PPT by AZB & PARTNERS Companies Act, 2013 And Draft Rules Mr-Ajay-Bahl.ppt

8/10/2019 PPT by AZB & PARTNERS Companies Act, 2013 And Draft Rules Mr-Ajay-Bahl.ppt

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Companies Act, 2013And Draft Rules



Directors: • Duties of Directors clearly laid down – Higher accountability.• Requirement of independent directors for a wider group of companies (and not only

listed entities).• Obligations to undertake Corporate Social Responsibility activities.• Nominee directors of financial institutions not deemed independent.

Shareholders:• Ability to initiate class actions on account of mismanagement/fraud etc.• Ability to execute legally enforceable contracts relating to transfer of securities in a

public company.

Auditors:• Rotation of Auditors (maximum term of 5 years for individuals and two terms of

five years for auditing firms) for certain classes of companies. Network firms notallowed to replace an outgoing firm.

• Bar on providing non auditing services to a company, where it is appointed as anauditor.

• Disqualifications on a number of grounds - holding of securities in the company byrelatives, engaged in business relationship with the company etc.

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Broad overview of the new law and some key aspects relevant todifferent stakeholders



Promoters:• New category of „Promoters‟ introduced.•

Liability with respect to public offers and disclosure requirements, attached to categoryof persons qualifying to be „Promoters‟ .• Defined to include persons who have „control‟ over the affairs of the company.• „Control‟ defined to include right to control management or policy decisions directly or

indirectly including through shareholders, voting agreements or in any other manner.

Companies:• Companies satisfying certain financial thresholds to undertake CSR activities.• Class of companies (to be notified) to have limited layers of subsidiaries.• New requirements for private placement of shares.• Buy-backs to have atleast 1 year gap.• Related party transactions to be subject to shareholders approval.• Mergers of Indian companies with foreign companies and vice-verse permitted subject

to conditions.• New requirement for directors responsibility statement for all companies.• Listed companies and certain specified unlisted companies to have at least 1 woman

director.•

Specified unlisted companies to have at least 1 independent director

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Broad Overview... (Contd.)



Investors:• Ability to execute legally enforceable contracts relating to transfer of securities in a

public company.• Articles may contain entrenchment provisions.• Mergers of Indian companies with foreign companies can only be done where

foreign companies are in notified jurisdictions and subject to RBI approval.• Blanket exemption to private companies to issue shares of different class ( beyond

equity and preference) eliminated. Shares with differential rights to be issued inaccordance with Rules which are yet to be notified.

• May be considered as “promoters‟ if they have contractual rights which areconsidered to fall within the definition of “control” .

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Broad Overview... (Contd.)



Definition of “control ” under the Act :• Control shall include the right to appoint majority of the directors or to control the

management or policy decisions exercisable by a person or persons actingindividually or in concert, directly or indirectly, including by virtue of theirshareholding or management rights or shareholders agreements or voting agreementsor in any other manner;

Section 469(1) of the Act, empower the Central Government to make rules “to carry out provisions of the Act ”.

Issue: In the context of the revised definition of “promoter” as discussed andconsidering the controversy surrounding the definition when used in other regulations/

policies, the expression “control” contextually under the Companies Act needs to be

clarified through appropriate rules. Arguably the scope of the rule making authority iswide enough to permit this.

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Control – Need for clarity through Rules?



Evaluation of

Certain Draft Rules

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Disqualification of Auditors:

• Draft rules propose financial threshold for investment in securities by relatives upto face

value of INR 1 Lakh.• The term „relative‟ has been widely defined to include a number of independent relatives

(e.g. brother, sister, son-in-law), over whom the auditor may have no control whatsoever.

• May result in situations where, due to the acquisition of securities by an independentrelative ( e.g. son-in-law) of a partner of auditing firm, outside such partners‟ knowledge,

such partner (along with the entire firm) is disqualified to act as an auditor of a company.

Issue:

If a direct interest or a commonality of interest in the investment of auditor is the basis of“disqualification” these limits should be revised to reflect separate limits for differentcategory of relatives:

• Lower limit for dependent relatives like son, wife, etc.• Exclusion of independent relatives like brother, sister, son-in-law, grandson, etc. or a

higher threshold for investments by them as commonality of interest cannot be presumed.

Audit and Auditors



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Selection of Auditors:

• Draft rules provide that Board/Audit Committee are mandated to consider completed and

pending proceedings against auditor.• To ensure compliance with the same, Auditor should certify details of completed and

pending proceedings to Companies, (in relation to pending proceedings, of which suchauditor has received notice), as part of the auditor certificate prescribed under the ruleswhich currently only requires the auditor to certify that he is eligible and not disqualified.

Reporting of Frauds by an Auditor:

• CARO, 2003 currently provides for reporting of frauds on or by a Company.

• Draft rules under Section 143 (12), only provide for reporting of fraud by officer oremployees on a Company that the auditor is aware of.

• Currently under CARO 2003, fraud reporting is not limited to any specific category offrauds. Considering the similar impact even other frauds may have on a company,suitable provisions may be made in orders to be issued under Section 143(11) forreporting of frauds by third parties (like vendors) involving the Company, which theauditor has notice of even where the officer or employees may not be fraudulently

involved.

Audit and Auditors (Contd.)



Calculation of Net Profit:

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Statutory Provision - Section 135(1) of the Act states that Net Profit shall be„calculated in accordance with Section 198 of the Act‟, which provides for a numberof adjustments like exclusion of profits from sale of undertaking, etc.

• Draft Rules - net profit for Section 135 (1) to be “ profits before tax and exclude net profit of branches outside India” .

•

Issue - Rules should clarify that the profit before tax be computed under Section 198only. Further exclusion of profit of branches may not be in conformity with Section135 which provides for profits to be calculated under Section 198 only.

CSR Spends: Draft rules provide that 2% of average net profits during every block of 3years.

• “At the risk of being in conflict with the Act”, the draft rules may consider clarifyingthe manner of computation of net profits if the Company has losses in one or moreyears in the past 3 yrs.

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Corporate Social Responsibility



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Contributions:

• Statutory Provision – Schedule VII provided for a specified list of activities whichmay be included by companies in their CSR Policy, which only included the PrimeMinister National Relief fund or other Central / State Govt. funds as 3 rd partieswhich could undertake CSR activities

• Draft Rules – Now clarify that CSR contributions can be made by Companies tovarious organizations with atleast 3 years track record in related areas.

Corporate Social Responsibil i ty (Contd.)



Statutory Provisions:Section 3 and 4 of the Companies Act 2013 (“Act ”) provide for setting up of OPCs for a

„lawful purpose ‟. There are no restrictions/thresholds contemplated in the statuterelating to formation / capital / change in status of OPC .

Draft Rules: Lay down the following restrictions:• Only Indian Citizens resident in India (i.e. stay ≥ 182 days) can set up OPC.• No person can set up more than 5 OPCs.• If OPC‟s capital > INR 50 Lacs or average annual turnover > INR 2 Crores, OPC to

be converted into a private/public company and all the relevant conditions for suchcategory will need to be satisfied.

Section 469(1) of the Act, empower the Central Government to make rules “to carry out provisions of the Act ”.

Issue:Apart from possibly making the OPC route un attractive the draft Rules for OPC byimposing restrictions, appear to be in conflict with the substantive provision of the Act.

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One Person Company (‘OPC’)



Rules relating to the following matters are yet to be notified:

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Issuance of shares/debentures (including sweat equity, shares with differentialrights).

• Buyback of shares• Redemption of preference shares.• Prospectus and Allotment of Securities (including GDRs)• Acceptance of deposits by companies• Mergers/arrangements• Appointment and remuneration of managerial personnel• Class of companies having a cap on number of subsidiaries• Special courts• Winding Up (including through summary procedure)

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Some Important Rules yet to be notified

PPT by AZB & PARTNERS Companies Act, 2013 And Draft Rules Mr-Ajay-Bahl.ppt

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