Key Aspects of Companies Act,2013

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Key Aspects of Companies Act,2013 J. Sagar Associates advocates & solicitors Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad

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Key Aspects of Companies Act,2013. J. Sagar Associates advocates & solicitors Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad. Classification & Company Incorporation Share Capital & Debentures Company Management & Corporate Governance Related Party, Investments & Loans CSR - PowerPoint PPT Presentation

Transcript of Key Aspects of Companies Act,2013

Page 1: Key Aspects of Companies Act,2013

Key Aspects

of

Companies Act,2013J. Sagar Associatesadvocates & solicitors

Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad

Page 2: Key Aspects of Companies Act,2013

Outline

Classification & Company Incorporation Share Capital & Debentures Company Management & Corporate Governance Related Party, Investments & Loans CSR Auditors & Accounts NCLT and Special Courts M & A Rehabilitation & Revival of Sick Companies Fraud & Class Actions Winding up Miscellaneous / Others

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Classification of Company

Private company – can have up to 200 members (Section 2(68) -already notified)

Public Company (subsidiary of public company will be a public company even if it continues to be a private company in its articles) (Section 2(71) - already notified)

Small Companies – not applicable to holding or subsidiary company, non-profit companies, companies governed by special Acts (Section 2(85) – already notified)

• A new concept• Private Company• Paid-up share capital not exceeding Rs. 50 lacs or

such higher amount as may be prescribed (not exceeding Rs.5 crores); or

• Turnover as per last profit and loss account not exceeding Rs.2 crores or higher amount as may be prescribed (not exceeding Rs.20 crores)

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Classification of Company

Dormant Companies (Section 455 - already notified)

• A new concept• Formed for future project or to hold an asset

or intellectual property• And has no “significant accounting

transaction”• “inactive company” for last 2 financial years• RoC on application shall allow status of

dormant company and issue a certificate in this regard

• Risk of name being removed if status of dormant company is not given

• Dormant company to maintain minimum director, file documents and pay annual fee to retain the dormant status

• may become an active company on an application made

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Classification of Company

One Person Company (Section 2 (62) - already notified)• A new concept• Only one person (individual) as a member• “One Person Company” to be affixed with the

name• A lot of exemptions including sections 100 to

111 Concept of layer of subsidiary and investment company

introduced – there are two exceptions (Section 2(87) proviso and Section 2(87)(d) and 186 - already notified)

Holding, Subsidiary and Associates companies – subsidiary test now on basis of 50% of total capital, not only equity (Section 2(87) - already notified)

Concept of Section 4(7) not specifically provided (already notified)

“Holding company” to include foreign holding company (Section 2(46) – already notified)

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Share Capital & Debentures

Public Offer (Section 23 – already notified)

Clear definition and concept of ‘Private Placement’ (Section 42 - already notified)

Equity Share Capital (Section 43 - already notified)

With voting rights With differential rights as to dividend, voting or

otherwise Preference Share Capital (Section 43 - already notified)

Redeemable Preference Shares can exceed 20 years and upto 30 years for specified infrastructure projects (Refer Schedule VI) (Section 55 - already notified)

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Share Capital & Debentures

Voting rights in respect of preference shares – no distinction between cumulative and non-cumulative preference shares (Section 47 - already notified)

Bonus issuance specifically provided – certain conditions imposed – cannot be issued from revaluation reserve and in lieu of dividend (Section 63 - already notified) – Offer once made cannot be withdrawn

Prohibition of issue of shares at discount - issue at discount to be void (Section 53 - already notified)

Issue of sweat equity shares permitted (Section 54 - already notified)

Preferential issue value to be determined by registered valuer (Section 62 - already notified)

Specific mention of issue of convertible debentures subject to shareholders’ resolution (Section 71 - already notified)

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Deposits

(Section 73, 74(1) & 76 - notified)

Allows acceptance of deposits from members and public

Private company can accept only from members

Resolution of shareholders required Issuance of circular to members with

statement of financial position, credit rating obtained, outstanding amount of previous deposits

Deposit Repayment Reserve Account in a separate bank account– 15% of the amount of deposits maturing during a financial year and financial year next following

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Deposits

Deposit Repayment Reserve Account shall be used only for repayment of deposit, no other purpose

Public company can accept deposits from public

Provided it has prescribed “net worth” or “turnover”

Banking company and NBFCs exempted

Stringent penalties provided - Unlimited liability of officers responsible of accepting deposit with intent to defraud

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Private companies subject to greater control & regulations

Restriction on transferability of shares (Section 2(68)(i) - already notified)

Two members to form quorum of shareholders’ meeting (Section 103 - already notified)

Two directors are required (as against 3 in case of a public company) (Section 149 - already notified)

May provide additional grounds of disqualifications for directors in its articles of association; (Section 164 - already notified)

Additional grounds for vacation of directors in its articles of association (Section 167 - already notified)

No requirement to keep the contract of employment with MD and WTD at its registered office (Section 190 - already notified)

Can provide financial assistance to persons for the purchase of its own shares by giving loans for such purchases (Section 67 - already notified)

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Private companies subject to greater control & regulations

No retirement of directors by rotation (Section 152 - already notified)

No restriction on the limits of managerial remuneration (Section 197 - already notified)

Exemption regarding disclosure in board of directors’ report of formal annual evaluation of board’s own performance and that of its committee and individual directors (Exempted through draft Rules)

Appointment of Woman Director, Independent Director (Exempted through draft Rules)

Appointment of Audit committee and Nomination and Remuneration Committee (Exempted through draft Rules)

Watch out for exemptions under Section 462 and the Final Rules!

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Company Management – Board of Directors

Minimum Directors–2 in a private Company and 3 in a public company (Section 149 - already notified)

Maximum number of directors increased to 15 – can be increased with special resolution of shareholders (Section 149 - already notified)

Number of directorships per director increased to 20 (with not more than 10 in a public company) (Section 165 - already notified)

At least one woman director in certain companies  - doesn’t apply to private companies (Section 149 - already notified)

At least one director to be resident in India for 182 days (Section 149 - already notified)

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Company Management – Board of Directors

Same concept – Additional Director, Alternate Director and Casual Vacancy (Section 161 - already notified)

Appointment by Board of Directors and Shareholders – Additional director cannot be appointed by Board if the director fails to be appointed by shareholders (Section 161 - already notified)

Disqualification of Directors (Section 164 - already notified)

Duties of directors specifically provided – to act in accordance with the articles of association (Section 166 - already notified)

Minutes of meetings prepared and signed in the manner prescribed in the Rules (Section 118 - already notified)

Disclosure of interest by director or KMP within 30 days of his appointment, relinquishment of office (Section 184 - already notified)

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Company Management – Board of Directors

Participation in the board meeting through prescribed video conferencing or other audio visual permitted (Section 173 - already notified)

Gap between two board meetings cannot exceed 120 days (Section 173 - already notified)

Minimum notice period of 7 days for board meeting – shorter notice possible if at least 1 independent director, if any, present (Section 173 - already notified)

Circular resolution - One third directors may require a board meeting – (Section 175 - already notified)

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Company Management – Board of Directors

Director may resign from office by giving notice in writing  - Board to intimate RoC and place before next general meeting (Section 168 - already notified)

Director to provide reason for resignation to RoC (Section 168 - already notified)

Date of resignation - effective from date specified or date letter is received, whichever is later (Section 168 - already notified)

Restriction on board of directors powers (Section 180 - already notified)

Directors’ Remuneration – Same Concept as in Companies Act, 1956 (Section 197- already notified)

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Company Management – Board of Directors

Additional matters only in board meeting

(Section 179 – already notified)- to issue securities, including debentures,

whether in or outside India- to give guarantee or provide security in respect

of loans- to approve financial statement and the Board’s report- to diversify the business of the company- to approve amalgamation, merger or reconstruction- to take over a company or acquire a controlling or substantial stake in another company

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Company Management – Board of Directors

Key Managerial Personnel(Section 2 (51) and Section 203 already notified)

- CEO or Managing Director or Manager- Whole-time Director- CFO- Company Secretary - Such other officer as may be prescribed

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Company Management – Board of Directors

Key Managerial Personnel Appointment in certain companies – private companies included (Section 203 (1) – already notified) Appointment by board of directors (Section 203 (2) –

already notified) Whole-time KMP cannot hold office in more than one

company except the subsidiary (Section 203 (3) – already notified)

Separation of office of chairman and managing director or CEO (Section 203 – already notified)

Casual vacancy to be filled in 6 months (Section 203 (4) – already notified)

Is an “officer in default” (Section 2(60) –already notified)

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Company Management – Board of Directors

Key Managerial Personnel- Is a “related party” (Section 2(76) and 188

already notified)- Right to be heard (but not vote) in audit committee

meeting when auditor’s report is considered (Section 177(7) – already notified)

- Disclosure of interest (Section 189(2)– already notified)

- Prohibition on forward dealing in securities (Section 194– already notified)

- Prohibition on insider trading of securities (Section 195– already notified)

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Company Management & Corporate Governance

Independent Directors

(Section 149 read with Schedule IV – already notified)

Applicable to listed companies and classes of public companies which are prescribed

Clear concept and definition of independent directors introduced – does not include MD, WTD and Nominee Directors

Declaration to be provided by Independent Director that he / she meets the criteria in the definition

Selection of independent directors from data bank maintained

Qualifications for independent directors more stringent than Clause 49 of the listing agreement

Appointment to be approved by shareholders and formalised through a letter of appointment

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Company Management & Corporate Governance

Term of appointment of Independent directors provided – upto 5 consecutive years but not more than 2 consecutive terms unless there is a cooling period of 3 years

Code for Professional Conduct for Independent Directors introduced– Schedule IV – includes Roles, Functions & Duties

Exclusion of independent directors from retirement by rotation

No stock option to independent directors – sitting fees, re-imbursement of expenses and profit related commission permitted

Liability of Independent Directors clearly provided

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Disclosures in Board of Directors’ Report

Disclosure in respect of voting rights not exercised directly by employees for shares to the ESOP scheme (Section 67(3)(C) proviso - already notified)

Reasons for not spending on CSR activities (Section 135 – already notified)

Additional disclosures in Board’s report (Section 134 – already notified)o Extract of the annual returno Composition of CSR Committee, CSR policy, its contents and

Annual Report on CSR activitieso Company’s policy of appointment and remuneration for

directors, KMP and other employees including criteria for determining qualifications, positive attributes, director’s independence

o Explanation to qualification, explanation or adverse marks by the auditor and secretarial auditor

o Particulars of loans, guarantees or investments

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Disclosures in Board of Directors’ Report

o Statement indicating development and implementation of a risk management policy including identification of the elements of risk which threaten the existence of the company

o Related party transactions alongwith justification for entering into such transactions – notice of Board meeting to provide certain specified information

Detailed reasons for revision of financial statements - board’s duty to send revised financial statements to shareholders

Re-appointment of independent director after 5 years (Section 149 – already notified)

Establishment of Vigil Mechanism (Section 177(9) – already notified)

List all elements of remuneration package of all directors, stock options, details of fixed component and performance linked incentives along with performance criteria, service contracts, notice period, severance fees

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Disclosures in Board of Directors’ Report

Receipt of commission by a director from the holding company or subsidiary company

Financial summary/highlights, change in business, details of directors, KMP, names of subsidiaries, joint ventures or associate companies, details relating to deposits, details of significant and material orders passed by regulators or Court of NCLT impacting the going concern status and company’s operation in future

Additional information in Directors’ Responsibility Statemento Statement that the directors had devised proper systems to

ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively

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Company Management & Corporate Governance

New Committees introduced ● Nomination and Remuneration Committee

(Section 178 – already notified)● Stakeholders Relationship Committee (Section

178 – already notified)● Additional powers to audit committee (Section

177 – already notified)

Compulsory Secretarial Audit Report in listed companies to be annexed to the Board’s report (Section 204 – already notified)

Related Party Transactions defined and regulated – Government approval exempted - Restriction on interested member voting (Section 188 – already notified)

Restrictions on non-cash transactions involving directors (Section 192 – already notified)

Vigil Mechanism (Section 177 (9) – already notified)

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Related Party Transactions

Clear definition of “Related Party” (Section 2 (76) - with reference to a company, means:

(i) a director or his relative;(ii) a KMP or his relative;(iii) a firm, in which a director,

manager or his relative is a partner;(iv) a private company in which

a director or manager is a member director;

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Related Party Transactions

(v) a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital;

(vi) 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;

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Related Party Transactions

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act;

(viii) any company which is a holding, subsidiary or an associate company; a subsidiary of a holding company to which it is also a subsidiary;

(ix) director or KMP of the holding company or his relative

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Related Party Transactions

Clear List of Related Party Transactions clearly provided (Section 188)

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind; (d) availing or rendering of any

services;

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Related Party Transactions

(e) appointment of any agent for purchase or sale of goods, materials, service or property;

(f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company;

(g) underwriting the subscription of any securities or derivatives thereof, of the company

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Related Party Transactions

Agenda of the Board Meeting should disclose matters prescribed under Rule 15 (1) of Companies (Meeting of Board and its Power) Rules, 2014

Interested director to absent from meeting (Rule 15 (2))

Central Government approval Exempted

Only Special Resolution of Shareholders required only in the following cases:

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Related Party Transactions

(i) Company having a paid-up share capital of Rs. 10 crores or more; or

(ii) Contracts or arrangements exceeding certain value:

sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding 25% of the annual turnover as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;

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Related Party Transactions

selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding 10% of net worth as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

leasing of property of any kind exceeding 10% of the net worth or exceeding 10% of turnover as mentioned in clause (c) of sub-section (1) of section 188;

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Related Party Transactions

availing or rendering of any services directly or through appointment of agents exceeding 10% of the net worth as mentioned in clause (d) and clause (e) of sub-section (1) of section 188;

appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rs. 2,50,000 as mentioned in clause (f) of sub-section (1) of section 188; or

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Related Party Transactions

remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth as mentioned in clause (g) of sub-section (1) of section 188

“Turnover” or “Net Worth” shall be on the basis of the audited financial statement of the preceding financial year

What happens to existing contracts?

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Related Party Transactions

Explanatory of the Board Meeting should disclose matters prescribed under Rule 15 (3) of Companies (Meeting of Board and its Power) Rules, 2014

Interested members not allowed to vote General Exemption - Arm’s length

transactions in ordinary course of business

Details of Related Party Transactions in Board Report including certain Arm’s Length transactions

Justification for entering the transactions to be provided in Board’s report

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Related Party Transactions

Particulars of contracts or arrangement with related party to be entered in the Register of contracts or arrangement in which directors are interested

Penalty – if contract or arrangement not ratified within 3 months, such contract voidable at the option of the board; the director concerned liable to indemnify

Public Co – Public Co. transactions not exempted now

Violation of related party transactions – ground for disqualification of a director

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Investments & Loans

Private companies also covered now Applicable to lending, giving of guarantee and

providing security to any “person” and not only “body corporate”

Approval in board meeting with the consent of all directors present and with prior approval of public financial institution

Special resolution of shareholders if the limits prescribed for lending, guarantee, security and investment are exceeded – resolution should specify the total amount upto which the Board is authorised to give such loan or guarantee to provide such security or make such acquisition

Disclosure in the financial statement full particulars of loans given, investment made or guarantee or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the borrower

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Investments & Loans

Rate of interest on a loan cannot be lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan

Investment company only upto two layers permitted – there are two exceptions

Exemptions – – Loans, guarantees given, security provided by banking company

or insurance company or housing finance company or company providing infrastructure facilities

– NBFC whose principal business is acquisition of securities – Rights issue of shares– Loan, guarantee, security provided by holding company to wholly

owned subsidiary or a joint venture company or acquisition of shares of wholly owned subsidiary - from seeking shareholders approval – provided details disclosed in financial statement (Rule 11 of Companies (Meeting of Board and its Power) Rules, 2014

Register to be maintained

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Loans to Directors

Applicable to all kinds of companies

Loan to directors or “to any other person in whom director is interested”

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;(d) any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

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CSR

Mandatory for companies with (i) net worth Rs.500 crores; or (ii) turnover Rs.1,000 crores; or (iii) net profit Rs.5 crores (Section 135 - already notified)

Companies to constitute CSR Committee Private companies do not require 3 directors

and no independent directors The board of directors’ report will have to

disclose the composition of the CSR committee

CSR committee to frame a CSR policy recommending the amount to be incurred on CSR activities

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CSR

The CSR policy to be approved by the board of directors

Contents of such policy have to be disclosed in the board of directors’ report in the format as prescribed in annexure to the CSR Rules and on company’s website, if any

Expenditure incurred in India will only qualify

Preference to be given to local areas of operation

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CSR

While calculating the profit for the purposes of CSR contribution, neither the profits earned from overseas branch of an Indian company nor the dividend received from other Indian companies be included provided those Indian companies are covered and comply with Section 135

Expenditure incurred exclusively for the benefit of employees of the company and their families is excluded

Failure to spend - report reasons in directors’ report – “Comply or explain” concept

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CSR

Not only the Indian companies but even foreign companies having a branch office or project office in India will need to comply with the CSR requirements if they fall within any of the criteria under section 135

The CSR activities to be undertaken by the companies have to be within the purview of Schedule VII, which lists all the permitted CSR activities

Companies to spend 2% of the average net profits for preceding 3 years to one or more of the listed CSR activities

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CSR

CSR activities may be undertaken through a registered trust or a registered society or a non-profit company established by the company or its holding or subsidiary or associate company. However, trust, society or company not established by the company or its holding or subsidiary or associate company should have a minimum track record of 3 years in undertaking CSR programs

Political contribution shall not be considered as CSR activity

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CSR

Collaboration on CSR activities with other companies is permitted provided the CSR committees of respective companies separately report their CSR projects or programs

Companies can build CSR capacities of their own personnel provided the expenditure shall not exceed 5% of the total CSR expenditure of the company in a financial year

  Tax treatment not clear yet

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Auditors & Accounts

Auditors to be appointed for 5 years with yearly ratification (Section 139 - already notified)

Individual auditors - 1 term of 5 years (Section 139 - already notified)

Audit firm - 2 terms of 5 years (Section 139 - already notified)

Cooling–off period of 5 years (Section 139 - already notified)

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Auditors & Accounts

“Audit partner and his team”, may be rotated by resolution of members of the company (Section 139 - already notified)

Casual vacancy to be filled within a certain time frame (30 days / 3 months) (Section 139 - already notified)

Auditor (both the individual and the firm) debarred for 5 years if found guilty of abetting or colluding in any fraud (Section 140(5) - already notified)

Coverage of financial statements enhanced – to include cash flow statement, statement of change in equity (Section 2(40) - already notified)

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Auditors & Accounts

Recommendation of Audit Committee for appointment of auditors

Restriction on re-opening of books of account and recasting of financial statements except on the order of NCLT and that too in cases when accounts prepared in fraudulent manner or affairs of company mismanaged (Section 130 - not yet notified)

Prohibition on providing non-audit services, such as investment advisory, management services, etc. (Section 144 - already notified)

Liable to imprisonment and damages for failure of certain duties and obligations - such as in case when deceives the company or its shareholders or creditors or tax authorities (Section 147(2) - already notified)

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Auditors & Accounts

Compulsory consolidation of accounts (Section 129 - already notified)

Financial year streamlined (April 1 to March 31) – 2 years’ time to align (Section 2(41) - already notified)

Restriction on the amount of interim dividend - In case of loss in current financial year – cannot exceed the rate higher than average dividends during preceding 3 financial years (Section 123(3) - already notified)

No provision for mandatory transfer of profit to reserves

Books of accounts can be prepared in electronic form as may be prescribed (Section 2(12) - already notified)

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Auditors & Accounts

National Financial Reporting Authority introduced (Section 132 – not yet notified)

Restriction on re-opening of books of account and recasting of financial statements except on the order of NCLT and that too in cases when accounts prepared in fraudulent manner or affairs of company mismanaged (Sections 130 & 131 – not yet notified)

Compulsory internal audit (Section 138 – already notified)

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NCLT & Special Courts

Chapter XXVII and XXVIII (Some sections notified)

• Single forum constituted as National Company Law Tribunal (NCLT)

• Principal bench in New Delhi• Appeals from NCLT’s orders to Appellate NCLT• Appeals from Appellate NCLT to Supreme Court • Special Courts (with powers of Sessions Court) to

try criminal offences – summary jurisdiction for imprisonment less than 3 years

• Mediation and Conciliation Panel • Carrying mediation between parties during any

proceedings • Time period to dispose matters is 3 months

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M&A

Chapter XV (not yet notified) Merger of listed company with unlisted company Fast track merger – between small companies and

holding and wholly owned subsidiary Exit to dissenting shareholders and takeover offer Purchase of Minority Shareh Cross border merger Enhanced disclosure Representation from various authorities Difficult to raise objections to schemes Dispensation of creditors’ meeting – if 90% in value

agree by affidavit Restriction on treasury stocks

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Rehabilitation & Revival of Sick Companies

Chapter XIX (not yet notified) Now applicable to all companies not only

industrial company

Test of sickness – inability to pay secured creditors and not erosion of net worth

Secured creditors representing 50% or more outstanding debt can file with NCLT for sickness if not paid within 30 days of demand

No such right to unsecured creditors – only right to 1/4th unsecured creditors to approve revival scheme

Company can also file the application

Formation of Rehabilitation and Insolvency Fund

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Fraud & Class Actions

Section 447 and 448 (already notified)

Fraud to include any act, omission, concealment of any fact or abuse of position with intent to deceive, to gain undue advantage from, or to injure the interests of the company or creditors or any other person

Person guilty of fraud could face imprisonment 6 months to 10 years and fine 1 to 3 times of amount involved in fraud

Minimum imprisonment 3 years if public interest is involved

Right to 100 or more members or depositors to file for class action

Serious Fraud Investigation (SFIO) – additional powers given

Punishment for fraudulently inducing persons to invest money

Unlimited liability of officers responsible of accepting deposit with intent to defraud

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Winding up

No major changes

Concept of summary procedure of liquidation introduced

Liquidators from panel of professionals

Creditor due for Rs. 100,000 for 21 days - ground of winding up

Ambiguity if 2 years’ salary paid as compensation or paid only if outstanding to workmen

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Miscellaneous / Others

Prohibition on forward dealing and insider trading

Certain provisions affecting listed companies Exclusion of independent directors from retirement by

rotation Return to be filed with the RoC with respect to the

change in number of shares held by promoters and top 10 shareholders within 15 days

Preparation of report for each AGM and file with the RoC in 30 days confirming the conduct of meeting in compliance of Companies Act

Report of the Board of formal annual evaluation of its own performance, committees’ and individual director’s performance

Financials to be placed on the website of the company

Rotation of auditors

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Miscellaneous / Others

1/3rd directors to be independent directors

One director elected by “small shareholders” (shareholding less than Rs. 20,000)

Compulsory Secretarial Audit Report to be annexed to the Board’s report

Disclosure in Board’s report, the ratio of remuneration of each director to the median employee’s remuneration

Merger into unlisted company

Concept and meaning of ‘Control’ introduced Number of partners could be 100 – HUF and

professionals governed by special Acts exempted Directors’ and Officers’ Policy Transfer of Proceedings

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Thank you!

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