and the Chartered Accountants Act,1949, or related Rules

and regulations under said legislations

• Incoming auditor/audit firm disqualified for appointment, if associated with the outgoing auditor/audit

firm under the same network of audit firms or operating under the same trade mark or brand. The

phrase 'same network of audit firms' is defined to mean the firms operating or functioning, hitherto or

in future, under the same brand name, trade name or common control

• Additional comments in auditor’s report prescribed - disclosure of the effect of pending litigations;

provisions required under any law or accounting standards for material foreseeable losses on long-term

contracts, including derivatives and delay in depositing money into the Investor Education and

Protection Fund

• Internal audit made mandatory for listed companies, public companies with share capital of Rs 50

crore or more, or turnover of 200 crore or more, or outstanding loans or borrowings exceeding Rs 100

crore, or with outstanding deposits of Rs 25 crore or more, at any point in time during the last financial

year, and for private companies with turnover of Rs. 200 crore or more, or outstanding loans or

borrowings exceeding Rs 100 crore, at any point of time during the last financial year

• Secretarial audit made mandatory for every public company with share capital of Rs 50 crore or more

or turnover of Rs 250 crore or more

• If the auditor has sufficient reasons to believe that fraud is committed against the company by officers

or employees, he shall report to the Central Government ('CG') within 60 days after following the below

mentioned procedures:

- forward his report to the Board/ Audit Committee, immediately seeking their reply within 45 days;

- on receipt of reply, forward the report to CG within 15 days;

- in case, if he fails to get reply within time, forward the report to CG, along with mention of such

failure of the Board/ Audit Committee

Mergers and Restructuring (Draft Rules) • Notice for meeting of the members and/or creditors of the company sanctioning scheme of

compromise or arrangement has to be accompanied with disclosures such as change in name/objects in

last 5 years, details of approval of the scheme by the Board, details on interest of promoters/directors

in the scheme, latest financial position of the company, latest auditor's report on the accounts, pendency

of any investigation/proceeding against the company, declaration that scheme would be in best interest

of employees, creditors, minority shareholders, etc.

• Not less than 14 clear days before the date fixed for the meeting, the notice of the meeting should be

advertised in newspapers in the prescribed format. Further, not less than 10 days before the date fixed

for hearing, notice of the hearing shall be advertised in the same newspaper in which the earlier notice

was published

• Accounting treatment for demerger shall be as stipulated in Section 2 (19AA) of the Income Tax Act,

1961, till the accounting standard is prescribed for the purpose of demerger

Other provisions (Final Rules) • Corporate Social Responsibility (CSR):

- every company (including its holding or subsidiary company and a foreign company), fulfilling the

prescribed criteria shall constitute a CSR Committee, with certain exceptions

- CSR activities to be undertaken within India and should not be exclusively for the benefit of

employees of the company or their family members

- net profit shall not include profits from overseas branches

- contributions to any political party shall not be counted

- detail of CSR activities to be disclosed in Board report

• Limit on association or partnership defined to be 50 persons for the purpose of carrying on any

business unless it is registered as a company under the 2013 Act or is formed under any other law for

the time being in force

• A public company shall be eligible for inviting, accepting or renewing deposits if it has a net worth of

Rs 100 crore or more, or a turnover of Rs 500 crore or more. Further, before making any invitation to

the public for acceptance of deposits, such company shall be required to obtain a prior consent of the

company in general meeting through a special resolution and file the said resolution with the ROC, and

with the Reserve Bank of India, if required.

• A company which had accepted deposits under the provisions of the 1956 Act ("Earlier Deposits”) is

exempted from the requirement to repay such deposits within the one year, as stipulated in the 2013 Act.

However, to avail this exemption, the company should have been regular in repayment of such

deposits (together with interest) in past, and continues to comply with other requirements of the 2013

Act

• A company engaged in setting up of infrastructure projects may issue preference shares for a period up

to 30 years, provided at least 10% of such preference shares are redeemed staring from the 21st year

onwards or earlier, at the option of the preference share holders

Other provisions (Final Rules) • With respect to the existing companies (registered under the 1956 Act), for the purpose of maintenance

of register of members, particulars of the register shall be compiled as per the provisions of the 2013

Act within 6 months from the date of commencement of these Rules (i.e. 01 April 2014)

• The annual return, filed by a listed company or a company with share capital of Rs 10 crore or more or

turnover of Rs 50 crore or more shall be certified by a Company Secretary in practice

• Every listed company shall file a return with the ROC for changes relating to either increase or decrease

of 2% or more in the shareholding position of promoters and top 10 shareholders, in each case either

value or volume of the shares, within 15 days of such change

Other provisions (Draft Rules) • Class action suits by members

- not less than 100 members of the company or not less than 10% of the total number of its

members, whichever is less, or

- any member or members singly or jointly holding not less than 10% of the issued share capital of

the company

• Class action suits by depositors

- the number of depositors shall be not less than 100 depositors or not less than 10% of the total

number of depositors, whichever is less; or

- any depositor or depositors singly or jointly holding not less than 10% of the total value of

outstanding deposits of the company

• Registered valuer to be a person whose name appears in the register of valuers maintained by the CG or

any authority, institution or agency, as may be notified by the CG

• Registered valuer can be a chartered accountant, a company secretary or a cost accountant who is in

whole-time practice, or a merchant banker, etc., and should have 5 years of continuous experience after

acquiring membership of respective institutions

• Methods of valuation have been prescribed in the Rules and a valuer needs to adopt the same. However,

in case he chooses to use other methods, adequate justification for use of such method to be provided

• The National Financial Reporting Authority ('NFRA') structure to have Committees on Accounting

Standards, Auditing Standards and on Enforcement

• NFRA shall undertake investigation or conduct quality review of audit of following classes of

companies:

- listed companies;

- unlisted companies with net worth not less than Rs 500 crore or share capital not less than Rs 500

crore or annual turnover not less than Rs1,000 crore as on the last day of the immediately preceding

financial year; or

- companies having securities listed outside India

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