The Companies (Amendment) Bill, Overview

Transcription

1 / info@vinodkothari.com / vinod@vinodkothari.com The Companies (Amendment) Bill, Overview Vinod Kothari & Company Kolkata Krishna Building 224 AJC Bose Road Kolkata Phone: / /7715 E: corplaw@vinodkothari.com New Delhi A/11, Hauz Khas, New Delhi Phone: / E: delhi@vinodkothari.com Mumbai , 175, Shreyas Chambers, D.N. Road, Fort, Mumbai Phone: / E: bombay@vinodkothari.com

2 2 Copyright The presentation is a property of Vinod Kothari & Co. No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission. In case of linking, please do give credit and full link

3 3 About Us Vinod Kothari & Co., Based in Kolkata, Mumbai, Delhi We are a team of consultants, advisors & qualified professionals having over 25 years of practice. Our Organization s Credo: Focus on capabilities; opportunities follow

4 Tabular Overview-

5 5 Highlights Changes proposed for 92 sections. Most of the changes are to simplify, soften the provisions of the Act. Most of the changes are based on the recommendations of the Standing Committee. What is the current status: Company Law Committee Reports dated 1 st February, 2016 suggested the changes in the Act; The Companies (Amendment) Bill 2016, introduced in Lok Sabha on March 16, 2016 was referred to the Committee on April ; Standing Committee gave its report dated December 07, 2016; The Lok Sabha has passed the Companies (Amendment) Bill, 2017 on July 27, 2017 Companies (Amendment) Bill, 2017 is in the agenda of Rajya Sabha

6 6 Amendments to iron out creases in drafting or construction Several of the proposed amendments are corrective, curative To fill gaps left by earlier law To make changes made by RoD Orders a part of the law To bring some changes from the Rules to the statute To correct inept drafting

7 7 Amendments in Brief (1/35) Section Changes under Bill, 2017 Explanation to 2(6)- associate company significant influence- control of 20% of total voting power, or control of or participation in business decisions under an agreement; joint venture- joint arrangement having joint control of the arrangement have rights to the net assets of the arrangement; 2(28)- cost accountant 2(30)- debenture 2(41)- financial year 2(46)- holding company, Requirement of holding COP. Exclusion to the instruments referred to in Chapter III-D RBI Act and such other instrument, as may be prescribed. The proviso relating to application to the Tribunal India has been extended to an associate company as well. Company to include a body corporate

8 8 Amendments in Brief (2/35) Section Changes under Bill, (49)- interested director 2 (51)- key managerial personnel Omitted. Inclusion of a whole time officer, not more than one level below the directors designated by the Board. 2 (57)- net worth Inclusion of debit or credit balance of profit and loss account. 2 (71)- public Insertion of the word and between the clauses. company 2 (76)- related party Substitution of clause (viii) to clarify a body corporate to be treated as a related party; Insertion of explanation to clarify quantum of investment by investing company or venture of the company

9 9 Amendments in Brief (3/35) Section Changes under Bill, (85)- small company Increase of the paid up capital criteria from 5 crore to 10 crore and turnover criteria from 20 crore to 100 crore; Substitution of the words "as per profit and loss account for the immediately preceding financial year" for the words "as per its last profit and loss account" 2 (87)- subsidiary company 2 (91)- turnover For control criteria, for the words "total share capital", the words "total voting power" has been substituted; Substitution of the clause to mean gross amount of revenue recognized in P/L from the sale, supply, or distribution of goods or on account of services rendered, or both. 3 A New section for members liability for reduction of number of members below statutory minimum and carries on business for more than 6 months;

10 10 Amendments in Brief (4/35) Section Changes under Bill, (5) (i)- Reservation of name Reservation of name for 20 days against 60 days from the date of approval for new companies; Existing companies change of name for 60 days from the date of approval. Earlier the day count was from the date of application. 7 (1)- Documents Self- declaration replaces affidavit from subscribers to the w.r.t. incorporation memorandum at the time of incorporation. 12 (1)- Intimation of Time limit of 15 days has been changed to 30 days. situation of RO 12 (4)- Intimation of Time limit of 15 days has been changed to 30 days. change of situation of RO 21- Authentication of Permits Board to authorise any employee of the company. documents 26 (1)- Prospectus Matters to be stated in a prospectus in case of a public offer

11 11 Amendments in Brief (5/35) Section Changes under Bill, (2)- Civil liability for misstatements in prospectus 42- Offer or invitation for subscription of securities on private placement Providing immunity to a person who proves of having relied on expert opinion pursuant to which such person shall not be liable for mis-statement in prospectus. The private placement offer letter and application form shall not carry any right of renunciation The company is not to utilise the money raised through private placement unless allotment has been made and return of allotment has been filed with the Registrar Reduction in filing return of allotment within 15 days of allotment. Filing of Private Placement Offer Letter not required Penal provisions have been segregated : Failure to file Return of Allotment Under sub-section (9) company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees. In case of violation of entire section: Under sub-section (10) the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through private placement or two crore rupees, whichever is lower (earlier it was whichever is higher), and the company shall also refund the monies that with

12 12 Amendments in Brief (6/35) Section Changes under Bill, (1)- Voting Rights Reference is given to sub-section (1) of section 188 relating to restrictions for the party to the contract to abstain from voting. 53 (2)- Prohibition on issue of shares at discount 54 (1)- Issue of sweat equity shares Removal of typo error and exception provided to Debt Restructuring scheme. Criteria for existence of company for 1 year on the date of Issue omitted.

13 13 Amendments in Brief (7/35) Section Changes under Bill, (1) (c)- Further issue of share capital 62 (2)- Further issue of share capital 73 (2)- Prohibition on acceptance of deposits from public 74 (1)- Repayment of deposits, etc., accepted before The change is clarificatory is nature to ensure compliance of Section 42. The change in the provision relates to the mode of sending the notice for rights offer. The changes in the provision relate to the change in the percentage (from 15% to 20%) of the amount of deposits maturing during the following financial year, to be kept in a separate bank account. Requirement of deposit insurance being omitted and changes in the wordings of the certification in case of a default in repayment. The change in the provision relates to repayment of deposits accepted before the commencement of the Act, Repayment extended to three years from commencement of the Act and reference to Chapter V for renewal of deposit given.

14 Amendments in Brief (8/35) 14 Section Changes under Bill, A- Punishment for contravention of section 73 or section (1)- Duty to register charges, etc. 78- Application for registration of charge 82 (1)- Company to report satisfaction of Change brought in penal provisions in case of contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or failure to repay any deposit or part thereof or any interest due thereon within the time period specified under section 73 or section 76 or rules made thereunder. Offence has been made non-compoundable in case of contravention of Section 73 or section 76. The change empowers CG to prescribe in consultation with the RBI, the charges to which section 77 shall not apply. Clarificatory change in period of registering the charge. Change brought to empower Central Government to prescribe additional fee for allowing filing of intimation of payment or satisfaction of charge and similar time limits as allowed under

15 15 Amendments in Brief (9/35) Section Changes under Bill, A- Punishment for contravention of section 73 or section 76 Change brought in penal provisions in case of contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or failure to repay any deposit or part thereof or any interest due thereon within the time period specified under section 73 or section 76 or rules made thereunder. Offence has been made non-compoundable in case of contravention of Section 73 or section (1)- Duty to register charges, etc. The change empowers CG to prescribe in consultation with the RBI, the charges to which section 77 shall not apply. 78- Application Clarificatory change in period of registering the charge. for registration of charge 82 (1)- Company Change brought to empower Central Government to prescribe

16 Section Changes under Bill, Declaration in respect of beneficial interest in any share 90- Investigation of beneficial ownership of shares in certain cases. Amendments in Brief (10/35) Omission of reference to section 403 for additional fees and time prescribed and an inclusive definition of Beneficial Interest has been provided as a new sub-section. Requirement of a declaration to the company by a significant beneficial owner, as defined under the section 90. The company is required to maintain a register thereof, the same shall be open for inspection by members on payment of fee as prescribed The company is required to file a return of significant beneficial owners with the Registrar within the period prescribed. The company is required to give notice to the concerned persons, who shall revert with the requisite information within 30 days of the notice. The company may also make an application to the Tribunal in the manner specified under this section. In case there is an individual/ person (other than the holding company) that ultimately holds beneficial interest of 25% and above in shares of the company, 16

17 Section Changes under Bill, (1)- Annual Return Amendments in Brief (11/35) The change relates to changes in the particulars of the annual return like: Omission of particulars for indebtedness; Omission of particular details of Foreign Institutional Investor Insertion of proviso to empower CG to prescribe Abridged forms for OPCs Small cos. etc (3)- Annual Return Web-link of the annual return (i.e. MGT-9 ) disclosed in the board s report to be sufficient and requirement of extract of the same in Board s Report Omitted. Omission of reference to section Return to be filed with Registrar in case promoters stake Section 93 omitted hence requirement of filing Form MGT-10 for change in the promoters stake omitted.

18 18 Amendments in Brief (12/35) Section Changes under Bill, (1)- Place of Omission of filing of copy of SR passed with the registrar for keeping and keeping registers under section 88 and annual returns under inspection of section 92 at a place other than R.O. of the company. registers, returns, etc 94 (3) Amendment proposed to ensure that personal details are not available publicly. 96 (2)- Annual Insertion of a provision relating to convening of an annual General Meetings general meeting of an unlisted company at any place in India, subject to the prescribed conditions. 100 (1)- Calling of extraordinary general meetin The change provides that EGM of a wholly-owned subsidiary of a company incorporated outside India, may be held outside India.

19 Amendments in Brief (13/35) 19 Section Changes under Bill, (1)- Notice of Meeting The change relates to the convening of general meetings at a shorter notice i.e. in case of an annual general meeting with the consent of atleast ninety five percent of the members entitled to vote thereat any other general meeting with the consent of atleast majority in number and ninety five percent of such part of the paid up share capital of the company giving a right to vote at such a meeting. 110 (1)- Postal Ballot The change provides that in case of matters required/being conducted through postal ballot, the same may be transacted at a general meeting by the company which is required to provide electronic voting facility under section (2)- Resolutions and agreements to be filed Omission of section 403 for time specified Minimum penalty on company decreased from Rs. 5 Lakh to Rs. 1 Lakh Minimum penalty on officer in default including liquidator

20 Section Changes under Bill, (3) Omission of the requirement of filing Form MGT-14 for resolutions passed under section 180(1) (a) and (c). However, the same is still required to be filed under clause (a) as the same are special resolutions. Further, exemption is available for filing MGT-14 for resolutions passed under section 179(3)(f) to grant loans or give guarantee or provide security in respect of loans by banking companies Report on annual general meeting 123- Declaration of dividend Amendments in Brief (14/35) Omission of reference to section 403 for time specified and additional fees prescribed. The changes are clarificatory in nature. In computing profits for payment of dividend, any amount representing unrealised gains, notional gains or revaluation of assets and any changes in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded. Further, provision has been made for declaration of interim dividend for any financial year or at any time during the period from closure of 20

21 Section Changes under Bill, (3)- Financial Statement Proviso to 130(1)- Reopening of accounts on court s or Tribunal s orders Amendments in Brief (15/35) The change includes associates for the purpose of consolidation and attachment of salient features to the financial statements. The Format AOC-1 anyways mandated providing details of associates and joint ventures. The amendment is simply Clarificatory. The change relates to re-opening of accounts after due approval of the Court or Tribunal. The court or the Tribunal shall give notice to the Central Government, the Income-tax authorities, SEBI or any other statutory regulatory body or authority concerned and shall take into consideration any representations made by them before passing any order under this Section. The change provides that other concerned parties, like a company or the Auditor/Chartered Accountant of the company should also be given an opportunity to present their point of view. Further, restriction has been imposed on the applicability of the provisions of section 130 for a period of eight years, unless a longer period is required through a specific direction issued by Central Government, under Section 128(5). 21

22 22 Amendments in Brief (16/3) Section Changes under Bill, Constitution of National Financial Reporting Authority The change relates to omission of provisions relating to constitution of an Appellate Authority for National Financial Reporting Authority. The appeals against the order the same the shall be examined by NCLAT. Minimum penalty on firms for prof. misconduct decreased from Rs. 10 Lakhs to Rs. 5 Lakhs. 134 (1)- Financial statement, Board s report, etc The change pertains to omission of the requirement of the CEO to be a director in order to sign the report 134 (3) Web address instead of the extract of MGT-9 would suffice. 134 (3) Straightening of language related to performance evaluation. 134 (3) (q) No requirement of repetition of disclosure already covered in FS; Only salient features of the policies placed on the website along with web address Prescriptive powers to CG to prescribe abridged Board's report or OPC or

23 23 Amendments in Brief (17/35) Section Changes under Bill, (1) - Corporate Social Responsibility "any financial year", has been substituted with "the immediately preceding financial year"; companies not having ID may constitute the committee without an ID 135 (3) "as specified in Schedule VII", to be replaced with "in areas or subject, specified in Schedule VII" 135 (5) Insertion of explanation for giving prescriptive power to CG for exclusion of certain sums for "net profit" calculation 136 (1)- Right of For sending the documents in less than 21 days before AGM consent requirement is same as member to copies of sec 101; audited financial statement Relaxation to listed companies to place unaudited financials of foreign subsidiaries on the website where country of incorporation does not require audit of such financials or may place consolidated financials of the foreign subsidiary; To provide copy of separate audited or unaudited financial statements of subsidiaries mandatorily to a member who asks for.

24 24 Amendments in Brief (18/35) Section Changes under Bill, (1)- Copy of financial statement to be filed with Registrar 139 (1)- Appointment of auditors 140 (3)- Removal, resignation of auditor and giving of special notice Omission of reference to section 403 for filing of accounts with ROC, instead the prescriptive powers have been given. Omission of the requirement of ratification of auditors appointment Change in penalty for non- filing of resignation return with RoC from to or the remuneration of the auditor, whichever is less.

25 25 Amendments in Brief (19/35) Section Changes under Bill, (3)- Eligibility, qualifications and disqualifications of auditors Straightening of language in clause (i) 143 (1) Proviso- Powers and duties of auditors and auditing standards auditors of holding company to have tight to access records of associate companies. 143 (3) IFC reporting to be only with reference to financial statements. 143 (14) "cost accountant in practice", to be replaced with "cost accountant"

26 26 Amendments in Brief (20/35) Section Changes under Bill, (2)- Punishment for contravention Change in maximum penalty from maximum 5 lacs to 5 lacs or four times the remuneration of the auditor, whichever is less; For known contravention, minimum fine is to be reduced to rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less. 147 (3) Auditors liability to pay for damages to be limited to to members or creditors of the company as against any other person. 147 (5) In case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable. 148 (3)- Central Substitution of the word cost accountant in practice with "cost accountant" shall be Government to substituted; specify audit of items of cost in respect of certain companies

27 27 Amendments in Brief (21/35) Section Changes under Bill, (3)- Company to have Board of Directors For determining resident director, day count would be proportionate for the period of existence for newly incorporated company Change in the criteria for independent directorship:- Introducing test of materiality for ascertaining pecuniary relationship with an independent directorship; amount of securities or interest for holding by relatives, which shall not be construed as pecuniary relationship; Introducing test of materiality for determining whether the relatives of the director have or have had pecuniary relationship with the company, its holding, subsidiary or associate company, i.e. o o o o the amount of security or interest held by the relative in the company, holding, subsidiary or associate company. the amount of indebtedness by the relative to the company, holding, subsidiary or associate company or their promoters, directors. amount up to which guarantee may be given or security may be provided by relative to the company, holding, subsidiary or associate or their promoters or directors of the holding company in connection with the indebtedness of any third person. However, the aforesaid restrictions are not available to a relative who is an employee for his employment during the preceding three financial years.

28 28 Amendments in Brief (22/35) Section Changes under Bill, Appointment of directors To be appointed as a director, a person should have a DIN or such other number as prescribed under section Application for allotment of Director Identification Number Central Government may prescribe such number that shall be treated as DIN for a person and no separate DIN in case of obtaining of such number 157- Company to inform Director Identification Number to Registrar Omission of reference to sec 403 and prescriptive powers have been given to CG. 160(1)- Right of persons other than retiring directors to stand for directorship Omission of the requirement of deposit money for IDs NRC / Board recommended directors.

29 29 Amendments in Brief (23/35) Section Changes under Bill, (2)- Clarity on ineligibility for appointment as an alternate director in case of holding Appointment of directorship in the same company. additional director, alternate director and nominee director 161(4) Omission of the word public company Appointment by the Board will require subsequent approval of shareholders. 164(2)- Disqualifications for Disqualification under section 164(2) is applicable to a director only at the time of non-compliance and in case of a continuing default a period of six months allowed appointment of to a new director to make the company compliant. director 164(3) Removes the inconsistency when read with the proviso to section 164(3) Number of directorships 167- Vacation of office of director Exclusion of dormant company for calculation of the number of directorships. In case of disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.

30 30 Amendments in Brief (24/35) Section Changes under Bill, (1) Removes the inconsistent situation when read with the proviso to section 164(3) 168 (1)- Optional DIR 11 on resignation Resignation of director 173 (2)- Meetings Subject to fulfilment of physical quorum directors may participate in all of Board the matters through VC 177 (1)- Audit Audit Committee to applicable only listed public companies Committee 177 (4) Other than 188 RPTs, Ac may give recommendation Ratification within 3 months subject to 1 crore No requirement of approval for RPTs other than of 188 between Holding and its subsidiary 178 (1)- NRC and SRC NRC to be applicable only on listed public companies

31 31 Amendments in Brief (25/35) Section Changes under Bill, (2) NRC shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the NRC itself or by an independent external agency and review its implementation and compliance. 178 (4) Substitutes the disclosure of the Nomination and Remuneration Policy in the board s report by web link of the same and salient features thereof. 178 Straightening of language 180 (1) (c)- Restrictions on powers of Board 184 (4)- Disclosure of interest by director Inclusion of securities premium in calculation of free reserves Omission of minimum penalty for contravention of the provision of this section.

32 32 Amendments in Brief (26/35) Section Changes under Bill, (5) (b) includes body corporates within the purview of this sub-section to align it with the provisions of section 184(2) 185- Loan to Allows companies to advance a loan to any other person in whom director is directors, etc interested subject to prior approval of the company by a special resolution. Loans extended to persons, including subsidiaries should be used by the subsidiary for its principal business activity only 186 (2)- Loan and Excludes employees investment by company 186 (3) Relaxation of the requirement of passing special resolution where loan/guarantee/security is provided to WOS/ JV or acquisition by subscription or otherwise shares company by the holding of its wholly owned subsidiary.

33 33 Amendments in Brief (27/35) Section Changes under Bill, (11) Extension of exemption to investments in rights issues made by body corporates (companies incorporated outside India) Question remains whether NBFCs engaged in personal lending are covered? 188 (1)- Related party Voting restrictions not to apply to a company in which ninety per cent. or transactions more members, in number, are relatives of promoters or are related parties 194- Prohibition on forward Omission. dealings in securities of company by director or key managerial personnel 195- Prohibition on insider trading of securities 196 (4)- Appointment of managing director, whole-time director or manager Omission Appoint or continue the appointment of MD/WTD/ manager of age of seventy years in case no special resolution has been passed, but an ordinary resolution has been passed and the Central Government is satisfied on an application that such appointment is beneficial to the company.

34 34 Amendments in Brief (28/35) Section Changes under Bill, (1)- Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits Replaces the approval of the Central Government for managerial remuneration above the prescribed thresholds with approval by shareholders in the general meeting by way of a special resolution. Approval of banks/ FIs etc. only in case of default. 197 (3) Omission of CG approval in case of inadequacy of profits 197 (9) 2 years period has been prescribed 197 (10) No CG approval for waiver of excess remuneration paid. SR will be required within 2 years 197 (11) Does away with the requirement of obtaining approval of the Central Government. 197 (16) and (17) New insertion as in auditors will be required to report on remuneration being in compliance of the Act.

35 35 Amendments in Brief (29/35) Section Changes under Bill, (3) (a)- Profits on sale of investments shall be not be deducted in case of Investment Calculation of Companies, whose principal business was sale and purchase of investments. profits Notional/unrealised gains and revaluation profits shall not be considered. 198 (4) (l) Provide for the deduction of brought forward losses of the years prior to the commencement of the Act, Central Clarificatory in nature, in light of the approval of the Central Government being Government or done away with. company to fix limit with regard to remuneration 201 (1)- Forms of, and procedure in relation to, certain applications Clarificatory in nature, in light of the approval of the Central Government being done away with.

36 36 Amendments in Brief (30/35) Section Changes under Bill, (1)- Investigation of ownership of company 223 (3)- Inspector s report 236 (4) (5) (6)- Purchase of minority shareholding 247 (2)- Valuation by registered valuers 366 (2)- Companies capable of being registered Additional clause, for inspectors to investigate and report on matters relating to the company and its membership Report may be obtained by members, creditors or any other person whose interest is likely to be affected. Transferor company to be refrred to as company whose shares are being transferred For ineligibility of being appointed as valuer timeline has been prescribed for having conflict of interest to be 3 years prior to appointment as valuer or 3 years after the valuation of assets was conducted Clarification on having minimum 2 members may be registerd as private company.

37 37 Amendments in Brief (31/35) Section Changes under Bill, (2) Clarification on having minimum 2 members may be registered as private company Obligations of New provison providing clarification for deemed dissolution of the firm/ companies registering under LLP this Part 379 (1)- Application of Act to foreign companies 384 (2)- Debentures, annual return, registration of charges, books of account and their inspection Applicability of the provisions of the Act to foreign companies has been segregated to two parts applicability to all foreign companies and companies covered under this chapter. Same as above

38 38 Amendments in Brief (32/35) Section Changes under Bill, (2)- Application of sections 34 to 36 and Chapter XX 403(1)- Fee for filing, etc. 406 (1)- Power to modify Act in its application to Nidhis Reference to section days beyond the due date prescribed in the respective sections is proposed to be deleted. Requires the approval of the Central Government for declaration of a company as Nidhi 409 (3)- Qualification of President and Members of Tribunal Qualification of members and president of the Tribunal

39 39 Amendments in Brief (33/35) Section Changes under Bill, Constitution of Appellate Tribunal Appeal against the orders of National Financial Reporting Authority shall also be heard by the NCLAT. 411(3)- Qualifications of chairperson and Members of Appellate Tribunal Qualifications of chairpersons and members of Appellate Tribunal 412(2)- Selection of Members of Tribunal and Appellate Tribunal Selection of members of the Tribunal and Appellate Tribunal

40 40 Amendments in Brief (34/35) Section Changes under Bill, (1)- Establishment Special Courts of Special Courts to try only those offenses carrying imprisonment of two years or more Application of Code to proceedings before Special Court In light of the amendments made in section (2)- Offences to be non-cognizable 440- Transitional provisions 441- Compounding of certain offences Complaints to be filed by a person who is a member of a company without any share capital. Clarificatory in nature Tribunal should have the power to compound offences punishable with fine as well as offences punishable with imprisonment or fine or both.

41 41 Amendments in Brief (35/35) Section Changes under Bill, A- Factors for determining level of punishment 446B- Lesser penalties for OPC or Small companies 447- Punishment for fraud 458- Delegation by Central Government of its powers and functions New section court to have due regard to certain factors while deciding the amount of fine or imprisonment (a) size of the company; (b) nature of business carried on by the company; (c) injury to public interest; (d) nature of the default; and (e) repetition of the default. Penalties to be application of fines in case of non-compliance with certain provisions of the Act, 2013 specified therein by an OPC or small company. Frauds involving less than 10 lac rupees to be compoundable offenses. Omission of the proviso in light of amendments made in section 194 and 195.

42 Curative amendments 42

43 43 Corrective amendments-1 Sec. 2 (30) Debenture to exclude money market instruments, and such other instruments as may be notified in consultation with the RBI Money market instruments are governed by Chapter III-D of the RBI Act Tenure upto 12 months Therefore, controversy about commercial paper not being debenture gets resolved. Additionally, upto 12 month debentures are also excluded from the definition Therefore, no DRR, or any other compliance with sec. 71 required in such cases However, will sec. 42 apply to short-term debentures? The word security in sec. 2 (81) refers to SCRA. SCRA definition includes any transferable securities. Distinction between transferable security, and negotiable security

44 44 Corrective amendments -2 Sec. 2 (57) Definition of net worth to be amended to add credit balance in P/l account The amendment should have actually been done in the definition of free reserves That would automatically reflect in the net worth definition as well Unfortunately, definition of free reserves remains the same as before Hence, doubts arise for the purpose of sec 180 (1) (c), sec 186 etc. whether surplus in p/l account to be counted

45 45 Bill, Holding companies, subsidiaries, associates

46 46 Amendments in respect of holding, subsidiary, associates Associate Sec 2 (6) continues to use the word associate company No provision to say that the word company shall include a body corporate Which is surprising, since the definition of holding company in sec. 2 (46) proposed to be amended to introduce the extension Hence, strictly speaking, foreign companies and LLPs excluded from the definition Definition of joint venture Added in Explanation below sec. 2 (6) Joint arrangement Joint control of the arrangement Have rights to net assets Definition of holding company New explanation for the term company to include body corporate; This is to align with the definition of subsidiary.

47 47 Subsidiaries and holding companies Change in basis of subsidiary/holding company recognition Sec. 2 (87) (ii) to be amended Total voting power instead of total share capital Therefore, preference shares not to be counted for the purpose of subsidiary recognition In view of the words exercises or controls preceding total share capital in the original law, this may be regarded as corrective amendment Definition aligned with accounting standards Meaning of total voting power Defined in sec. 2 (89) Definition of sec 2 (89) defines voting power as specific to any particular matter; it is not general voting rights Specific voting rights may be different from total voting strength For example, for variation of class rights However, should be understood in the sense of total voting power in general meeting

48 48 Some illustrations S has equity Rs 50 crores, held by X; convertible pref shares Rs 100 crores, held by Y. S has equity Rs 50 crores, held by X; compulsorily convertible pref shares Rs 100 crores, held by Y. S has equity Rs 50 crores, held by X; provisions of shareholders agreement provide management rights to Y. S has equity Rs 50 crores, held by X; nonconvertible pref shares Rs 100 crores, on which there has been default in payment of dividends. The preference shares were non-cumulative and the dividend has been skipped for more than 2 years since issue The preference shares were cumulative and the dividend has been skipped for more than 2 years since issue, but has subsequently been paid The preference shares were non-cumulative and the dividend has been skipped for more than 2 years since issue, and still remains outstanding

49 49 Bill, Small companies

50 50 Provisions pertaining to small companies Meaning of a small company The limits of paid up capital and turnover are as follows: Existing limit May be notified upto Proposed increase in maybe-notified limit Paid up capital Rs 50 lacs Rs 5 crores Rs 10 crores Turnover as per Rs 200 lacs Rs. 20 crores Rs 100 crores Additional conditions Turnover to be based on P/L of immediate preceding FY Existing language is last P/L A small company is a private company Not a holding or subsidiary company Not a sec 8 Not a company regulated by a special Act

51 51 Relaxations applicable to small companies Small company is a private company Therefore, enjoys all exemptions of a private company Additional relaxations in the Bill Abridged form of board report and abridged annual return for a small company Sec 446B The maximum amount of fines/imprisonment in case of small companies will be half of what is fixed for normal companies Existing relaxations Two Board meetings in a year Cash flow statement not required Short-cut merger for small companies

52 52 Bill, Beneficial interests, shareholding changes

53 53 Filing of beneficial interest sec. 89 Beneficial interest, if different from the interest of a registered holder, needs filing under sec. 89 Provisions of the section to be made clearer by addition of a definition Meaning of beneficial interest to be added by sub-section (10) to say, beneficial interest includes right or entitlement to any of the rights of a member, or right receive or participate any dividend The section has to be read with opening lines of sec. 89 Name of the person is entered in the register of members, but person does NOT hold beneficial interest That is to say, if the beneficial interest holder s name is borne on the register of members, there is no case of applying sec. 89/90 With extended definition, provisions may be attracted In case of voting arrangements voting rights transferred without registering transfer of shares Transfer of dividend rights Deletion of reference to sec 403 Filing must be done within 30 days Beyond 30 days will attract additional fee as well as condonation

54 Filing of undisclosed beneficial interest holders new sec 90 Sec 90 is a new provision altogether; mandates filing of undisclosed beneficial interest Once again, in view of the opening language of sec. 89, if the shareholder is the beneficial owner as well, the section has to applicability Significant beneficial ownership 25% of shareholding in a company, or Right or actual exercise of control Right or actual exercise of significant influence Section applies when all the following conditions satisfied Significant beneficial interest is held by an individual By an individual Whether acting alone or together, with one or more persons or trusts Including persons or trusts outside India Is the section similar to UBO identification That could have been the only possible intent However the language does not seem to suggest that Since beneficial ownership is defined in terms of sec. 89, which applies only where beneficial interest is different from interest of registered shareholder 54

55 55 Beneficial interests register Beneficial interests are to be filed as per the Rules to be laid Company to file with the Registrar Company to maintain a register of beneficial interests If the company has information about significant beneficial interest of someone, which is not notified to the company, the company may notify the person seeking information Provision to apply to NCLT to force the person to declare beneficial interest

56 56 Declaration in case of pledge etc. Whether sec. 89 & 90 shall apply in case of pledge Yes, if the all the rights attached thereto are also transferred in case of transfer pending registration Yes. in case of pooling of voting rights. Yes

57 Bill, Private Placement

58 58 Quick snapshot- 1/2 Substitution of entire section To provide specifically that private placement offer and application shall not carry rights of renunciation. Restriction on utilisation of application money till allotment is made and return of allotment is filed with ROC. To enable companies to make more than one issue of securities at any time to the identified persons under this section. Filing of record of offers to be dispensed with.

59 59 Quick Snapshot- 2/2 Time limit for filing return of allotment in PAS-3 to be reduced to 15 days from 30 days from the date Failure to file the above form to make promoters and directors liable to a penalty for each default of 1000 rupees for each day subject to maximum 25 lakhs. Penalty on promoters and directors for contravention of section 42 to be amended as amount raised through such offer or 2 crore, whichever is lower. (Earlier it was amount involved in the offer or 2 crore, higher)

60 60 Other changes in private placement and rights shares Sec 62 (1) (c ) to be amended to make it subject to sec 42 In case of rights shares, the rights offer permitted to be sent through any mode having proof of delivery

61 Bill, Public offers

62 62 Public offers The disclosures required in offer documents will be as per SEBI s requirements SEBI is expected to freeze disclosure requirements and reports in offer documents in consultation with the MCA Until that is done, the disclosures as per ICDR regulations shall apply Sec 35 amended to provide safe harbour to directors in case of statements purporting to be made by an expert Reasonable ground to believe that the expert had competence on the matter Had not withdrawn his consent

63 63 Issue of shares at a discount Banks/lenders making use of SDR mechanism were facing difficulty in converting their loans into shares The company being losses, obviously the net value of the share was lower than par However, Companies Act forced the lenders to convert shares at par value Sec. 53 (2A) permits a company to issue shares at a discount On conversion of debt into equity Based on statutory resolution plan or debt restructuring scheme as per guidelines of the RBI statutory resolution plan is misleading, as conversion of of debt into equity happens not under statute

64 64 Issue of sweat equity shares Sec. 54 to be amended To permit issue of sweat equity shares within 1 year from the date of commencement of business

65 Bill, Deposits

66 66 Sec 73 Quick snapshot-1/2 Deposit of amount to DRR on or before 30 th day of April each year Amount to be deposited shall be equivalent to 20% of deposit maturing during the following financial year Existing 15% of deposits maturing during the FY+ next FY Deposit insurance to be done away with The prohibition on accepting further deposits to apply indefinitely only to a company that had not rectified/made good the defaults and to be allowed to accept further deposits after 5 years thereon

67 67 Quick snapshot-2/2 Sec 74, 76A Repayment period to be enhanced to 3 years instead of 1 year from the commencement of the Act, or n or before the expiry of the period for which the deposits were accepted, whichever is earlier. The limits of fines have been revised as per the provisions of sec 76A The fine of 1 Cr shall be substituted with a fine of 1 Cr. or twice the amount of deposit accepted by the company whichever is lower Further as per clause (b) the penalty was 7 years OR fine which is now substituted with 7 years AND fine Making it non- compoundable

68 Meaning of Deposit

69 69 Meaning of Deposit under the Companies (Acceptance of Deposits) Rules, /2 Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include any amount received against issue of commercial paper or any other instrument issued in accordance with the guidelines or notification issued by the Reserve Bank of India Amount received as a loan or financial assistance from mutual funds. Amount received by a company form another company Amount received towards subscription of any securities Allotment to be made within 60 days from the date of receipt of money or advance. amount not refunded within 15 days from completion of 60 days will be treated as deposits. Any adjustment will not be treated as refund. Amount received before 1 st April, 14 & disclosed in the B/S for FY ended 31 st March, 14 against which allotment is pending as on 31 st March, 2015: Timeline was till 1 st June, 2015 either to refund, allot or to comply with the rules. Amount received from the directors of the company or relative of director in case of private company Disclosure in Board s Report required. Amount raised by issue of secured or compulsorily convertible bond/debentures Secured by first charge or pari-passu with first charge on any assets referred to in Schedule III of the Act excluding intangible assets. Compulsorily convertible into shares within 10 years.

70 70 Exclusions from meaning of Deposit - 2/2 Any amount received from an employee in the nature of non-interest bearing security. Not exceeding the employees annual salary under a contract of employment. Any non-interest bearing amount received or held in trust. Amount received in the course of business as an advance for supply of goods or provision of services Such advance to be appropriated within a period of 365 days from acceptance of such advance Amount received in the course of business as an advance for an agreement for sale of immovable property Such advance to be appropriated against such property in accordance with the terms of the agreement. Amount received as security deposit for performance of a contract for supply of goods or providing services. Amount received in the course of business as advance for long term projects or for supply of capital goods

71 71 What is not a deposit? 1/2 Receipt of anything other than money Loans from Banks, Financial institutions and Mutual Funds. Money received from Company Amount issued as CCD Provided it is mandatorily converted in shares in 10 years Amount issued as Secured debentures Amount received in trust. Provided no interest is paid Amount raised by issuance of units Advance received for supply of goods/ services Maximum 365 days Deposit from directors Amount received from employee Not exceeding his annual salary Provided it is 100% secured

72 72 What is not a deposit? 2/2 Commercial paper Any other instruments issued as RBI guidelines/ notification Short term NCDS issued with 12 months maturity and by private placement will get exempted. Share warrants Exempt from deposits but covered u/s 62 (1) (c) Promoter s unsecured funding On stipulation imposed by lending institution Any other transaction not amounting to deposit in substance Collective Investment Scheme not a deposit Security Deposit Deposit from foreign corporate, citizens. Listed NCDs

73 73 What is included in deposit? Deposit in substance Amount received from LLP Deemed Deposit If a scheme promises returns, in cash or in kind, at the end of the specified period, the scheme will still be treated as a deposit Several chit funds in West Bengal thrived using such surrogates as booking of land, booking of flats, booking of tour, or even things like booking of rice or sarees. Infact, as per this rule, the instalment purchase schemes being promoted by several jewellery companies will become illegal. Provisions under Rule 2 (c)

74 New Rules for supply of Goods/ services When does it become deposit? If not appropriated towards supply of goods/ services within 365 days from date of acceptance of advance will be deemed as deposit, within 15 days from the date of expiry of 365 days Goods/ services can be delivered/ provided and again advance can be taken on revolving basis, squared off on FIFO basis for same underlying transaction. Gold deposit scheme will become illegal If agreement is not duly registered In case of advance received for sale of immovable property CLC recommends to have a written agreement 74

75 75 Bill, Charges

76 76 Registration of charges Sec. 77 to be amended to provide for exemption from registration Such charges as may be prescribed, in consultation with the RBI Sec. 78 to provide clarity Charge holder may register creation within 30 days to 300 days If not done within 300 days then to seek extension u/s 87 Extended period of registration for modification or satisfaction of charge Existing provision allow extension of time for filing of a charge only in case of creation This is obviously an anomaly Sec 82 to be amended to permit filing of modification or satisfaction also within 300 days

77 77 Bill, Board & Committee meetings, video conferencing

78 78 Board meetings using video conferencing Sec 173 (2) prohibited use of VC in certain matters For example, approval of annual financial statements Proposed amendment says that if a physical quorum is present at the place where the meeting is held, other directors may participate by VC in such restricted matters too The insistence on a physical quorum seems most unreasonable In case of VC meetings, there may not be a physical place of the meeting at all Intent of law seems to allow only participation but not voting as directors present shall not be counted for quorum

79 Video conferencing- SS1

80 80 SS 1-Participation in board meetings by AV means A director may participate via AV means SS 1, seems to be granting a generic power to a director to use AV for participating in board meetings only if company provides such facility. Several companies have not permitted directors to participate via VC There may be several internal concerns Director shall not participate through Electronic mode in meetings on restricted items, unless expressly permitted by the Chairman ( Para 1.2.3). Chairman means Chairman of Board or Committee or Chairman appointed or elected for a meeting. The Act read with the Rules contain a prohibition with no scope for the Chairman to permit discussion on restricted items ICSI FAQs- Chairman has been given the discretion only over and above physically present quorum and such director not to be counted for quorum and nor entitled to vote. Bar on use of AV facility for annual financial statements extended to audit committee as well

81 Audit Committee and NRC composition, business 81 Sec Audit Committee to be needed only in case listed public companies Debt listed private companies get exempted Sec 149 as it stands requires only listed public companies to appoint independent directors Sec Nomination and Remuneration Committee Only in case listed public companies Board evaluation Currently the NRC does evaluation of the Board Now, NRC has only to lay the manner of effective evaluation Evaluation may be carried by Board NRC Or external agency

82 82 Bill, Accounts and consolidation

83 83 Consolidation, signing of accounts, etc. The proposed amendment in sec 129 (3) is mere straightening of language The explanation below sec 129 (3) is getting merged into the section The proposed change in sec. 134 (1) on signing of financial statements is also a straightening of language The financial statements need to be signed by Chairman, if authorised or two directors, one of whom should be the MD, where there is one CEO CFO CS

84 84 Amendment in AS-21 AS-21- Consolidated Financial Statements Scope widened to align with CA, 2013 Where an enterprise does not have a subsidiary but has an associate and/or a JV, such an enterprise should prepare CFS in accordance with AS- 23 Accounting for Associates in CFS AS-27 Financial Reporting of Interests in Joint Ventures respectively.

85 85 Re- opening of accounts- Sec. 130 Court/ Tribunal shall have power to give notice to any person concerned Order for re- opening may be made only upto 8 FYs Unless CG directs otherwise

86 86 Bill, Auditors

87 87 Appointment of auditors The requirement for annual ratification of auditors is removed Disqualification of auditor The disqualification in sec. 141 (3) (i) was very badly worded Rendering of prohibited services by any associated entities The language is made more meaningful now With direct or indirect service To Hold co/ Subsidiary of the company

88 88 More provisions about auditors Non- filing of resignation minimum fine may be the remuneration if it less than 50K Powers of auditors to seek information required for consolidation extend to associate companies This seems queer, as associates are not under the control of the investor company Auditors report on internal financial controls There has been a huge controversy on internal financial controls, whether IFC as per sec. 143 (3) (i) is only control over financial reporting Sec. 134 (5) puts a much wider meaning Board s responsibility is obviously much wider Auditor s responsibility is on financial reporting This author always had the view that IFC for sec. 143 means control on financial reporting, citing provisions from US Exchange Act from where the provision comes Amendment in sec. 143 makes it clear now

89 89 Civil liability of the auditor Sec. 147 (3) was a lethal section providing for auditors civil liability The section as it worded provided right of claiming compensation to any person relying on erroneous financial statements Sec. 147 (3) (ii) to be amended to limit the compensation right only to members and creditors of the company Also, vicarious liability of partners of an audit firm is sought to be avoided by proviso to sec. 147 (5) Only the partner who was colluding the abetment to be liable

90 Companies(Auditor s Report) Order,2016

91 91 Background of CARO Central Government came up with CARO,2003 effective from 1 st July,2003 by virtue of power conferred under sub-section(4a) of Section 227 of Act,1956 Order specified 21 matters to be specified in the Auditor s Report With Act,2013 Central Government came up with CARO,2015 effective from 10th April,2015 by virtue of sub-section (11) of Section 143 of Act,2013 Order specified 13 matters to be specified in the Auditor s Report Committee was setup to recommend matters for inclusion in the statement to be attached with Auditor s Report under Section 143(11) of the Act,2013 along with public comments MCA came up with CARO,2016 effective from 30 th March,2016, i.e. from the F.Y

92 92 Applicability of CARO,2016 Applicable to : Every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013, except- a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 an insurance company as defined under the Insurance Act,1938 Section 8 company under CA,2013 A One Person Company as defined under clause (62) of section 2 of the Companies Act,2013 and a small company as defined under clause (85) of section 2 of the CA,2013 New inclusion Private companies exceeding the thresholds as stated in the Order Not being subsidiary and holding company of a public company Paid up capital and reserves and surplus not more than 1 crore Earlier it was 50 lakhs Does not have total borrowings from Banks/ Fis not more than 1 crore and Earlier it was 25 lakhs Does not have total revenue (including discontinued operations) as disclosed in schedule III more than 10 crore Earlier it was 5 crore

93 93 Inclusions in Auditor s Report(1/3) Reporting on keeping the title deeds of immovable property in the name of the company to be stated along with the reason New inclusion Expanded scope to cover all loans granted by the Company to its related parties To report in respect of loans, investments, guarantees and security as per Section 185 and 186 of CA,2013

94 94 Inclusions in Auditor s Report(2/3) Requires reporting of default on repayment of loans or borrowings only and not any other dues to a financial institution, bank, and government To state the applicability of equity/capital raised by the Company Reporting on the fraud made by the Company, or its officers or employees To report on the status whether Nidhi Company has complied with Net Owned Fund in the ratio of 1:20 to meet out the liability To report on maintenance of 10% encumbered term deposits by Nidhi Company as per Nidhi Rules,2014

95 95 Inclusions in Auditor s Report(3/3) To submit a statement on the compliance of the provisions in relation to preferential allotment along with that of private placement Reporting on any non-cash transactions of the Company with its directors or persons connected with him as per section 192 of CA,2013 Reporting about the registration of the Company under section 45-IA of the RBI Act, 1934

96 96 Deletions from the Auditor s Report(1/2) Reporting on disposing off of substantial part of fixed assets during the year, if any Reporting on reasonability and adequacy of the procedures followed for physical verification of inventory Omission of statement in relation to transfer of funds to IEPF within prescribed time Reporting of accumulated losses at the end of financial year of the Company Omission of reporting about the Internal Control system of the Company

97 97 Deletions from the Auditor s Report(2/2) Reporting about the Internal Audit system of the Company Though being a statutory auditor, one has to review the same Reporting about the records maintained by the Company dealing or trading in shares, securities, debentures or other investments Reporting about funds raised by the Company Reporting about securities created in respect of debentures

98 98 Important Compliances to be checked(1/3) Managerial Remuneration:- To check if the remunerations paid as per applicable provisions mandated under the provisions of section 197 read with Schedule V of CA,2013 Related Party Transactions:- To check if all the transactions with related parties are in compliance with Section 188 and 177 of CA,2013 along with disclosure in the financial statements as required under AS

99 99 Important Compliances to be checked(2/3) Loans and Investments:- To report on loans, investments and guarantees and security in respect of provisions under section 185 and 186 of CA,2013 with the following additional checks: To check if the same is extended to directors, their related parties and to outsiders as well To check the adequacy of returns filed under section 186(7) of CA,2013 Acceptance of Deposits:- To report upon any acceptance of deposit by the Company as per section 73 and 76 of CA,2013 with the following additional checks: To check whether directives issued by the RBI or under the provisions of CA,2013 have been complied or not To check the compliance or any order, if passed, by the CLB or RBI

100 100 Important Compliances to be checked(3/3) Registration as an NBFC:- To report on registration of the Company under RBI Act,1934 To check whether the Company has registered itself under section 45-IA of RBI Act,1934

101 101 Queries that may arise Whether statutory auditor needs to cross check the work under the domain of secretarial auditor as per section 204 of CA,2013? Whether companies under the ambit of section 204 of CA,2013 can avoid this overlapped checking as there is no point of companies being passed by two set of auditors? Whether the statutory auditor can merely rely upon the work done by secretarial auditor?

102 Bill, Related party transactions

103 103 Several changes on related party transactions RPT continues to be the hotbed of legislative action Two RoD orders have amended definition in sec 2 (76) Amendment Act, 2015 replaced special resolution requirement by Ordinary resolution Provided for omnibus approvals by audit committee Several circulars of the MCA Bill, 2017 proposes several changes Definition of interested director in sec. 2 (49) to be deleted Definition of related party becomes commutative in case of investor and associate; joint venturer and joint venture Carve out in sec. 184 (5) to be extended to bodies corporate Process of ratification of contracts by audit committee under sec 177 (4) (iv); puts focus on contracts not covered by sec. 188 Purported carve out for voting by related parties on general meeting resolution puts a unique stress on numerical minority At the same time, it becomes clear that the bar on voting will be for every related party, and not just the party to the contract

104 104 Definition of related party Replacement of the word company with the words body corporate u/s 2(76)(viii)- the term associate company cannot include associates incorporated outside India since the company means a company incorporated under Act, 2013 or any previous company law. Inclusion of investor in respect of an associate company: Currently, in case of an investor-associate, the down-stream entity is related party, but upstream entity is not. Proposed addition of investing company Once again, the word investing company may be limited to Indian entities only Inclusion of venturer of a company under the purview of related party- Along with new explanation Investing body corporate or venturer to be determined based on the investment which tantamounts the company to become an associate of such body corporate

105 105 Ratification of transactions by audit committee Current law does not explicitly require prior approval of audit committee for related party transactions However, with the insertion of omnibus approval, it was seeming as if the approval was prior Now, Bill adds a provision for ratification; also providers for power of audit committee to avoid transactions not pre-approved by it Bill proposes to add 3 more provisos below sec. 177 (4) (iv) First one was added by Cos (Amendment) Act 2015 to provide for omnibus approval Proviso 2: in case of transactions not covered by sec 188, where audit committee does not approve transaction, it shall make recommendation to the Board Proviso 3: provides power of the audit committee to ratify transactions upto Rs 1 crore value, or else avoid them Proviso 4: provides for exemption for transactions with WOS, only for transactions not covered by sec. 188.

106 106 Second proviso to sec 177 (4) (iv) Mandating Audit Committee to submit its recommendation to the Board such transactions, other than transactions referred to in section 188, where Audit Committee does not approve the same: This creates a new Board reference point altogether Existing law transactions not covered by sec. 188 are not required to go to the Board at all They come to the Audit Committee Audit committee may approve May disapprove There was no scope for the Board to approve something not approved by the Audit Committee In matters of RPTs, for logical reasons, audit committee had the upper hand The proposed amendment: Widens the scope for Board review, including for transactions not covered by sec. 188, if not approved by the Board Seems to suggest that the Board may even approve transactions not approved by the audit committee

107 107 3 rd proviso to sec. 177 (4) (iv) Lays several things Seems limited to transactions upto Rs 1 crore only Transaction Entered into without prior approval Which should include prior omnibus approval as well Not ratified by the audit committee May be avoided by the audit committee at its option And The transaction is with a related party (should actually read as relative) to a director, or is approved by any other director Such director shall indemnify the company for a loss incurred by it Power to ratify transactions upto Rs 1 crore Provision has contradiction with Rule 6A which empowers audit committee to grant omnibus approval for transactions upto Rs 1 crore Complete legislative gap for transactions exceeding Rs 1 crore These are the transactions not covered by omnibus approval If not ratified by the audit committee Even the compensatory obligation of the director not provided for.

108 108 4 th provision to sec 177 (4) (iv) Provides for exemption in case of transactions not covered by sec. 188, if entered into with WOS Interestingly: Listing Regulations completely exempt transactions with WOS Sec 188 provides exemption from seeking shareholders approval in case of transactions between holding company and WOS Sec 177 (4) (iv) had no exemption whatsoever Underlying rationale is that the concerns of base erosion and profit shifting do not become any less relevant in case of transactions with WOS. Therefore, there isno case for not routing transactions through audit committee The scenario that now emerges for transactions with WOS: Transactions covered by sec. 188 Audit committee approval required u/s 177 (4) (iv); not required under Listing Regulations Board approval required if not in ordinary course of business or arms length Shareholders approval not required Transactions not covered by sec. 188 Audit Committee approval not required u/s 177 (4) (iv) Board approval not required, as not covered by sec. 188 Shareholders approval not required Transactions not covered by sec 188 are financial transactions; may involve substantial movement of resources. Exemption from audit committee approval may not be proper

109 109 Amendment in sec. 188 Bill proposes to add a proviso below the second proviso to sec. 188 (1) Interestingly, there was a 4 th proviso added by Amendment Act 2015 to provide carve out for shareholders approval in case of transactions with WOS There is a proviso below the second proviso proposed to be added by the Bill There will be total of 5 provisos post this insertion Makes shareholders approval inapplicable where 90% of members, in number, are relatives of promoters, or are related parties Bar on voting is applicable only to related parties By definition, relatives of promoters are not related parties at all. Hence, they are not barred from voting anyway. Also, the proviso does not recognise promoters themselves: If counts only relatives of promoters However, if together with related parties, promoters relatives, are numerically 90% or more of members, then bar on related parties voting does not apply This brings a very significant change MCA circular 30/2014 becomes meaningless So, as in case of the listing agreement, all related parties will refrain from voting Unless the case falls in the 90% numerical majority case

110 110 Numerical minority of shareholders gets the power to block resolutions Bill proposes a carve out by exempting companies in which ninety percent or more members, in numbers, are relatives of promoters or are related parties, from seeking shareholders approval. If shareholding pattern of A Ltd comprises of B Ltd holding 91% of paid up capital and 100 shareholders holding remaining 9% of paid up capital- In this case, since A Ltd does not hold majority of shares in numbers, the ones holding 9% of paid up capital will decide the fate of the RPTs. If they choose to block the RPTs, there is no way to get the same approved unless the RPT is in ordinary course of business and on arm s length basis If shareholding pattern of X Ltd comprises of Mr. Y (promoter) along with one of his relative holding 91% of paid up capital and Z Ltd (an unrelated entity) holding 9% of the paid up capital. In the instant case, Mr. Y and his relative need not abstain from voting on the transaction as they hold majority of shares in numbers.

111 111 Position for different companies Private companies Bar on related party voting does not apply Government companies Transactions between 2 government companies exempted. Public, listed companies If going under sec. 188, related parties shall not vote, unless covered by the numerical majority threshold If going under Listing Regulations, all related parties shall not vote

112 112 Sec 188- in brief Definition is specific Includes family members of HUF Related party transactions under the law are subject to serious restraint Most transactions that a company may have with related parties require approval of Board Directors are required to observe compliance u/s 184(2) with regard to disclosure of interest and non- participation in a particular discussion. In the general meeting the member who is a related party shall not vote if he is related party to the context of a particular transaction Bill, 2016 proposes a carve out by exempting companies in which 90% or more members, in numbers, are relatives of promoters or are related parties, from complying with the said requirements.

113 113 Sec 177(iv)- in brief All transactions with related parties though not covered by section 188, shall require approval of Audit Committee in terms of sec 177. Bill, 2016 proposes mandating Audit Committees to submit its recommendation to the Board such transactions, other than transactions referred to in section 188, where Audit Committee does not approve the same. Seems to have a vertical distinction made in relation to transactions covered under section 188 and those not covered under the same. Bill, 2016 proposes power to ratify transactions by Audit Committee to be granted only for any transaction involving any amount not exceeding 1 crore rupees. This seems to be contradicting with the provisions relating to omnibus approvals, as provided under Rule 6A of MBP Rules which provided deemed omnibus approval to transactions of aforesaid amount. RPTs exceeding value of Rs. 1 crores, not placed before Audit Committee for prior/ omnibus approval remains unanswered

114 Scope of approval of Audit Committee & shareholders after Bill, 2017

115 Scope of Audit Committee (AC) approval under Act, Nature of approval granted Yes Whether matter placed before AC for prior approval? No Value of transaction Prior approval for specific transaction Omnibus Approval Disapproved by AC Not exceeding Rs. 1 crore Exceeding Rs. 1 crore For sec 188 transa ction For other than sec 188 transaction For transaction between HC & WOS For foreseen transactions meeting criteria for granting Omnibus Approval Deemed approval for unforeseen transaction not exceeding 1 crore rupees AC may ratify within 3 months or the transaction shall be voidable at the option of the AC*?? No clarity on the same Recommend to Board if not in OC or not on AL basis Other than sec 188 transaction 177 (4) N.A Transaction u/s 188 AC approval shall apply in view of fourth proviso to section 177 (4) (iv) Sec 188 transaction Board can consider u/s 177 (8) Other than Sec 188 transaction AC will recommend to Board pursuant to second proviso to section 177 (4) (iv) * May require director or employee to compensate if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

116 *if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it. Shareholder Approval under Act, 2013 Whether the RPT is not in ordinary course of business (OC) or not on arm s length basis (AL) exceeding the limits specified under Rule 15? No 116 Provisions not applicable Yes Yes Related parties need not abstain from voting on the resolution Yes Whether 90% or more members, in numbers are held by relatives of promoters or are related parties Whether Shareholders approached for prior approval by a resolution or ratification within 3 months of entering in the transaction? No Related parties to abstain from voting on the resolution Shareholders may choose to ratify & not avoid the RPT No Voidable at the option of shareholders Avoid the transactions May approve the transaction May disapprove the transaction May require director/employee to compensate*

117 Bill, Loans to Directors and Directors entities

118 118 Quick snapshot Substitution of entire existing provisions Partly prohibitory and partly restrictive Aligning of interest rate with Section 186(7) Directors of subsidiary, JV, associate companies still excluded

119 119 Prohibition u/s 185(1) A company shall not- directly or indirectly advance any loan including any loan represented by book debt to; or give any guarantee or provide any security in connection with a loan availed by any director of the company, its holding company any partner or relative of above firm in which the above director or relative is partner

120 120 Restriction u/s 185(2) A company may by passing a special resolution and on the condition of utilisation of money in principal business activities- directly or indirectly advance any loan including any loan represented by book debt to; or give any guarantee or provide any security in connection with a loan availed by Any person in whom any of the director of the company is interested

121 121 Person in whom director is interested any private company of which any such director is a director or member 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 any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

122 122 Exemption to : Loan Exemption provided to MD/WTD as part conditions of service to all employees or pursuant to a scheme approved by an SR is in the ordinary course of business where interest charged not less than prevailing yield of G sec of 1 year, 3 year, 5 year or 10 year made by holding company to WOS WOS to utilise money in its principal business activities Guarantee or security provided by holding company in respect of loan made to WOS or loan made by bank or FIs to subsidiaries Subsidiary to utilise money in its principal business activities

123 Overview 123 Loans to Directors [Section 185] Are you public company Are you private company Are you govt. company 1. No body corporate members 2. Borrowings from banks Fis < twice the paid up capital or Rs. 50 crore or No default in repayment of borrowings Whether approval of the administrative Ministry obtained No No Are you advancing loan to director or giving guarantee or providing any security in connection with any loan taken by - Cntd. next slide

124 124 a) any director of company, or of a company which is its holding company or any partner or relative of any such director b) any firm in which any such director or relative is a partner Yes Is that any of the following - a) Loan to MD/WTD i. as part of conditions of service extended by company to all employees ii. pursuant to any scheme approved by the members by a special resolution b) loan or guarantee given or securities given for due repayment of any loan by company in its ordinary course of business and interest is charged at a rate not less than the rate of prevailing yield of 1Year/3Year/5year/10Year Government security closest to the tenor of the loan c) any loan made by holding company to its WOS company or an guarantee/security provided by holding in respect of any loan made to subsidiary company provided loan is used by subsidiary for principal business activity d) any guarantee given or security provided by holding company in respect of any loan made by any Bank or FI to its subsidiary company provided loan is used by subsidiary for principal business activity Yes No No Allowed Yes any person in whom any of the director of the company is interested "any person in whom any of the director of the company is interested" means (a) any private company of which any such director is a director or member; (b) 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 (c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company. Are the conditions being satisfied - (a) a special resolution is passed by the company in general meeting : Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and (b) the loans are utilised by the borrowing company for its principal business activities. No Allowed Allowed Prohibited Yes - Allowed No - Prohibited

125 125 Persons liable for contravention If the provisions of the section are contravened : Company shall be punishable with a fine. Minimum-5 lakhs Maximum-25 lakhs Every officer shall be punishable Imprisonment- 6 months Fine-Minimum-5 lakh Maximum-25 lakh Director or other person loan/guarantee/security is provided: whom the Imprisonment-6 months Fine-Minimum-5lakh Maximum-25lakh

126 Bill, Loans and investments by companies

127 127 Quick snapshot- 1/2 Provisions of investment through layers of investment companies was proposed to be omitted in Bill 2016 however such a proposal is removed form Bill 2017 The insertion of an explanation to clarify the exclusion of employees from the requirement of the section Same as provided in MCA circular dated 10 th March, 2015 The provisions with respect to aggregation of loans and investments for the purpose of calculating limit to be provided. As provided in Rules However, the aggregation only includes past loans etc. made to body corporate ignoring other person. Combined reading leads to a confusion

128 128 Quick snapshot -2/2 Exemption from shareholders resolution to loan, guarantee security provided to WOS and JVs and acquisition of securities of WOS As provided in the Rules Substitution of sub- section (11) to provide exemption inter alia to Exemption to banking companies, lending companies, insurance companies, housing finance companies: Giving of loans or providing guarantees or securities Exemption to investment companies Loans as well as investments? Garbled language talks of investment made in respect of investment or lending activities The implication seems to be that if investments are acquired in connection with lending activities, they get exempted The word financing of industrial enterprises comes again in sec. 186 (11) Most lending NBFCs will need to pass special resolutions to avoid the sectoin Definition of investment companies Either of asset or income criteria Note, RBI requires both income and asset criteria to be satisfied to be treated as an NBFC

129 129 Position in case of NBFCs Lending companies Say, an NBFC has paid up capital Rs 40 crores, free reserves Rs 60 crores, assets Rs 500 crores Has given loans worth Rs 300 crores. How much can the company invest? Investment companies Say, an NBFC has paid up capital Rs 40 crores, free reserves Rs 60 crores, assets Rs 500 crores Has made investments worth Rs 300 crores. How much can the company lend? Any NBFC Say, an NBFC has paid up capital Rs 40 crores, free reserves Rs 60 crores, assets Rs 500 crores Has given personal loans Rs 200 crores, and made investments worth Rs 300 crores. How much can the company lend?

130 130 Exemptions provided Loan, Guarantee, Security, investment made Investment made Banking company investment company Insurance company Rights issue u/s 62 HFCs Rights issue by any body corporate a company which is established with the object of and engaged in the business of financing industrial enterprises a company which is established with the object of and engaged in the business of providing infrastructure facility NBFC whose principal business is acquisition of securities Investment made in respect of lending or investment activities

131 Bill, Managerial remuneration

132 132 Quick snapshot- 1/3 Omission of the requirement of approval of CG for remuneration exceeding 11% Currently first proviso requires ordinary resolution and approval of CG SR for remuneration more than 10%, 5% and 3% as provided under subsection (2) of 196 The existing proviso requires an ordinary resolution Not properly worded provides for increasing the sub-limit within overall limit of 11% requires SR but for increasing the overall limit beyond 11% only requires an OR. Consent of lenders, NCD holders or secured creditors for payment exceeding the limit as prescribed to be obtained before general meeting The language says default in payment Bill, 16 used the word subsisting Dispensing of the requirement of CG approval for payment in case of inadequate profit

133 133 Quick snapshot- 2/3 Refund of excess payment or payment without approval within 2 years or lesser period as decided by company Waiver of any sum refundable shall require SR within 2 years Such waiver shall require consent of lenders or secured creditors before obtaining shareholders approval The language says default in payment Auditors report to contain a statement wrt remuneration being paid in accordance with the provisions and other details as may be prescribed Pending application with CG shall be abated Whether companies which have already passed a shareholders resolution shall still require consent of the lenders or creditors? Because the consent is required prior to shareholders approval.

134 134 Quick Snapshot-3/3 Section 197- For an investment company, profits, by way of premium on shares or debentures of the company, which are issued or sold by the company will form part of the normal profit from its ordinary business. Clarity is provided that profits are not of capital nature. Credit shall not be given for any amount representing unrealized gains, notional gains or revaluation of assets. Similar exclusion exists in the definition of free reserves and is also proposed to be inserted by way of proviso to clause (a) of sub-section (1) of section 123 relating to declaration of dividend.

135 135 Few concerns under proposed amendments-1/5 What all defaults are relevant for the purpose of the 3 rd proviso to sec 197 (1)? Default in term loan from bank Default in term loan from FI Language speaks the word subsisting Default in payment of any dues (the term may include principal, interest or any other dues) in respect of any non convertible debentures Default in payment of any dues to any other secured creditor (the above 4 collectively referred to as financial creditors Is the proposed provision (seeking consent of lenders) applicable in case of private companies? No, Sec 197 requires the consent of shareholders only in case of public companies. The proviso as proposed is linked with shareholders approval. Hence, there will be no need to seek lenders consent in case of private companies, even if such private company has a running default with lenders.

136 136 Few concerns under proposed amendments-2/5 The company has taken a loan from an NBFC on which default is subsisting. Can the company pay minimum remuneration to its managerial personnel? No, if the financial facility from the NBFC is a secured loan. When do we say the loan is a secured loan? Where there is a security interest created to back up the loan. The company contends that the company has paid all its dues to the lender; however the lender contends that there are unpaid dues. Will the company be eligible to appoint managerial personnel with minimum remuneration? Logically, a default should be recognised as default based on the books of account of the company.

137 137 Few concerns under proposed amendments-3/5 What is the meaning of prior approval for the above purpose? How will such approval be sought? Is it from each of the 4 categories of financial creditors, or from a majority of them at a meeting? The approval is needed only from such financial creditors, for whom a default is subsisting. Apparently has to be bought from each of the financial creditors. Is a default a pre condition for needing the consent of the financial creditors? Yes

138 138 Few concerns under proposed amendments-4/5 At what point of time should the default be subsisting? At the time of proposing the resolution in general meeting If the company passes a resolution in year 1 inter alia for payment of minimum remuneration, for a period of 5 years, and in year 3, the company faces a bad year and is not able to pay the dues to its financial creditors. Can the company go ahead and pay the minimum remuneration? Yes. The approval requirement is linked with the passing of the resolution and not with the payment of the remuneration

139 Few concerns under proposed amendments-5/5 139 If the company proposes to pay remuneration as per percentages of profits (11% overall, 10% to all WTDs, and 5% to each MD or WTD), is there a need to seek the approval of the financial creditors? No. the approval is required only where the limits based on percentage of profits are exceeded. Is the payment of minimum remuneration possible in case of a CEO? Yes. Remuneration to the CEO is not governed by sec. 197, unless the CEO can be regarded as the manager.

140 140 Few concerns under proposed amendments-5/5 Whether a managerial director who has attained the age of 70 years be appointed? Previously a MD who has attained an age of 70 years may continue on the board subject to prior SR. However,with the Amendment Bill, 2017 the provisions are amended to say that a managerial director may be appointed even : where no SR is passed, but the votes cast in favour are more than votes cast against ; CG is satisfied on application of Board that such appointment is beneficial to the company

141 141 Approvals for payment of Managerial Remuneration Company Public Company Private Company Total Managerial Remuneration Individual Limits Provision of Section 197 not applicable Up to 11% of Net Profits of the company Board Resolution Exceeding 11% of Net Profits of the company OR, subject to the provisions of Schedule V + Prior approval of Banks, PFI, NCD holders or secured creditors (applicable in case of defaulting companies) Company has any one of MD/WTD/Manager Remuneration payable to MD/ WTD/ Manager Up to 5% of the Net Profits of the compan y Exceed ing 5% of Net profits of the compa ny Remuneration payable to other directors Up to 1% of the Net Profits of the compan y Board Resolution (if within the prescribed limits) i.e. up to 5%, 1%, 10%, 3% as the case may be or 11% overall; Exceed ing 1% of Net profits of the compa ny Remuneration payable to MD/ WTD/ Manager Up to 10% of the Net Profits of the compan y Company has more than one MD/WTD/Manager Exceedi ng 10% of Net profits of the compan y Remuneration payable to other directors Exceedi ng 3% of Net profits of the compan y Exceedi ng 3% of Net profits of the compan y SR + Prior approval of Banks, PFIs, NCD holders or secured creditors (applicable in case of defaulting companies) (if exceeding the prescribed limits)