COMPANIES ACT, A Regulatory Handbook for Corporates

Transcription

1 COMPANIES ACT, 2013 A Regulatory Handbook for Corporates Updated: June 2015

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3 COMPANIES ACT, 2013 A Regulatory Handbook for Corporates Updated: June 2015 Companies Act, 2013

4 PREFACE The Companies Act, 2013 has substituted the Companies Act, 1956 after a span of 58 years with most provisions becoming effective as on April 1, The Companies Act, 2013 has been organized in 29 chapters and consists of 470 sections and 7 schedules. In addition to the provisions of the Companies Act, 2013, a substantial part of the law is in the form of Rules. Till date, 183 sections have come into force, thus bringing into effect all the important provisions, such as those dealing with Accounts, Auditors, Directors and Issue of shares. The provisions which have not become operative are primarily pertaining to compromise, arrangements, mergers, oppression & mismanagement, sick companies, liquidation of companies, National Law Tribunal and National Financial Reporting Authority. Since the enactment of the Companies Act, 2013, over and above the Rules, the Ministry of Corporate Affairs has issued an aggregate of 116 Notifications, Circulars and Orders making it difficult even for the most ardent reader to keep abreast of the changes. The significant changes since the enactment of the Act have been reflected by way of footnotes for ease of reference. The latest in the above developments are the Notifications dated 5th June, 2015 granting exemption to private companies and Section 8 companies. The focus of the publication is in respect of the most significant provisions from the perspective of the business and corporate world. We have identified and listed the Top 20 Action Items. which are applicable to most companies. The procedural compliances have not been discussed at length. It is necessary to ascertain the detailed regulations based on specific facts prior to taking action. The distinguishing features of the Companies Act, 2013 have been listed below: Better Governance Greater Accountability lunlisted public companies are also required to appoint independent directors if they fulfil certain conditions. lappointment of 1 resident director is mandatory for all companies. lthe concept of vigil mechanism has been introduced. lcertain companies are required to have a Nomination and Remuneration Committee and a Stakeholders Relationship Committee. linsider trading and forward dealing has been expressly prohibited. l Officer in default now also includes key managerial personnel. lthe annual return of a company shall now disclose numerous additional details. Companies Act, 2013

5 3. 4. Digital Era Operational difficulties lparticulars to be included in the directors report have been significantly increased and any misstatement/ omission in the same attracts heavy penalties. lthe concept of evaluation of performance of directors has been introduced. lshareholders have been vested with the power of initiating class action to prevent oppression and mismanagement. lnotices of meetings may be given electronically. lmeetings conducted through video conferencing have been recognised by the Companies Act, le-voting facilities must be given to members of listed companies. lcertain stringent provisions dealing with powers of the board, issue of shares, inter-corporate loans and investments, related party transactions, deposits, etc. are now also applicable to private companies, thus affecting their day-to day operations. lcertain provisions such as those dealing with preferential allotment and private placement are applicable to private companies too but lack clarity. limplementation of the provisions of the Companies Act, 2013 and the Rules notified thereunder in a phased manner has made the transition process obscure. This publication is of extreme relevance to companies, businessmen, directors, shareholders, managerial personnel (CEO/CFO/CS) and other stakeholders. With a view to assist readers in getting acquainted with the Companies Act, 2013, all the important provisions of the same have been presented in a user friendly manner, in simple and uncomplicated language We hope this endeavor assists you in taking appropriate steps towards ensuring compliance with the Companies Act, 2013 read with the latest Rules, Notifications, Circulars and Orders. Happy Reading! Companies Act, 2013

6 CONTENTS Top 20 Action Items: Are you complying with Companies Act, Chapter 1: Accounts And Audit 18 Chapter 2: Chapter 3: Directors And Committees Of The Board 27 Key Managerial Personnel And Managerial Remuneration 35 Chapter 4: Charges And Deposits 43 Chapter 5: Loans And Investments 48 Chapter 6: Related Party Transactions And Other Transactions 54 Chapter 7: Share Capital And Dividend 59 Chapter 8: Administration And Meetings 70 Chapter 9: Other Provisions 78 Abbreviations 89 Companies Act, 2013

7 Sr. No. 1. TOP 20 ACTION ITEMS: ARE YOU COMPLYING WITH COMPANIES ACT, 2013? Action Required Acceptance of Deposit As per the New Act, deposit has been defined to mean any receipt of money by way of deposit or loan or in any other form by a company, thus making the definition much wider in its scope. The Deposits received from shareholders of a private company are no longer exempt and will be treated as Deposits. Share Application money or advance for securities received towards allotment of securities shall also fall within the meaning of the term deposit, if shares are not allotted within period of 60 days from date of receipt of money. Form DPT-4 must be filed in respect of deposits received by the before the commencement of the New Act, where the amount of such deposit or part thereof or any interest thereon remains unpaid existing as on the date of the commencement of the New Act and the said deposits should be repaid within 1 year f r o m t h e d a t e o f commencement of the New Act or from the date on which such payments are due, whichever is earlier. Applicability Listed Unlisted Public Yes Yes No if : Private accepts from its members monies not exceeding 100% of the aggregate PSC + free reserves and Such company files with ROC the details of the monies so accepted. Effective Date Are you compliant? Yes / No Companies Act,

8 Sr. No. 2. Action Required Loans to directors and any other person in whom the director is interested (Section 185) The New Act restricts a company from advancing any loan, providing any guarantee in connection with loan, providing any security in connection with loan, to any of its directors or to any person in whom the director is interested subject to certain exemptions. Any other person in whom the director is interested means l any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; l any firm in which any such director or relative is a partner; l any private company of which any such director is a director or member; l any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or l any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in a c c o r d a n c e w i t h t h e directions or instructions of the Board, or of any director or directors, of the lending company. Applicability Listed Unlisted Public Yes Yes Yes if : Private A body corporate has invested in the share capital of the company; If the borrowings of such a company from banks or financial institutions or any body corporate is not less than twice of its PSC or Rs. 50 crore, whichever is lower and Such a company has defaulted in repayment of such borrowings subsisting at the time of making transactio ns under this section. Effective Date Are you compliant? Yes / No 2 Companies Act, 2013

9 Sr. No. 3. Action Required Limit on loans and investment (Section 186) A company cannot make investment through more than 2 layers of investment companies. However, this shall not affect: la company from acquiring any other company incorporated outside India, if such other company has investment subsidiaries beyond 2 layers; la subsidiary from having any investment subsidiary for the purposes of meeting the requirements of any law. A company shall not directly or indirectly give any loan to any person or body corporate or give any guarantee or security in connection with the loan and acquire by way of subscription, purchase or otherwise the securities of any other body corporate exceeding l60% of its PSC, free reserves and securities premium account or l100% of its free reserves and securities premium account; whichever is more. In case the loan, guarantee, security or investment exceeds the above limis, the approval of shareholders by way of special resolution is required. Further in case of default of loan from banks and Applicability Listed Unlisted Public Private Effective Date Yes Yes Yes Are you compliant? Yes / No Companies Act,

10 Sr. No. Action Required o t h e r p u b l i c f i n a n c i a l institutions, prior approval of lending institutions is required. These provisions shall now also apply to a private company. 4. Related Party Transactions Special Resolution is required where transactions exceed the following limits in case of: lsale, purchase or supply of any goods or materials d i r e c t l y o r t h r o u g h appointment of agents: 10% of Turnover or Rs. 100 crore, whichever is less. lselling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents: 10% of Net Worth or Rs. 100 crore, whichever is less. lleasing of property of any kind: 10% of Net Worth or 10% of Turnover or Rs. 100 crore, whichever is less. lavailing or rendering of any services directly or through appointment of agents: 10% of Turnover or Rs. 50 crore, whichever is less. lappointment to any office or place of profit in the company, its subsidiary company or a s s o c i a t e c o m p a n y : Remuneration in excess of Rs. 2,50,000 per month. lr e m u n e r a t i o n f o r underwriting the subscription o f a n y s e c u r i t i e s o r Applicability Listed Unlisted Public Private Effective Date Yes Yes Yes (the threshold limits for applicabil ity have been notified w.e.f 14 August 2014) Are you compliant? Yes / No 4 Companies Act, 2013

11 Sr. No. Action Required derivatives thereof of the company: 1% of Net Worth. However, these provisions shall not apply with respect to transactions entered into by the company in its ordinary course of business and on an arm s length basis. Companies must determine whether the transaction falls within this exemption.(companies may be required to produce a domestic transfer pricing report, if available and applicable, or any other report from the auditors establishing that the transactions entered into by the company were in its ordinary course of business and on an arm s length basis.) Applicability Listed Unlisted Public Private Effective Date Are you compliant? Yes / No 5. Corporate Social Responsibility Companies fulfilling the eligibility criteria must lform a CSR Committee and lspend atleast 2% of the average net profits of the preceding three financial years on CSR. The activities eligible for CSR have been substantially enhanced and includes Renewable Energy, Swachh Bharat Kosh and many others. The Board s report shall disclose the composition of the CSR committee, CSR policy, an annual report on CSR, failure to spend the required amount (if applicable) Net worth: Rs. 500 crore or more or Turnover: Rs crore or more or Net profit: Rs. 5 crore or more in any of the 3 preceding financial years Companies Act,

12 Sr. No. Action Required 6. Financial Statements T h e N ew Act re q u i re s companies to prepare cash flow statement and statement of changes in equity (if applicable) along with the balance sheet, profit and loss account and explanatory notes. The financial statements including the consolidated financial statements of all s u b s i d i a r i e s i n c l u d i n g associates and joint ventures of the company shall be laid before the AGM. This shall not apply to preparation of c o n s o l i d a te d f i n a n c i a l statement by an intermediate wholly-owned subsidiary, other than a wholly-owned subsidiary whose immediate p a r e n t i s a c o m p a n y incorporated outside India. Also for the financial year commencing from the 1st day of April, 2014 and ending on 31st March, 2015, consolidation is not required in case of a company which does not have a subsidiary/ies but has one or more Associate Companies or Joint Ventures or both. A statement containing the salient features of the financial statements must also be attached to the financial statements. Applicability Listed Unlisted Public Private Effective Date Yes Yes Yes (Until the accounting standards are specified by the CG, the standards as specified by the Old Act shall be deemed to be the accounting standards.) Are you compliant? Yes / No 6 Companies Act, 2013

13 Sr. No. 7. Action Required Appointment of Independent Directors and Woman Director Independent Directors The term independent director has been clearly d e f i n e d. A c o d e f o r i n d e p e n d e n t d i re c t o r s d e t a i l i n g t h e i r r o l e s, f u n c t i o n s, d u t i e s, appointment etc. is provided. He can hold office for a maximum of two consecutive terms of 5 years each. Thereafter a cooling period of 3 years should pass before reappointment. An independent director must give intimation to the company at the first board m e e t i n g a f t e r h i s appointment and in every F.Y. that he meets the criteria for independent director. The tenure of an independent d i r e c t o r a t t h e commencement of the New Act will not be counted for his appointment or holding office of director. Accordingly, the existing independent director m u s t b e r e a p p o i n t e d expressly as per the New Act prior to As per amended Clause 49 of the Listing Agreement a person cannot serve as an Independent Director in more than 7 listed companies. Applicability Listed Yes (as per revised clause 49 of the Listing Agreement which has come into effect from ) Unlisted Public PSC: Rs. 10 crore or more; or TO: Rs. 100 crore or more; or outstanding loans, deben tures and depos its: Rs. 50 crore. (A company fulfilling the above criteria shall have atleast 2 independ ent directors) Private Effective Date No (for listed companie s) Are you compliant? Yes / No Companies Act,

14 Sr. No. Action Required A person who is serving as a Whole time director in any listed company shall serve as an Independent director in not more than 3 listed companies. Woman Director falling under prescribed class of companies is required to appoint atleast one women director on the Board of the company. Applicability Listed Unlisted Public Yes P S C : R s crore o r more or T O : R s crore o r more Private Effective Date No Are you compliant? Yes / No 8. Appointment of Whole Time Director / MD / CEO, CFO and Secretary C o m p a n i e s to a p p o i n t following WTKMP: lmd/ceo/manager, in absence of aforesaid officers a WTD; and lcfo; and l Secretary Appointment of WTKMP to be by way of Board Resolution which should contain terms and conditions of appointment. Yes PSC of PSC of Rs. 5 Rs. 10 crore or more crore for s o r appointment more. of CS PSC of Rs. 5 crore o r m o re f o r appoi n t m e nt of CS Companies Act, 2013

15 Sr. No. 9. Action Required Conducting Board Meetings Gap between two Board Meetings The gap between two Board Meetings should not exceed 120 days. Notice of Board Meeting A notice of not less than 7 days must be given in writing to every director at his address registered with the company either by post or hand delivery be electronic means. Provisions of shorter notice for Board Meeting are applicable only to companies requiring appointment of i n d e p e n d e n t d i r e c t o r. Companies not requiring appointment of independent director must give 7 days notice and cannot give a shorter notice pending clarification from MCA. Interested Directors not to vote If a director of a public company is interested in a board resolution, he shall not participate in such proceeding of the meeting. In case of a private company, an interested director may participate in the meeting pursuant to disclosure of interest. Filing of Board Resolutions Certain resolutions passed by the Board are also required to be filed with the ROC. Applicability Listed Unlisted Public Private Effective Date Yes Yes Yes Are you compliant? Yes / No Companies Act,

16 Sr. No. 10. Action Required Appointment of Internal Auditor Companies which fulfill the eligibility criteria must appoint an internal auditor who shall either be a CA or C W A o r s u c h o t h e r professional as decided by the Board to conduct an internal audit of the functions and activities of the company. The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the Internal Audit. Applicability Listed Yes Unlisted Public PSC: Rs. 50 crore or more or Turnover: Rs. 200 crore or more or Outstanding loans or borrow ings from banks or public financial institu tions: Rs. 100 crore or more at any point of time during the preced ing financi al year or Private Turnover: Rs. 200 crore or more or Outstanding loans or borrowings from banks or public financial institutions : Rs. 100 crore or more at any point of time during the preceding financial year. Effective Date Are you compliant? Yes / No 10 Companies Act, 2013

17 Sr. No. Action Required 11. Establishing Internal Financial Controls, Enterprise Risk Management Policy and Legal Compliance Framework. Internal Financial Control Independent Auditor s Report must disclose the adequacy and effectiveness of internal financial controls. This requirement is applicable to all companies. All listed companies must disclose the adequacy and effectiveness in the Board s report. A u d i t C o m m i t t e e o f companies required to c o n s t i t u t e a n A u d i t Committee is required to evaluate internal financial controls. Setting up Enterprise Risk Management Policy The Board s report must Applicability Listed Unlisted Public Outstanding deposits: Rs. 25 crore or more at any point of time during the preced ing financi al year Private Effective Date Yes Yes Yes (To be reported in the Board s report from the F.Y onwards.) Auditor to report on adequacy of internal financial controls from the F.Y onwards. Are you compliant? Yes / No Companies Act,

18 Sr. No. Action Required include a statement indicating d e v e l o p m e n t a n d implementation of a risk management policy for the c o m p a n y i n c l u d i n g identification of elements of risk, if any, which in the opinion of the board may threaten existence of the company Legal Compliance Framework The Board s report must include a statement indicating that the directors had devised proper systems to ensure c o m p l i a n c e w i t h t h e provisions of all applicable laws and that such systems were adequate and operating effectively. 12. E s t a b l i s h m e n t o f V i g i l Mechanism The New Act requires a company to have a vigil mechanism to be overviewed through the audit committee or the Board where audit committee is not required for enabling the directors and employees to report genuine concerns. The establishment of a vigil mechanism shall be disclosed on the website of the company, if any, and in the Board s report. Applicability Listed Yes Unlisted Public Accepts deposits from the public or Borrowed money from banks and financi al instituti ons in excess of Rs. 50 crore. Private Borrowed money from banks and financial institutions in excess of Rs. 50 crore. Effective Date Are you compliant? Yes / No 12 Companies Act, 2013

19 Sr. No. Action Required Every company shall have 1 director who has stayed in India for a total period of not less than 182 days in previous calendar year. Applicability Listed Unlisted Public Private Effective Date 13. Appointment of Resident Yes Yes Yes Director Are you compliant? Yes / No 14. Appointment, reappointment, vacation and resignation of director. Every Director must attend at least 1 Board meeting upto as absence from all the meetings of the Board held during a period of 12 months with or without seeking leave of absence results in vacation of office of director. A director must also file a copy of his resignation to the Registrar within 30 days from the date of resignation in Form DIR-11. Accordingly, every director must ensure that he has a digital signature certificate. ( DSC ) In case of appointment of any person other than retiring directors as directors, including regularization of additional directors, a sum of Rs. 1 lakh must be deposited with the company atleast 14 days prior to the general meeting. Yes Yes Yes Yes Yes Not applicable Companies Act,

20 Sr. No. Action Required 15. Constitution of Committees Yes Audit Committee An audit committee shall consist of m i n i m u m 3 directors with majority independent directors and majority of directors who can read and understand financial statements. The functions of the audit c o m m i t t e e h a v e b e e n enhanced. A director shall not be a member in more than 10 Audit Committee and Stakeholder s Relationship Committee or act as Chairman of more than 5 A u d i t C o m m i t t e e a n d Stakeholder s Relationship C o m m i t t e e a c r o s s a l l companies in which he is a director Nomination and Remuneration Committee This committee shall consist of 3 or more non-executive directors of which not less than half shall be independent directors. The key functions of this committee shall include: lidentifying persons who are qualified to become directors and who may be appointed in senior management lformulating the criteria for determining qualifications, positive attributes and independence of a director. lrecommending to the Board a p o l i cy re l a t i n g to t h e r e m u n e r a t i o n f o r t h e directors, key managerial p e r s o n n e l a n d o t h e r employees. Applicability Listed Unlisted Public PSC: Rs. 10 crore or more or Turnover: Rs. 100 crore or more or Outstanding loans or borrow ings or debent ures or deposi ts: Rs. 50 crore or more. Private Effective Date No or within 1 year from appointm ent of independ ent directors, whichever is earlier. Are you compliant? Yes / No 14 Companies Act, 2013

21 Sr. No. Action Required Restrictions on powers of the Board apply uniformly to all c o m p a n i e s. A s p e c i a l resolution, as opposed to an ordinary resolution under the Old Act, is required for passing of resolutions specified under the section on restriction of powers of the Board. Applicability Listed Unlisted Public Private Effective Date 16. Restriction on powers of the Yes Yes No Board Are you compliant? Yes / No 17. Transitional arrangements Resolutions passed between and Resolutions approved or passed by companies under relevant applicable provisions of the Old Act during the period from to and in respect of w h i c h i m p l e m e n t a t i o n commenced before , can be implemented, in accordance with provisions of the Old Act and the said resolutions shall be valid for a period of 1 year from the passing of the resolutions or 6 m o n t h s f r o m t h e commencement of t h e corresponding provision in the New Act. If the conditions specified above are not fulfilled, or upon expiry of the validity term of t h e r e s o l u t i o n s, t h e resolutions must be passed afresh or ratified. Yes Yes Yes As per notificati on in this regard. Companies Act,

22 Sr. No. Action Required Amendment of Memorandum and Articles of Association of Every must determine if its memorandum and articles of association are in line with the requirements of the New Act in order to be able to amend them suitably as and when mandated. Applicability Listed Unlisted Public Private Effective Date Are you compliant? Yes / No 18. Additional details to be displayed on the Letterheads, Billheads etc. New Act requires certain additional details like Corporate Identity Number (CIN), Telephone No., Fax No., and Website address to be printed on its Letterheads, Billheads, Notices and Official Publications. 19. Filing of Forms with the ROC Any document, fact or information required to be filed with the ROC can now be filed only upto 270 days after the day on which it should have been filed by payment of additional fees. Filing later than the said period may require prior condonation of delay by the ROC. The company and its officers in default shall become liable to penalty or punishment upon failure to file such document, fact or information within the period mentioned above. Yes Yes Yes Yes Yes Yes Companies Act, 2013

23 Sr. No. Action Required 20. Appointment and rotation of auditors and appointment of Secretarial Audit Appointment and rotation of auditors Companies which fulfill the applicability criteria shall not appoint or re-appoint, lin case auditor is an individual, for more than one term of 5 consecutive years and lin case of an audit firm, for more than two terms of 5 consecutive terms. In case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the New Act shall be taken into account for the purpose of rotation. W h e r e c o m p a n y h a s appointed 2 or more auditors (individual or firm) as joint auditors, the company may follow the rotation in such manner as both or all joint auditors do not complete their term in same year. A notice of appointment shall be given by the company to the auditor and the ROC within 15 days from the date of appointment. Appointment of Secretarial Yes Auditor Companies required to have secretarial audit conducted by Secretary in Practice. The report of such an audit would be part of Board s report in format as prescribed by the Rules. Applicability Listed Unlisted Public Yes PSC: 10 crore or more or Public borro wings from financi al institu tions, banks or public deposi ts: Rs. 50 crore or more. PSC: Rs. 50 crores or more; or Turnover: Rs. 250 crores or more Private PSC: 20 crore or more or Public borrowings from financial institutions, banks or public deposits: Rs. 50 crore or more. No Effective Date (A transition period of 3 years has been provided for the commenc ement of rotation of auditors) Are you compliant? Yes / No Companies Act,

24 Chapter 1: Accounts And Audit

25 Chapter 1: Accounts And Audit 1.1 Accounts Financial year [Section 2(41)] st st All companies must follow 1 April to 31 March as their financial year. Companies which are holding or subsidiary companies of a foreign company and which are required to follow a different financial year for the purposes of consolidation of their accounts outside India may apply to the Tribunal for allowing the company to adopt a different financial year Books of account [Section 128] Books of account and other relevant books and papers must be kept at the registered office of the company. However, books of account can be kept at other places in India as may be decided by the Board. The New Act now specifically provides that books of accounts can be maintained in electronic mode with servers physically located in India and the manner of their maintenance has also been provided Financial statement [Section 129] Companies shall prepare cash flow statement and statement of changes in equity along with the balance sheet, profit and loss account and explanatory notes. OPC, small company and dormant company may not include a cash flow statement along with the balance sheet, profit and loss account and explanatory notes. Consolidation of financial statements is mandatory for all subsidiaries including associates and joint ventures of the company. 1 ( Schedule III and accounting standards shall not apply to the preparation of consolidated financial statement by an intermediate wholly-owned subsidiary other than a wholly-owned subsidiary whose immediate parent is a company incorporated outside India.) The requirement of consolidation of accounts shall not apply for the financial year from 1 April 2014 to 31 March 2015 in case of a company which does not have a 1 Inserted vide Notification dated 14 October Companies Act,

26 subsidiary or subsidiaries but which has associate companies or joint ventures or both. 2 ( Schedule III and accounting standards shall not apply in respect of consolidation of financial statements by a company having subsidiary or subsidiaries outside India only for the financial year commencing on or after 1 April 2014.) A statement containing the salient features of the financial statements must be attached to the financial statements Re-opening of accounts [Section 130] No company shall re-open its books of accounts and shall not recast its financial statements unless an application is made by Central Government, Income-tax authorities, SEBI or any other regulatory authority or any person concerned and an order is made by Court or Tribunal to the effect that: The relevant earlier accounts were prepared in a fraudulent manner; or The affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements. (This provision is not yet notified and hence not into force.) Voluntary revision [Section 131] The concept of voluntary revision has been recognised for the first time under the New Act. Directors of the company may prepare revised financial statement or a revised report in respect of any of the 3 preceding financial years after obtaining approval of the Tribunal in certain cases. Revised financial statement or report shall not be prepared or filed more than once in a financial year. Detailed reasons for such revision must be disclosed in Board s report. (This provision is not yet notified and hence not into force.) Authentication of financial statements, Board's report [Section 134] FINANCIAL STATEMENTS Chairperson or 2 directors (1 MD and CEO) and CFO + CS (if appointed) BOARD'S REPORT Chairperson or 2 directors (including MD) or 1 director (if there is only 1 director) 2 Inserted vide the Companies (Accounts) Amendment Rules, 2015 notification dated 16 January, Companies Act, 2013

27 1.1.7 Filing of Financial Statements with ROC [Section 137] A copy of the financial statements, including consolidated financial statement must be filed with the ROC. Every company is also required to attach the accounts of its subsidiaries which have been incorporated outside India and not having place of business in India. Benefit which was earlier given to private companies to file their balance sheet and profit & loss account separately has been withdrawn under the New Act Corporate Social Responsibility (CSR) [Section 135] Meaning: CSR means and includes: lprojects or programs relating to activities specified in Schedule VII to the New Act; or lprojects or programs relating to activities undertaken by the Board of a company in pursuance of recommendations of the CSR Committee of the Board as per CSR policy of the company provided such policy covers subjects enumerated in Schedule VII of the New Act. Net Profit: Net profit means the net profit as per its financial statement in accordance with the applicable provisions of the New Act, but shall not includelany profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and lany dividend received from other companies in India, which are covered under and complying with the provisions of section 135 (CSR provisions) of the New Act. Applicability: The provisions of CSR shall apply to every company having: lnet worth: Rs. 500 crore or more; or lturnover: Rs crore or more; or lnet profit: Rs. 5 crore or more during any of the 3 preceding financial years. Companies Act,

28 CSR shall also be obligatory to a foreign company having its branch office or project office in India fulfilling the criteria provided above. Spendable amount on CSR: Every qualifying company, must spend in every financial year at least 2% of the average net profits of the company made during the 3 immediately preceding financial years on CSR. Board shall be responsible for ensuring the same. CSR Committee: Any company fulfilling the applicability criteria set out above must constitute a CSR Committee. The following table indicates the manner of composition of CSR Committee. Listed CSR Committee of listed company shall consist of: Minimum 3 directors Out of which, at least 1 should be an i n d e p e n d e n t director. Unlisted CSR Committee of an unlisted company, which is not required to a p p o i n t a n independent director, shall constitute a CSR Committee without such director. CSR Committee of unlisted company required to appoint an independent d i r e c t o r s h a l l consist of: Minimum 3 directors Out of which, at least 1 should be an i n d e p e n d e n t director. Private A private company shall constitute a CSR Co m m i tte e w i t h o u t a n i n d e p e n d e n t director. CSR Committee of a private company h a v i n g o n l y 2 directors on its B o a r d, s h a l l constitute a CSR Committee with o n l y 2 s u c h directors. Foreign CSR Committee of a foreign company shall consist of at least 2 persons, of which 1 person shall be nominated by the foreign company and 1 person shall be t h e a u t h o r i zed representative of the company who is a person resident in India and whose particulars have been submitted to the ROC as per the provisions of the New Act. Functions of the CSR Committee: CSR Committee shall: lformulate and recommend a CSR policy to the Board; lrecommend amount of expenditure to be incurred on CSR activities; and lmonitor the CSR policy of the company from time to time. Modalities of performing CSR Activities: lcsr activities can be undertaken through a registered society or registered 22 Companies Act, 2013

29 trust or a company established under Section 8 of the New Act by the company either singly or along with its holding or subsidiary or associate company, or along with any other company or holding or subsidiary or associate company of such other company or otherwise. lcollaboration with other companies for undertaking CSR projects or programs is also permitted subject to the condition that the collaborating companies are in a position to report separately as per the reporting requirements under the New Act. Activities not considered as CSR: The following activities of the company shall not be considered as CSR activities: lcsr Projects or programs or activities undertaken outside India; lcsr Projects or programs or activities that only benefit the employees of the company and their families; lcontribution of any amount, directly or indirectly, to any political party; lactivities undertaken in the normal course of business; lone-off events such as marathons/ awards/ charitable contributions, etc.; lexpenses incurred by the company for fulfillment of any Act/ statute or regulations. Responsibility of the Board: The Board of every qualifying shall: linclude in the Board s report an annual report on CSR activities as per format provided; lapprove the CSR policy, take into account recommendations made by the CSR committee and disclose the contents of such policy in the Board s report and place it on company s website; lensure that the CSR activities are undertaken by the company; lensure that at least 2% of average net profits are spent on CSR activities. 1.2 Auditors Internal Audit [Section 138] Applicability: Internal audit is applicable to the following class of companies: Companies Act,

30 LISTED COMPANY lall UNLISTED PUBLIC COMPANY lpsc: Rs. 50 crore or more or lturnover: Rs. 200 crore or more or loutstanding loans & borrowings from b a n k s / p u b l i c f i n a n c i a l institutions: Rs. 100 crore or more at any p o i n t d u r i n g t h e preceding financial year or lo u t s t a n d i n g deposits: Rs. 25 crore or more at any time d u r i n g p re c e d i n g financial year. PRIVATE COMPANY lturnover: Rs. 200 crore or more or loutstanding loans & borrowings from b a n k s / p u b l i c f i n a n c i a l institutions: Rs. 100 crore or more at any p o i n t d u r i n g t h e preceding financial year Transition: Existing companies hit by these provisions had been given time until 30 September, 2014 to comply with the same. Qualifications: Internal Auditor shall be a CA or CWA or such other professional as may be decided by the Board. Internal Auditor may or may not be an employee of the company. Scope: The Audit Committee of the company or the Board shall, in consultation with the internal auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit Rotation of Auditors [Section 139] Applicability: Following class of companies shall not appoint or re-appoint as auditors, in case auditor is an individual, for more than one term of 5 consecutive years and in case of an audit firm, for more than two terms of 5 consecutive years: 24 Companies Act, 2013

31 LISTED COMPANY lall UNLISTED PUBLIC COMPANY lpsc: Rs. 10 crore or more or lpublic borrowings f r o m f i n a n c i a l institutions, banks or public deposits: Rs. 50 crore or more at any p o i n t d u r i n g t h e preceding financial year PRIVATE COMPANY lpsc: Rs. 20 crore or more or lpublic borrowings f r o m f i n a n c i a l institutions, banks or public deposits: Rs. 50 crore or more at any p o i n t d u r i n g t h e preceding financial year Where company has appointed 2 or more auditors (individual or firm) as joint auditors, the company may follow the rotation in such manner as both or all joint auditors do not complete their term in same year. Transition: In case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the New Act shall be taken into account for calculating the period of 5 consecutive years or 10 consecutive years, as the case may be. The New Act has stipulated a period of 3 years from date of commencement of this Act to comply with the provisions. Manner of appointment of auditors: The auditors of a company shall be appointed in the manner provided below: lin case a company is required to form an Audit Committee under the New Act, auditor shall be appointed through the Audit Committee and in case an Audit Committee is not required to be constituted, the auditor shall be appointed by the Board; lthe Audit Committee shall recommend to the Board the name of the individual or the audit firm and the Board shall consider and recommend such auditor to members for appointment; lif Board disagrees with the recommendation of Audit Committee, it shall refer back the recommendation to the Audit Committee citing reasons for such disagreement; Companies Act,

32 lthe Board shall send its own recommendation, if the Audit Committee decides not to reconsider its original recommendation. 3 Ceiling on number of companies: A person or a partner of a firm may be appointed or reappointed as an auditor provided the person or partner is at the date of such appointment or reappointment holding appointment as auditor in not more than 20 companies. However, this ceiling of 20 companies shall not include OPC, dormant company, small company and private company having PSC of less than Rs. 100 crores. 3 Inserted vide Notification dated 5 June Companies Act, 2013

33 Chapter 2: Directors And Committees Of The Board

34 Chapter 2: Directors And Committees Of The Board 2.1 Directors [Section 149] Number of directors A minimum number of 3 directors are required to be appointed in case of a public company and a minimum number of 2 directors are required to be appointed in case of a private company. A maximum number of 15 directors can be appointed by a company. However, this number can be increased by a special resolution of the members Composition RESIDENT DIRECTOR levery COMPANY shall have a director who has stayed in India for a total period of not less than 182 days in previous calendar year. WOMAN DIRECTOR llisted COMPANY lpublic COMPANY lpsc: Rs. 100 crore or more or lturnover: Rs. 300 crore or more shall have a woman director. INDEPENDENT DIRECTOR llisted COMPANY : 1/3rd directors should be Independent Directors, lpublic COMPANY shall have 2 independent directors if it is a public company having - lpsc: Rs. 10 crore or more or lturnover : Rs. 100 crore or more or loutstanding loans, debentures and deposits. Rs. 50 crore or more Independent Director ARE YOU AN INDEPENDENT DIRECTOR? FIND OUT WITH THE FOLLOWING QUESTIONNAIRE Before taking the questionnaire keep the following information ready: 1. Names of directors of the company 2. List of promoters of the company 3. Names of the holding, subsidiary and associate company (Associate company has been explained in chapter 9) 4. List of your relatives 28 Companies Act, 2013

35 QUESTIONS YES NO PROMOTER GROUP a. Are you a promoter of the company, its holding, subsidiary or associate company? b. Are you related to the promoters or directors of the holding, subsidiary or associate company? PECUNIARY RELATIONSHIP* c. Do you have a pecuniary relationship with the company, its holding or subsidiary or associate company? (Answer for the period starting 2 financial years immediately preceding the current financial year) d. Do you have a pecuniary relationship with the promoters or directors of the company, its holding or subsidiary or associate company? (Answer for the period starting 2 financial years immediately preceding the current financial year) e. Have your relatives had any pecuniary relationship or transaction with the company, its holding or subsidiary or associate company? (Answer for the period starting 2 financial years immediately preceding the current financial year) (The amount should be the lower of: more than 2% of the gross turnover or total income or Rs. 50 lakh) f. Have your relatives had any pecuniary relationship or transaction with promoters or directors of the company, its holding or subsidiary or associate company? (Answer for the period starting 2 financial years immediately preceding the current financial year) Companies Act,

36 (The amount should be the lower of: more than 2% of the gross turnover or total income or Rs. 50 lakh) g. Do you individually or with your relatives hold 2% or more of the total voting power of the company? TRANSACTION WITH COMPANY h. Were you an employee or KMP of the company or its holding, subsidiary or associate company? (Answer for the period starting 3 financial years immediately preceding the current financial year) i. Was any of your relative an employee or KMP of the company or its holding, subsidiary or associate company? (Answer for the period starting 3 financial years immediately preceding the current financial year) j. Were you or any of your relatives, an employee, partner or proprietor in any CA, CS or CWA firm working for the company or its holding, subsidiary or associate company? (Answer for the period starting 3 financial years immediately preceding the current financial year) k. Were you or any of your relatives, an employee, partner or proprietor in any legal or consulting firm which has had a transaction with the company or its holding, subsidiary or associate company? (Answer for the period starting 3 financial years immediately preceding the current financial year) (The amount of transaction should be 10% or more of the gross turnover of the firm) l. Are you a CEO or director of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company? 30 Companies Act, 2013

37 m. Are you a CEO or director of any non-profit organisation that holds 2% or more of the total voting power of the company? RESULT: *Pecuniary relationship does not include transactions entered by an independent director with the company concerned at par with any member of the general public and at the same price as is payable/paid by such member of public. i.e. in the ordinary course of business and at arm s length. Any remuneration received from one or more companies by way of sitting fees, reimbursement of expenses for participation in the Board and other meetings, profit related commission approved by the members shall also not fall within the meaning of pecuniary relationship. Answer to all the above questions is NO: You are an independent director Answer to any of the above questions is YES: You are not an independent director If you clear the above result, you have to comply with the following: You must give a declaration about your independence at the first Board Meeting you attend and thereafter at the first Board Meeting of every financial year or whenever there is any change in the circumstances which affect your independence. You must abide by the provisions of Schedule IV which prescribes a code for independent directors. You shall not be entitled for any further stock option. Term for holding office for an independent director shall be as under: Unlisted Public : Independent director shall hold office for term of 5 consecutive years and shall be eligible for re-appointment on passing of a special resolution. Further, independent director shall be eligible to hold office for not more than 2 terms of 5 consecutive years. He shall, however, be eligible for appointment after a cooling period of 3 years. Companies Act,

38 Listed Public : As per the Listing Agreement, independent director shall be eligible to hold office for not more than 2 terms of 5 consecutive years. However, in case the independent director has already served as an independent director for 5 years or more in a company as on October 1, 2014, he shall be eligible for appointment, on completion of his present term, for 1 more term of up to 5 years only. Other provisions governing Independent Directors: Vacancy: Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than the immediate next Board Meeting or 3 months from the date of such vacancy, whichever is later. Discontinuance of requirement of Independent Director: Where a company ceases to fulfill any of the applicability conditions stated above for 3 consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions. Liability of Independent Director: The liability of an independent director would be only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes and with his consent or where he had not acted diligently Alternate Director [Section 161] The New Act now states that an alternate director can be appointed in place of a director who absents himself from India for a period of 3 months. An alternate director to an independent director must now also fulfill the criteria of an independent director Number of Directorships [Section 165] A person can now be a director in up to 20 companies. However, a person cannot be a director in more than 10 public companies including private companies which are holding or subsidiary of a public company. In case of a listed company, an independent director shall not serve as an independent director in more than 7 companies and any person who is serving as a whole time director in any listed company shall serve as an independent director in not more than 3 listed companies. 32 Companies Act, 2013

39 2.1.5 Duties of directors [Section 166] The New Act now expressly specifies the duties of directors. A director shall act in accordance with company s articles; act in good faith; exercise his duties with due care and diligence. A director shall not involve in any conflicting interest with the company; achieve or attempt to achieve any undue advantage; assign his office Vacation of Office [Section 167] Under the New Act, amongst other things, the office of a director shall become vacant if he absents himself from all the meetings of the Board held during a period of 12 months with or without seeking leave of absence Resignation of Director [Section 168] The New Act now provides for resignation of a director and states that the resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later. The company and the director shall intimate the ROC within 30 days from the date of resignation Board s report [Section 134] Disclosures in the Board s report have now been substantially increased. The Board is now required to include particulars of contracts, arrangements with related parties, particulars of loans, guarantees and investments, policies of the company, evaluation of the committees, details in respect of adequacy of internal financial controls with respect to financial statements, extract of annual return, etc. Companies Act,

40 2.2 Committees and Mechanism The provisions pertaining to Committees and Vigil Mechanism are as under: Particulars Audit Committee Vigil Mechanism Nomination and Remuneration Committee Applicability Composition Functions Ø Listed companies ØListed companies Ø Listed companies ØPublic companies with ØC o m p a n i e s w h i c h ØAll public companies o PSC: Rs. 10 crore or accept deposits from o PSC: Rs. 10 crore or more or the public. more or o Turnover: Rs. 100 ØCompanies which have o Turnover: Rs. 100 crore or more or borrowed money from crore or more or b a n k s a n d p u b l i c o Outstanding loans financial institutions: o Outstanding loans or borrowings or Rs. 50 crore or more. or borrowings or debentures or debentures or deposits: Rs. 50 crore or more. deposits: Rs. 50 crore or more. ØIt shall consist of at The Audit Committee shall least 3 directors. o v e r s e e t h e v i g i l ØMajority should be mechanism and if there is independent directors no Audit committee, the who can read and Board shall nominate a understand financial director who shall oversee statements the vigil mechanism. The establishment shall be disclosed on the website, if any. The functions of the Audit Committee have been enhanced. The New Act is silent on the manner of electing the chairman. Stakeholders Relationship Committee Every company h a v i n g s h a re h o l d e r s, d e b e n t u r e - holders, depositholders and any other security holders at any time during a financial year. ØIt shall have 3 or more Ø It shall consist non-executive directors. o f a ØAt least half of the m e m b e rs s h a l l b e independent directors. ØChairperson of the c o m p a n y c a n b e m e m b e r o f s u c h committee but shall not chair such committee. chairperson who shall be a non-executive director and s u c h o t h e r members as m a y b e decided by the Board. ØThe chairperson shall ØThe attend the AGM. ØThe vigil mechanism ØIt shall identify persons shall look into genuine who are qualified to concerns that may be become directors and reported by directors who may be appointed and employees. in senior management. ØThe vigil mechanism ØIt shall recommend to s h a l l p r o v i d e f o r t h e B o a r d t h e i r adequate safeguards a p p o i n t m e n t a n d against victimization of removal and shall carry e m p l o y e e s a n d out evaluation of every directors who avail of director s performance. the vigil mechanism and ØIt shall formulate the also provide for direct criteria for determining a c c e s s t o t h e qualifications, positive Chairperson of the Audit a t t r i b u t e s a n d Co m m i t te e o r t h e independence of a director nominated to director. play the role of Audit Committee, as the case ØIt shall recommend to may be, in exceptional the Board a policy cases r e l a t i n g t o t h e remuneration for the d i r e c t o r s, k e y managerial personnel and other employees. chairperson shall attend the AGM. It shall consider and resolve the grievances of security holders of the company. 34 Companies Act, 2013

41 Chapter 3: Key Managerial Personnel And Managerial Remuneration

42 Chapter 3: Key Managerial Personnel And Managerial Remuneration 3.1 Key Managerial Personnel (KMP) [Section 203] Meaning Key managerial personnel in relation to a company means: The Chief Executive Officer or the managing director or the manager; The whole-time director; The secretary; The Chief Financial Officer; and Such other officer as may be prescribed. (No other officer has been prescribed yet.) Threshold for appointment The following companies shall appoint a whole-time KMP (Except a CS) Every listed company and Every public company having a PSC of Rs. 10 crore or more. 4 The threshold for appointment of CS is as follows: Every company having a PSC of Rs. 5 crore or more Appointment Every company belonging to the class of companies as mentioned above, shall appoint lmd, CEO or Manager and in their absence a whole-time director, lcs and lcfo Every whole-time KMP shall be appointed by means of a resolution of the Board containing the terms and conditions of appointment including remuneration. 4 Modified and substituted vide Notification dated 9 June Companies Act, 2013

43 If the office of any whole-time KMP is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy. A return of appointment of KMP must be filed with the ROC within 30 days from the date of his appointment KMP in more than one company Whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time. If the whole-time KMP holds office in more than 1 company at the same time on the date of commencement of the New Act, he shall, within a period of 6 months from such commencement, choose 1 company, in which he wishes to continue to hold the office. However, the fact that a person is a KMP in more than one company shall not disentitle him from being a director of any company. He shall need the permission of the Board for the same. A company may also appoint as its MD, a person employed as a MD or manager in another company subject to the following: a. He is an MD or manager in not more than one company. b. The appointment or employment is approved by a unanimous resolution of the Board. c. Specific notice of the meeting where such resolution is to be passed is sent to all directors in India Disclosure of Interest A KMP must disclose his concern or interest in respect of any items of special business to transacted at the meeting which is likely to be annexed to notice. He shall also disclose his shareholding interest (provided it is greater than 2% of the PSC) in another company with which a transaction is proposed in the special business. Any benefit accruing to a KMP due to inadequate disclosure or non-disclosure with respect to a transaction in which he is interested, shall be held by the KMP in trust for the company. Companies Act,

44 3.1.6 Register of KMP A register of KMPs shall be maintained at the registered office which shall include the details of securities held by each KMP in the company or its holding, subsidiary, subsidiary of company s holding company or associate companies Restrictions KMP is prohibited from forward dealing in securities of company. KMP is also prohibited from insider trading. A violation of this provision shall subject the KMP to a heavy penalty as per the provisions of the New Act. 3.2 Managerial Remuneration [Section 196 and Section 197] Appointment A company cannot appoint MD and manager at the same time. The terms and conditions of appointment and the remuneration payable shall be included in the notice convening the Board Meeting and the General Meeting in which the appointment shall be considered. In case, the appointment is in variance of the provisions of the New Act and the Schedule, approval of the Central Government is also 5 required. However, in case of a private company, the remuneration and terms and conditions of appointment of a managing director, whole-time director or manager need not be subject to the Schedule and approval in a general meeting Term A manager, MD or whole-time director cannot be appointed or reappointed at a time for a period of more than 5 years. Reappointment of such a person cannot be made earlier than 1 year before the expiry of his term Eligibility conditions A company can only appoint or continue in employment any person as MD, whole-time director or manager provided: The person is above 21 years of age. The company has passed a special resolution to appoint person who has attained age of 70 years. The person is residing in India for a continuous period of 12 months preceding his appointment or has a valid employment visa in case he is a non-resident. 5 Inserted vide Notification dated 5 June Companies Act, 2013

45 The person is not an undischarged insolvent or at any time been adjudged as such. The person has not suspended payment to creditors. The person has not been convicted by a Court of an offence and sentenced for term of more than 6 months. The person draws remuneration subject to the limit provided under the New Act in case where he is managerial personnel in more than 1 company Return of appointment The New Act now requires a company to file a return of MD/ whole-time director/ manager s appointment with the ROC within 60 days instead of 90 days as provided earlier Payment of remuneration The amount of remuneration payable to the managerial personnel of a company depends on the type of the company and on the availability of adequate profits. Remuneration shall be paid by the following companies in the manner as specified: 6 Private : No limits have been imposed on a private company with respect to the payment of remuneration to managerial personnel. Public having profits: A public company having profits may pay remuneration subject to the following limits: Particulars of remuneration Total remuneration Remuneration payable to only 1 MD, manager or whole-time director 5% More than 1 MD, manager or whole-time director taken together 10% Remuneration to directors other than MD or whole-time director Remuneration to directors other than MD or whole-time director 6 Inserted vide Notification dated 5 June Not more than specified percentage (%) of net profits 11%(it can exceed these limits with the approval of the Central Government) 1% (if there is a MD or a whole-time director) 3% (where there is no MD or whole-time director) Companies Act,

46 The above percentages do not include sitting fees payable to directors. company which does not have profits or has inadequate profits: A company, other than a private company, which has inadequate profits or which does not have profits shall pay an amount which shall be the higher of the amounts derived from the methods below: METHOD A Compute effective capital Calculate amount as per the following limits: Where effective capital is: Negative- Rs. 5 crore Rs. 5 crore- Rs. 100 crore Rs. 100 crore- Rs. 250 crore Limit of annual remuneration (in Rs.) 30 lakhs 42 lakhs 60 lakhs Rs. 250 crore or 60 lakhs % more of the effective capital in excess of Rs. 250 crore. METHOD B Compute current relevant profit Calculate 2.5% of the current relevant profit Compare with amount in Method B Compare with amount in Method A Limit of remuneration that may be paid is the higher of the amounts derived by Method A and Method B Method B shall apply only in case the managerial person was not paid during the preceding 2 years prior to his appointment. holding security of nominal value of more than Rs. 5 lakh or an employee or a director of the company or related to any director or promoter. A special resolution may be passed by the shareholders in order to double the limits mentioned above. 40 Companies Act, 2013

47 3.2.6 Meaning of key terms for the computation of remuneration as per the above methods Effective capital means: laggregate of the PSC (excluding share application money or advances against shares); lamount standing to the credit of share premium account; lreserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after 1 year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc. and other short-term arrangements) reduced by laggregate of any investments (except in case of investments by an investment company whose principal business is acquisition of shares, stock, debentures or other securities); accumulated losses and preliminary expenses not written off. Current relevant profit means: The profit as calculated under section 198 which deals with calculation of profits but without deducting the excess of expenditure over income referred to in sub-section 4 (l) in respect of those years during which the managerial person was not an employee, director or shareholder of the company or its holding or subsidiary companies Conditions for payment of remuneration as above Remuneration shall be paid as above subject to the following conditions: Payment of remuneration is approved by Board and by Nomination Committee and Remuneration Committee, if applicable. has not defaulted in repayment of any debts, public deposits, debentures, interest thereon for a continuous period of 30 days in preceding financial year before such appointment; Special resolution is passed for a period not exceeding 3 years; Information and disclosures as required under Schedule V are included in statement to be given to shareholders along with notice calling general meeting. Companies Act,

48 In addition to the above, the managerial personnel shall be entitled to certain perquisites which shall not be included in the ceiling of remuneration computed above Sitting fees Subject to discretion of Board, a director may receive sitting fees for attending meetings of Board or Committee thereof. However, sitting fees to a director shall not exceed Rs. 1 lakh per meeting of Board or Committee thereof. Sitting fees payable to an independent director and woman director shall not be less than fee payable to other directors Recovery of remuneration [Section 199] The New Act now provides for recovery of remuneration paid to managerial personnel in certain cases. This is a new provision and states that where a company is required to re-state its financial statements due to fraud or non-compliance with any requirement under the New Act and the rules made thereunder, the company shall recover from any past or present MD or whole-time director or Manager or CEO who, during the period for which the financial statements are required to be re-stated, received the remuneration (including stock option) in excess of what would have been payable to him as per restatement of financial statements. 42 Companies Act, 2013

49 Chapter 4: Charges And Deposits

50 Chapter 4: Charges And Deposits 4.1 Charge [Section 77] The key changes in the position of law governing charges are set out below: All charges require registration Creation or Modification of Change Within 30 days or within 300 days of creation or modification upon giving reasons to ROC Satisfaction of Charge Satisfaction of a charge must be intimated to ROC Within 30 days or within 300 days of satisfaction upon giving reasons to ROC A delay beyond 300 days from the creation/ modification must be condoned by the CG. Condonation of delay The Charge will not be registered unless such delay has been condoned. Penalty Penalty prescribed for failure to register a charge has been modified and now also includes imprisonment of every officer in default along with fine. 4.2 Deposit [Section 73 and Section 74] What is a deposit? Any receipt of money by way of deposit or loan in any other form by a company What is not a deposit? Amount received from directors subject to declaration from such director; Any amount received by a company from another company; Share Application money or advance for securities received towards allotment of securities, provided shares are allotted within period of 60 days from date of receipt of money; Amount received from an employee of the company not in excess of his annual salary under contract of employment; 44 Companies Act, 2013

51 Any advance received against orders for the supply of goods or properties or for the rendering of any service, provided it is appropriated within a period of 365 days from the date of acceptance From whom to accept a deposit? Depending upon the eligibility, some companies can accept deposits only from members while some can accept deposits from public as well as members. The details of the same are set out below: Threshold Depositor Limit lprivate lpublic with Net worth less than Rs. 100 crore or Turnover less than Rs. 500 crore lpublic with Net worth of Rs. 100 crore or more or Turnover of Rs. 500 crore or more How to accept a deposit? lmembers only lmembers only lmembers and lpublic l100% of PSC + Free reserves l25% of PSC + Free reserves l10% of PSC + Free reserves l25% of PSC + Free reserves Circular Inform ROC A circular should be issued to the members/public giving such details as have been specified under the New Act. A copy of the circular must be filed with the ROC within 30 days from the issue of circular. Bank Account Deposit at least 15% of the amount of deposits maturing during the current and next financial year in a separate bank account called Deposit Repayment Reserve Account. This account shall be used only for the repayment of deposits. Deposit Where amount of deposit and interest is less than Rs. 20,000, Insurance insurance coverage would be the full amount of deposit and interest and where amount of deposit is more than Rs. 20,000, the insurance coverage shall be minimum Rs. 20,000. Depositors Trustees Where a company has borrowed from its members and/or public, it shall appoint one or more trustees to be called as Depositors Trustees. Companies Act,

52 Creation of Security Credit Rating Repayment In case of secured deposit, as per the New Act a company must mandatorily create a charge on tangible assets in favour of Depositor Trustees. Companies need to obtain credit rating from recognised agency every year during the tenure of deposits. Deposits must be repaid with rate of interest which shall not exceed the maximum rate of interest or brokerage prescribed by the RBI for acceptance of deposits by NBFCs. 7 It must be noted here that except the provisions governing creation of security and repayment, a private company which accepts from its members monies not exceeding 100% of aggregate of the PSC and free reserves and files the details of the monies so accepted to the ROC is not required to comply with the remaining provisions governing acceptance of deposits, specified above Exempt Companies The provisions governing deposits shall not apply to the following companies: Banking ; A registered NBFC; A registered Housing Finance ; Such other companies as may be prescribed by Central Government. (No such companies have been prescribed till date) Deposits taken under Old Act Where deposits have been accepted under Old Act and such deposits along with interest are unpaid as on commencement of the New Act, the company was required to: File within 3 months of commencement of New Act (i.e. up to 30 June 2014) a statement of deposits for deposits accepted and remaining unpaid; and Repay within 1 year from date of such commencement or from the date on which they are due, whichever is earlier. 7 Inserted vide Notification dated 5 June Companies Act, 2013

53 However, above point shall be deemed to have been complied, if the company which had accepted/ renewed deposits under Old Act has been repaying such deposits in accordance with the provisions of Old Act. 8 It must be noted here that amounts received by private companies from their members, directors or their relatives prior to 1 April 2014 shall not be treated as deposits under the New Act subject to the condition that relevant private company shall disclose in the notes to its financial statements for the financial year commencing on or after 1 April 2014 the figure of such amounts and the accounting head in which such amounts have been shown in the financial statement Penalties for acceptance of deposits in contravention of the provisions of the New Act Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the provisions of the New Act governing deposits or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified by the New Act; The company shall, in addition to the payment of the deposit or part thereof and the interest due, be punishable with fine which shall not be less than Rs. 1 crore but which may extend to Rs. 10 crore. Every officer in default of the company shall be punishable with imprisonment which may extend to 7 years or with fine which shall not be less than Rs. 25 lakhs, but which may extend to Rs. 2 crore or both. (This provision is not yet notified and hence not into force) 8 Clarified by General Circular 05/2015 dated 30 March Inserted vide the Companies (Amendment) Act, 2015 as Section 76A and is yet to come into effect. Companies Act,

54 Chapter 5: Loans And Investments

55 Chapter 5: Loans And Investments 5.1 Powers of the Board Powers [Section 179] The powers of the Board to be exercised only at a Board Meeting and not by circulation have been widened and now additionally include: Issuing securities including debentures within or outside India, Granting loans or giving guarantee or security, Approving financial statement and Director s report, Diversifying the business of the company, Taking over of a company or acquiring a control or substantial stake in another company, Making political contributions, Appointing or removing KMP, Appointing internal auditors and secretarial auditor Restrictions [Section 180] The provisions dealing with restrictions on powers of the Board require the Board to exercise certain powers only with the approval of its members in the general meeting. A special resolution at a general meeting is required for the Board to exercise the powers specified in the section dealing with restriction on powers of the Board. 10 These restrictions are not applicable to a private company Political contribution [Section 182] The amount that may be spent on political contributions shall not exceed 7.5% of the average net profits of the company during the 3 immediately preceding financial years. 10 Inserted vide Notification dated 5 June Companies Act,

56 5.2 Loans to Directors [Section 185] Allowable loans RESTRICTED la company cannot give a loan, guarantee or security in respect of a loan to: ldirector of the company ldirector of the holding company lpartner or relative of director lfirm in which the director or relative is a partner lprivate company of which the director is a director or member. lbody Corporate in which a director or 2 directors together hold atleast 25% of the total voting power lbody corporate whose Board, MD or manager are accustomed to act in accordance with the directions or instructions of the Board or any director of the company. ALLOWED la company can give a loan, guarantee or security with respect to a loan: lto a Managing or whole-time director as part of service conditions extended by company to all its employees. lto a Managing or whole-time director pursuant to a scheme approved by a special resolution of the members. lif it is a company which in the ordinary course of its business p rov i d es l o a n s o r g i ves guarantees or securities for the due repayment of any loans which charge a rate of interest not less than that declared by RBI Exemptions Wholly-owned subsidiary la company can give a loan, guarantee or security in respect of a loan to its wholly-owned subsidiary provided the whollyowned subsidiary uses the loan made for its principle business activities. Subsidiary la company can give a guarantee or security in respect of a loan made by any bank or financial institution to its subsidiary provided the subsidiary uses the loan made for its principle business activities 11 Also inserted in Section 185 by Companies (Amendment) Act, 2015, Although the Companies (Amendment) Act, 2015 has not yet come into effect, the exemptions are currently contained in Rule 10 of the Companies (Meetings of Board and its Powers) Rules, Companies Act, 2013

57 5.2.3 Loans and Investments by [Section 186] The following table complied by us answers certain FAQs relating to loans and investments. FAQ Which company can give loans and make investments? Answer Any company except that which has defaulted in the repayment of any deposits or in payment of interest thereon shall give any loan or guarantee or security or make an acquisition. How to give a loan or An approval of all the directors present at the meeting guarantee or security? of the Board is required prior to giving any loan, guarantee or security. What are the limits upto which a loan, guarantee or security can be made? What is the prescribed rate of interest? What are the disclosures required? A company cannot: Give any loan to any person or other body corporate; (any person covers employees, share transfer agents, stock brokers, etc.) Give any guarantee or provide security in connection with a loan to any other body corporate or person; Acquire by way of subscription, purchase or otherwise, the securities of any other body corporate in excess of the higher of 60% of (PSC + free reserves + securities premium account) or 100% of (free reserves+ securities premium account) A company cannot give a loan at a rate of interest lower than the prevailing yield of 1, 3, 5, 10 year Government security closest to the tenor of the loan. A company which is giving any loan, guarantee or security as per the above provisions shall disclose the particulars and the purpose of the same in the financial statements. A register in respect of the same shall also be maintained. Companies Act,

58 FAQ What if the company exceeds the limits specified above? When do the above provisions not apply? Answer A special resolution of the members is required. The special resolution passed shall specify the total amount up to which the Board is authorized to give such loans/ guarantee or provide security or make acquisition. However, no such resolution is required in case of a loan, guarantee or security provided by a holding company in respect of its wholly-owned subsidiary. Approval of the financial institutions concerned where any term loan is subsisting shall also be obtained. The above requirements do not apply to: Loan or guarantee given or security provided a company to its wholly owned subsidiary company or a joint venture company. Acquisition made by a holding company, by way of subscription, purchase or otherwise of the securities of its wholly owned subsidiary company. Loan or guarantee given or security provided by a banking company or an insurance company or a housing finance company in the ordinary course of its business. Loan or guarantee given or security provided by a company engaged in the business of financing of companies or of providing infrastructural facilities. Acquisition made by a non-banking financial company registered with RBI and whose principal business is acquisition of securities. Acquisition made by a company whose principal business is the acquisition of securities. Shares allotted in pursuance of a rights issue. 12 Acquisition made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business. 13 Loans or advances made by companies to their employees other than MD and WTD provided they are in 12 Inserted vide Companies (Removal of Difficulties) Order dated 13 February Clarified vide General Circular No. 04/2015 dated 10 March Companies Act, 2013

59 FAQ Answer Investment by means of a special purpose vehicle accordance with the conditions of service applicable to employees and also are in accordance with the remuneration policy, if applicable. 14 Exemption to a Provisions governing loan to directors shall not apply to a private company private company. In whose share capital no other body corporate has invested any money whose borrowings from banks or financial institutions or any body corporate is less than twice of its PSC, or Rs. 50 crore, whichever is lower and which has not defaulted in repayment of such borrowings subsisting at the time of making transactions under this section. COMPANY A INVESTMENT COMPANY 1 INVESTMENT COMPANY 2 INVESTMENT COMPANY 3 OPERATIONAL COMPANY B A company cannot make investment through more than 2 layers of investment companies. The above shall not affect: company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country; Subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. 14 Inserted vide Notification dated 5 June Companies Act,

60 Chapter 6: Related Party Transactions And Other Transactions

61 Chapter 6: Related Party Transactions And Other Transactions 6.1 Related Party Transactions [Section 2(76) and Section 188] What is the meaning of a related party? Related Party with reference to a company means: i. Director or his relative; ii. iii. iv. KMP or his relative; Firm in which a director, manager or his relative is a partner; Private company in which a director or manager is a member or director; v. Public company in which a director or manager or his relative is a director and holds along with his relatives, more than two per cent of its PSC; vi. vii. Any body corporate whose Board, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; Any person on whose advice, direction or instructions a director or manager is accustomed to act; viii. Any company which is holding, subsidiary or an associate company, fellow subsidiary of such company; ix. KMP of holding company or his relative. Nothing in clause (vi) or (vii) shall apply to advice given in professional capacity. The definition of the term relative has been limited and now only includes members of a Hindu Undivided Family, husband and wife and father including step father, mother including step mother, son including step son, son s wife, daughter, daughter s husband, brother including step brother, and sister including step sister. 15 It must be noted that transactions of a private company with a company which is: a holding, subsidiary or an associate company of such private company or a subsidiary of a holding company to which it is also a subsidiary shall not attract the provisions of Section 188 dealing with related party transaction. 15 Inserted vide Notification dated 5 June Companies Act,

62 6.1.2 What kinds of transactions with related parties require prior approval? The following transactions require prior approval if they are entered into with a related party: Sale, purchase or supply of any goods or materials; Selling or otherwise disposing of, or buying, property of any kind; Leasing of property of any kind; Availing or rendering of any services; Appointment of any agent for purchase or sale of goods, materials, services or property; Related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; Underwriting the subscription of any securities or derivatives thereof, of the company What is the procedure for entering into any of the above transactions with a related party? If the transaction does not exceed the limits specified below: Board resolution is sufficient. 16 Transaction Sale, purchase or supply of any goods or materials directly or through appointment of agents. Selling or otherwise disposing of, or buying property of any kind directly or through appointment of agents. Leasing of property of any kind. Availing or rendering of any services directly or through appointment of agents. Appointment to any office or place of profit in the company, its subsidiary company or associate company. Limit 10% of Turnover or Rs. 100 crores, whichever is less. 10% of Net Worth or Rs. 100 crores, whichever is less. 10% of Net Worth or 10% of Turnover or Rs. 100 crores, whichever is less. 10% of Turnover or Rs. 50 crores, whichever is less. Remuneration in excess of Rs. 2,50,000 per month. Remuneration for underwriting the subscription of any securities or derivatives thereof of the company. 1% of Net Worth. 17 If the transaction exceeds the limits specified above. Special resolution of the members is required. 16 Transaction limits substituted vide Notification dated 14 August Ordinary Resolution shall be sufficient once Section 188 of the Companies (Amendment) Act, 2015 is notified. 56 Companies Act, 2013

63 The above trigger shall not apply to any transaction entered into by a company In its ordinary course of business and On an arm s length basis What should be done where the above procedure is not followed? 18 In case where the consent of the Board or an approval by special resolution as required is not obtained, the contract/arrangement shall be valid only if it is ratified by the Board or by a special resolution of the members within 3 months from the date on which such contract or arrangement was entered into. In case it is not ratified within the prescribed time, the contract is voidable at the option of the Board What are the restrictions on an interested party? A director interested in any contract or arrangement with a related party shall not be present at the meeting during discussions of the subject matter of the 19 resolution relating to such contract or arrangement. In case of a private company, a director interested in any contract or arrangement with a related party may participate in the meeting after disclosing his interest. A member shall not vote on resolution in general meeting if such member is 20 interested in contract or arrangement placed before the meeting. In case of a private company, a member may vote on a resolution to approve any contract or arrangement even if such member is a related party. 21 The term related party for this purpose only refers to such related party as may be a related party in the context of the contract or arrangement for which the 22 special resolution is being passed What compliance is required? The following compliances are required in case of related party transactions by a company: 18 Ordinary Resolution shall be sufficient once Section 188 of the Companies (Amendment) Act, 2015 is notified. 19 Inserted vide Notification dated 5 June Inserted vide Notification dated 5 June Clarified vide General Circular No. 30/2014 dated 17 July, Ordinary Resolution shall substitute the word 'special resolution' once Section 188 of the Companies (Amendment) Act, 2015 is notified. Companies Act,

64 Board Meeting agenda for passing a resolution for the approval of a related party transaction shall disclose certain particulars. The Explanatory Statement annexed to the notice of a general meeting shall contain certain particulars. Every contract or arrangement shall be referred to in Board s report to shareholders along with justification for entering in to such contract or arrangement Will the directors or employees be liable in case of a default? In case where a contract or arrangement with a related party is not ratified as required, if the contract is with a related party to any director or is authorized as such by any other director, the concerned directors shall indemnify the company against loss incurred by the company due to such contract or arrangement. In addition to the above, a company can proceed against a director or other employee who had entered into such contract in contravention of provisions of the New Act for recovery of loss sustained as a result of such contract. The director or any other employee in case of companies other than listed companies shall be punishable with fine and imprisonment. 6.2 Other Restrictions Restrictions on Non-Cash Transactions [Section 192] Any arrangement between a company and its directors in respect of acquisition of assets for consideration other than cash shall require prior approval by a resolution in general meeting and if the director or connected person is a director of its holding company, approval is required to be obtained by passing a resolution in general meeting of the holding company Prohibition on forward dealings in securities [Section 194] The New Act prohibits a director of a company or a KMP to buy a right to call for delivery at a specified price and within a specified time, of a specified number of relevant shares or debentures, right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or debentures Prohibition on Insider Trading [Section 195] The New Act makes insider trading by a director or a KMP, a criminal offence. Communication in the ordinary course of business, profession or employment will not be treated as insider trading. 58 Companies Act, 2013

65 Chapter 7: Share Capital And Dividend

66 Chapter 7: Share Capital And Dividend 7.1 Issue of Securities A company may raise capital by issue of securities in the following ways: Public company Private company Prospectus Private Placement Rights Issue Bonus Issue Private Placement Rights Issue Bonus Issue Public Issue (Applicable only to Public Companies) [Sections 23 to Sections 40] Process Application to stock exchange Issue of red herring prospectus, prospectus or a shelf prospectus (if the company belongs to a class prescribed by SEBI) Variation in terms of contract or objects of prospectus Minimum subscription Bank account Allotment Return of allotment Requirements Approval from the stock exchange is required for the securities to be dealt with. Failure to apply or obtain permission would entail mandatory refund of money received from applicants. The prospectus must contain all the details as are prescribed in the New Act and the Rules. The punishment for misstatement in prospectus is very severe and it attracts both criminal and civil liability. Terms may be varied only by special resolution through postal ballot The dissenting shareholders that do not agree with the change shall be given an exit offer by promoters or by controlling shareholders. Allotment cannot be made unless the minimum amount stated in the prospectus has been subscribed to. The amount so subscribed shall not be less than 5% of the nominal amount of the security. If minimum amount is not subscribed to within 30 days, the entire amount received must be refunded. All monies received on application to the securities must be kept in a separate bank account and cannot be used for any purpose other than those stated in the New Act. Subject to the condition of minimum subscription being complied with, securities shall be allotted. Return of allotment must be filed within 30 days. 60 Companies Act, 2013

67 7.1.2 Private Placement (Applicable to Public and Private Companies) [Section 42] Process / Particulars Approval Number of persons to whom offer may be made Requirements Approval of shareholders by way of special resolution for proposed offer or invitation of securities is required. Offer shall not be made to more than 200 persons in the aggregate in a financial year. Exclusions: Following persons are excluded while calculating the limit of 200 persons. Qualified Institutional Buyers Employees of the company Restriction of 200 persons is individually for each kind of security. Value of offer Time limit for allotment The value of such offer or invitation per person shall be with an investment size of not less than Rs. 20,000 of face value of the securities. Allotment of securities must be completed within 60 days of receipt of application money. If the company fails to allot securities within 60 days, then the application money must be returned to subscribers within 15 days from the completion of 60 days, failing which interest will be charged at the rate of 12% per annum. Important Points No offer or invitation of another kind of security shall be made unless allotment with respect to offer or invitation made earlier in respect of any other kind of security is completed, withdrawn or abandoned by the company. Application money received shall be kept in a separate bank account in a scheduled bank. Application money should be received through cheque/ demand draft/ any other banking channels, but not in cash. Companies Act,

68 7.1.3 Rights Issue (Applicable to Public and Private Companies) [Section 62] Process Approval Allottees Time limit for allotment Requirements Approval of Board of Directors is required Allotment shall be made to: To holders of equity share holders of the in proportion to the equity shares held on the date of offer. lthe offer shall be made by notice specifying the number of shares offered and for time, being not less than 15 days and not more than 30 days from the date of the offer. 23 A private company may reduce this period subject to the consent of 90% of the members of the private company. lif the offer is not accepted within given time it shall be deemed as declined lunless articles provide otherwise, the offer shall be deemed to include a right to renounce the shares or renounce the shares in name of any other person lafter expiry of the time or on receipt of earlier intimation, the person to whom the offer is made, declines the shares offered, the Board may dispose of the shares in such manner as may be advantageous to the shareholders and the. Employees under a scheme of employee s stock option by special 24 resolution of members (An ordinary resolution shall be sufficient in case of a private company). any other person either for cash or for a consideration other than cash, if price of such shares is determined by the valuation report of a registered valuer with special resolution of members. Allotment of securities must be completed within 12 months of passing of resolution Bonus Issue (Applicable to Public and Private Companies) [Section 63] Unlike the Old Act, the New Act now provides separate provisions with respect to issue of bonus shares to shareholders. Bonus shares may be issued by a company out of: a. its free reserves; b. the securities premium account; or c. the capital redemption reserve account. 23 Inserted vide Notification dated 5 June Inserted vide Notification dated 5 June Companies Act, 2013

69 Except upon the fulfillment of certain conditions, a company cannot capitalize its profits or reserves for the purpose of issuing bonus shares. Bonus shares cannot be issued in lieu of dividend. A company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same Issue of Sweat Equity Shares [Section 54] Approval: Special Resolution Notice: Explanatory statement of the notice requires a lot of particulars to be stated therein. Lock in period: 3 years from the date of allotment Price: Determined by registered valuer Remuneration: It shall be treated as part of the managerial remuneration Disclosure: The following disclosures are required: lboard s report must contain certain disclosures. lregister of sweat equity shares must be maintained at the registered office and must be authenticated by a CS or any other person authorised by the Board Employee Stock Option Scheme [Section 62] By Listed Companies: Where the equity shares of the company are listed on a recognized stock exchange, the Employees Stock Option Scheme shall be issued, in accordance with the regulations made by SEBI. By Unlisted Companies: Procedure for Unlisted Companies for issuing employee stock option is as follows: Conditions/Requirements a. Special resolution in general meeting and 25 Ordinary resolution in general meeting for a private company. b. The option can only be granted to employees of company, as more specifically defined in the Rules. Restrictions a. An employee who is promoter or person belonging to promoter group or director directly or indirectly holding more than 10% of outstanding equity shares shall not be eligible for ESOP. Disclosures a. Certain disclosures must be made in E x p l a n a t o r y Statement. b. Board s report for the year must disclose particulars of ESOP. 25 Inserted vide Notification dated 5 June Companies Act,

70 Conditions/Requirements c. The company shall have freedom to determine the exercise price in c o n f o r m i t y w i t h applicable accounting policies, if any d. There shall be a minimum 1 year lock in period between grant of options and vesting of option. e. The company shall h a v e f re e d o m to specify lock in period for shares. f. In event of death of employee while in employment, options granted to him shall vest in the legal heirs or nominees. g. S e p a r a t e s p e c i a l resolution shall be required for grant of option to employees of subsidiary or holding company; or where the grant of option to employees during 1 year is equal to or exceeds 1% of issued capital. Restrictions b. Options granted to employees shall not be transferable to any other person. c. O p t i o n s g r a n t e d cannot be pledged, h y p o t h e c a t e d, m o r t g a g e d o r encumbered. Disclosures c. to maintain Register of Employee Stock Options which can be maintained at the registered office or such other place as may be specified by the Board Issue of Equity Shares with Differential Voting Rights [Section 43] 26 (With respect to a private company, the provisions of the New Act shall be subject to the provisions of the articles.) Approval: The following approvals are required lauthorization in the articles of company lordinary Resolution 26 Inserted vide Notification dated 5 June Companies Act, 2013

71 lin case of listed company, resolution by postal ballot Limit: Shares with differential voting rights shall not exceed 26% of total post-issue paid-up equity share capital including equity shares with differential voting rights issued at any point of time. Track record: The company must have track record of distributable profit for last 3 years. No default: The company should not have defaulted in: lfiling financial statement and annual return for preceding 3 financial years. lpayment of dividend, repayment of matured deposits, redemption of preference shares or debentures, payment of interest on deposits or debentures Conversion: The company cannot convert existing equity shares into equity shares with differential voting rights and vice versa. Disclosures: The following disclosures must be made: ldisclosure of information required must be given in Explanatory Statement. ldisclosure of information must be given as prescribed in Board s report for the financial year in which such issue is completed. lregister of members to contain all relevant particulars of the shares so issued Issue of Shares on Preferential Basis Meaning: Preferential Offer means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include a lpublic issue; lrights issue; lemployee stock option scheme; Companies Act,

72 lemployee stock purchase scheme; lissue of sweat equity shares; lbonus shares or ldepository receipts issued in a country outside India or foreign securities. Shares: Equity shares, fully and partly convertible debentures or Securities: Any other security convertible into or exchanged with equity shares at a later date. Approval: The following approvals are required lauthorization in articles of company lspecial Resolution Fully paid-up: Securities shall be made fully paid-up at the time of their allotment. Disclosure: Explanatory Statement must disclose certain information. Allotment: Within 12 months from special resolution otherwise a fresh special resolution would be required. Consideration: Securities may be issued for cash or for any other consideration determined by registered valuer. 27 The provisions governing private placement should also be followed with respect to issue of shares on preferential basis except where the issue is made to one or more existing shareholders only Issue and Redemption of Preference Shares [Section 55] Approval: The following approvals are required 27 Inserted by Notification dated 18 March Companies Act, 2013

73 lauthorization in articles of company lspecial Resolution No default: The company should not have at the time of issue defaulted in lthe redemption of preference shares or lpayment of dividend due on any preference shares. Redemption: The company may redeem the preference shares: lat a fixed time or on the happening of a particular event; lany time at the company s option; or lany time at the shareholder s option. Infrastructure : A company engaged in the setting up and dealing with infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years. In this case the company must redeem a minimum 10% of such preference shares every year latest from the 21st year Issue of Debentures [Section 71] Approval: Special Resolution is required for issue of debentures with or without option of conversion into shares. Voting Rights: The debentures issued shall not carry voting rights. Date of Redemption: Maximum 10 years from date of issue except companies engaged in infrastructure projects, infrastructure finance companies and infrastructure debt fund non-banking financial companies can issue debentures for more than 10 years but not exceeding 30 years. Appointment of Debenture Trustee: If a company issues a prospectus or makes an offer or invites the public or its members exceeding 500 in number for subscription of debentures, appointment of debenture trustee is mandatory. Companies Act,

74 The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than 60 days after the allotment of the debentures. Debenture Redemption Reserve (DRR): The shall create DRR out of profits. 7.2 Payment of Dividend [Section 123] The provisions pertaining to payment of dividend are as under: In case of profit Final Dividend In case of loss The company may declare dividends out of Profits of the company for that year after providing depreciation. Profits of the company for any previous year or years arrived after providing for depreciation. Out of money provided by the Central Government or State Government for the payment of dividend by the company in pursuance of guarantee given by the company. In case of inadequacy of profits or absence of profits in any year, a company may declare dividend out of surplus subject to conditions, namely: lthe total amount to be drawn shall not exceed one-tenth of the sum of its PSC and free reserves as per latest audited financial statement. lthe amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. lthe balance of reserves after such withdrawal shall not fall below 15 % of its PSC. 28 lno company shall declare dividend unless carried over p r e v i o u s l o s s e s a n d depreciation not provided in previous year or years are set off against profit of the company of the current year. 28 This requirement has been deleted vide Notification dated 29 May Companies Act, 2013

75 In case of profit Interim Dividend In case of loss Out of surplus in the profit and loss account. Out of profits of the financial year in which such interim dividend is sought to be declared. Dividend cannot be declared at a higher rate than the average dividends declared by the company during immediately preceding 3 financial years Procedure which remains same as that under the Old Act Amount of dividend, including interim dividend, must be deposited in a scheduled bank account within 5 days of declaration of dividend. Unpaid or unclaimed dividend after 30 days of declaration must be transferred to Unpaid Dividend Account within 7 days from the expiry of 30 days. Unpaid or unclaimed dividend for a period of 7 years from the date of transfer to the Unpaid Dividend Account must be transferred to Investor Education and Protection Fund Points of difference vis-á-vis the Old Act Stricter Points A which fails to repay deposits accepted before commencement of the New Act cannot declare dividend on equity shares till the default continues. Dividend can be declared only from its free reserves. Lenient Points 29 It is not required for a company to set off its past losses before declaration of dividend. It is not mandatory before the declaration of dividend to transfer such percentage of company s profit to the reserves of the company. The percentage of transfer of reserves (if any) shall be decided by the Board. Payment of dividend is now expressly allowed through electronic mode to the registered share holder. 29 This requirement has been deleted vide Notification dated 29 May Companies Act,

76 Chapter 8: Administration And Meetings

77 Chapter 8: Administration And Meetings 8.1 Registers [Section 88] Register of Members la company must maintain a register of shareholders, register of debenture holders and a register of any other security holders. lthe register of shareholders must contain details of each class of equity and preference shareholders residing in India and outside India. lexisting companies had to comply with this requirement within 6 months from the commencement of Rules. (i.e. up to 30 September 2014) Foreign Register A company may maintain a register called the foreign register outside India containing particulars of security holders outside India. This is subject to authorization in the articles of the company. Notice of situation of foreign register must be given to the ROC within 30 days from the opening of such a register. 8.2 Annual Return [Section 92] The provisions apply to all companies including companies not having a share capital. Sr. No. Particulars Requirements under the New Act 1. Additional The New Act now requires a lot of additional information to be Requirements provided for in the annual return. 2. Period of The annual return must be filed till the close of the financial reporting year and not till the AGM of the company. 3. Signing It must be signed by a director and CS and in the absence of a CS by a practicing CS. 4. Certification Annual return filed by a listed company or a company with lpsc of Rs. 10 crores or more or lturnover of Rs. 50 crores or more, shall be certified by a practicing CS. 5. Board s report The Board s report must contain an extract of the annual return 6. Time period The annual return must be filed with the ROC within 60 days from for filing the AGM. Companies Act,

78 8.3 Electronic Records [Section 120] The following companies may maintain their records in electronic form levery listed company or la company having not less than 1000 shareholders, debenture holders and other security holders. Responsibility: The onus is on the MD, CS or any other director or officer as decided by the Board for security of records. 8.4 Meetings Annual General Meeting (AGM) [Section 96] The table below containing FAQs complied by us explains the provisions relating to AGM. Sr. No. Particulars Requirements 1. When should an AGM be held? First AGM First AGM must be held within 9 months from the closure of the first financial year of the. Subsequent AGM lagm must be held in each year. lagm must be held within 15 months form the date of previous AGM. lagm must not be held later than 6 months from the date of closure of the financial year. 2. On what days AGM must be held during business hours i.e. between 9 a.m. to 6 p.m. can you conduct on any day which is not a national holiday. an AGM? 3. How much notice is required? Notice must be given at least 21 clear days in advance. It may be sent in electronic format. Shorter Notice A shorter notice may be given subject to consent of at least 95% of the members entitled to vote. 72 Companies Act, 2013

79 Sr. No. Particulars Requirements 4..W h a t i s t h e Private quorum required for conducting 2 members are required to be personally present for a valid meeting. an AGM? Public Minimum number of members required to be personally present for a valid meeting shall be as per the requirement stated below: No. of Members of the No. of members as on the date of AGM less than 1000 members: 5 members 1001 to 5000 members: 15 members More than 5000 members: 30 members 5. Can a member vote electronically? 6. What is the filing that should be done with respect to an AGM? Every listed company and a company having not less than 1000 shareholders, shall provide to its members facility to exercise their right to vote at general meetings by electronic means subject to the fulfillment of certain requirements. Every listed company must prepare a report on AGM. The report shall be signed by the Chairman of the meeting or in his absence by 2 directors one of whom shall be MD, if there is one and CS of the. The report is to be filed with ROC within period of 30 days from date of conclusion of AGM. 30 A private company may, however, contain more lenient provisions than those provided in the New Act governing notice of meeting, explanatory statement, quorum for meetings, chairman of meetings, proxies, restriction on voting rights, voting by show of hands and demand for poll Extra Ordinary General Meetings [Section 100] The Board may whenever it deems fit, call an extra ordinary general meeting. All provisions relating to notice (including shorter notice) and quorum as provided in respect of an AGM shall be applicable to an extra ordinary general meeting. 30 Inserted vide Notification dated 5 June Companies Act,

80 8.4.3 Board Meetings [Section 173] The table below indicates the provisions relating to Board Meeting. Sr. No. Particulars 1. How often should you conduct a Board Meeting? Requirements First meeting of the Board First Board Meeting must be held within 30 days of incorporation. Subsequent Board meetings 4 meetings to be held every year. Gap between two meetings should not be more than 120 days. 2. How much notice is required? At least 7 days' notice in writing should be given to every director at his address registered with the. Notice can be sent by hand delivery or post or electronic means. Shorter Notice 3. What is the quorum required for conducting a Board Meeting? A meeting may be called at a shorter notice but 1 independent director must be present. If independent director is not present, the decisions will be final subject to ratification by an independent director. In case of conveying of Board Meeting by a private company at shorter notice a circular for clarification by MCA would be welcome. The quorum required is 1/3rd of the total strength or 2 directors whichever is higher. In situations where due to the removal or resignation of a director, required quorum is not present, the continuing directors may appoint new directors to fulfill the quorum requirement or for calling an AGM/ EGM Board Meeting Through Video Conferencing [Section 173] Notice of the meeting: The notice of the meeting shall inform the directors regarding the option 74 Companies Act, 2013

81 available to them to participate through video conferencing mode or other audio visual means. Intimation by Director: la director intending to participate through video conferencing or audio visual means shall communicate his intention to the chairperson or the CS of the company. lthe director, who desires, to participate may intimate his intention of participation through the electronic mode at the beginning of the calendar year and such declaration shall be valid for 1 calendar year. While conveying Board Meeting through video conferencing or any other audio video means, a company must: lsafeguard the integrity of the meeting by ensuring sufficient security and identification procedures. lrecord proceedings and prepare the minutes of the meeting. lensure that no person other than the concerned director are attending or have access to the proceedings of the meeting through video conferencing mode or other audio visual means. lstore for safekeeping and marking the tape recordings or other electronic recording mechanism as part of the records of the company at least before the time of completion of audit of that particular year. The following matters shall not be dealt with in a meeting through video conferencing or other audio visual means: lapproval of the annual financial statements; lapproval of the Board s report; lapproval of the prospectus; lapproval of the matter relating to amalgamation, merger, demerger, acquisition and takeover Proxies [Section 105] Audit Committee meetings for consideration of accounts shall also not be held through video conferencing or other audio visual means. A person appointed as proxy cannot act on behalf of more than 50 members and holding in aggregate more than 10% of total share capital of the company carrying voting rights. Companies Act,

82 However, a member holding more than 10% of the total share capital of the company carrying voting rights may appoint a single person as proxy and such person shall not act as proxy for any other person or shareholder Postal Ballot [Section 110] (Applicable to Listed and Public Companies having more than 200 members) Following procedure shall be followed for passing of resolution by postal ballot. Notice Notice shall be sent to all the shareholders, along with a draft resolution explaining the reasons and requesting them to send their assent or dissent in writing on a postal ballot form. Advertisement An advertisement shall be published in at least one vernacular newspaper of the district and in at least one English language newspaper having a wide circulation in that district. Appointment of Scrutinizer The Board shall appoint scrutinizer for conducting the postal ballot voting process in a fair, transparent manner ascertaining the requisite majority. Time of assent or dissent Shareholders should intimate their assent or dissent within a period of 30 days from the date of dispatch of the notice. Report of Scrutinizer The scrutinizer shall submit his report as soon as possible after the last date of receipt of postal ballots but not later than 7 days. Passing of resolution If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot including voting by electronic means, it shall be deemed to have been duly passed at a general meeting convened in that behalf. Resolution only by means of postal ballot The New Act prescribes that certain specific business shall be transacted only by means of postal ballot. 76 Companies Act, 2013

83 8.5 Miscellaneous Limitation of time for Issue of Certificates [Section 56] Every company shall deliver the certificates of all securities allotted, transferred or transmitted within the time limits specified below: Incorporation: Within a period of 2 months from the date of incorporation in the case of subscribers to the memorandum (Old Act did not specify any time period) Allotment: Within 2 months from the date of allotment, in case of any allotment (Old Act provided a period of 3 months) Transfer: Within a period of 1 month form the date of receipt of the instrument of transfer by the. (Old Act provided a period of 2 months) Debentures: Within a period of 6 months from the date of allotment of debenture (Old Act provided a period of 3 months) Secretarial Audit [Section 204] Applicability: llisted lpublic company having PSC: Rs. 50 crore or more or Turnover: Rs. 250 crore or more. Authority: Practicing CS. Duty of : the shall give all assistance and facilities to Practicing CS for auditing the secretarial and related records of the. Board Report: Board report shall include any explanation to any qualification or observation or any remarks made by Practicing CS in Secretarial Audit Report. Companies Act,

84 Chapter 9: Other Provisions