Companies Act Understanding New Provisions. Dhinal Shah Chartered Accountant

Transcription

1 Companies Act 2013 Understanding New Provisions Dhinal Shah Chartered Accountant

2 Agenda Key changes relating to financial statements Key changes relating to audit Additional liabilities and action against the auditor Enhanced corporate governance measures Related party transactions Mergers and amalgamations Page 2

3 Brief Overview Act to replace 57 years old law Act contains 29 Chapters, 470 sections and 7 schedules as against the earlier law of 658 sections under 13 parts and 15 schedules Major portion of the law is in the form of Rules, to be notified in near future Central Government empowered to modify various provisions at various point of times Around 298 sections of the Act notified Clarified that all provisions relating to depreciation, directors report, auditors report, CFS, etc. are applicable from financial year commencing on or after April 1, 2014 Page 3

4 Approach of new company Law Essential Principles Retained Quick Resolution Self Regulation Aligned to Internation al Practices Rule of Law To Law of Rules Better Governanc e Cater to Growth Easy complianc e Page 4

5 Key changes relating to financial statements

6 Financial year All companies to follow uniform financial year, i.e., 1 April to 31 March Transitional period Existing companies required to align its financial year within 2 years of commencement of new law Exception/ exemption Holding/ subsidiary of a company incorporated outside India and required to follow different financial year for consolidation of financial statements outside India Tribunal s approval required Page 6

7 Financial statement Current requirement Listed companies Turnover > 50 crores Turnover =<2 crores (or higher amount as prescribed) Turnover > 2 crores (or higher amount as prescribed) Cash Flow Statement X X SOCIE X X X X New requirement Cash Flow Statement X SOCIE (where applicable) No AS deals with preparation of SOCIE Guidance needs to be provided Format for cash flow statement or SOCIE not prescribed Remaining format of Financial Statements (Balance Sheet, Profit and Loss, Notes) to remain exactly the same as Revised Schedule VI Page 7

8 New depreciation schedule: Overview Prescribes useful lives of various assets instead of SLM/ WDV rates Rates for tangible assets only : no prescription for Intangible Assets Applicable Accounting Standards to govern the same Three classes of companies Class I: Prescribed class of companies which comply with prescribed AS Can adopt different useful lives/residual values if an appropriate justification is given for the same Class II: Companies regulated by other law, e.g., electricity companies Depreciation rate for assets as prescribed by regulatory body to prevail Class III: Other companies Assets cannot have useful life longer than that prescribed No separate rate for double/ triple shift; depreciation to be increased by 50% for the period of double shift for the period triple shift use Page 8

9 New depreciation schedule: Component accounting Depreciation is defined as systematic allocation of depreciable amount of an asset over its useful life. Depreciable amount is defined as cost of the asset or other amount substituted for cost, less its residual value Useful life is: Period over which an asset is expected to be available for use, or Number of production/ similar units expected to be obtained from its use by the entity Useful life of part of an asset to be determined separately If its cost is significant vis-à-vis total cost of the asset Its useful life is different from the remaining parts Thus, each such significant part must be depreciated over its respective useful life. Transitional provisions Carrying amount to be depreciated over the remaining useful life as per Schedule II If remaining useful life is nil, depreciable amount to be adjusted with retained earnings Page 9

10 New depreciation schedule: key impacts Companies falling in the first category may choose to adopt higher/ lower useful life if the same can be justified Depreciation across companies may vary even within the same industry For revalued assets, full depreciation charge on the revalued asset may impact profit and loss Currently, depreciation on revalued amount can be recouped from the revaluation reserve Companies may follow any suitable method of depreciation It may be possible to follow the unit of production method which is currently specifically prohibited Principles of component accounting introduced AS-10 and AS-6 may need to be revised accordingly Page 10

11 Control vs. Subsidiary Control is defined to include: Right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner Subsidiary is defined to mean a company in which the holding company: Controls the composition of the Board of Directors, or : Exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies One may have to look beyond board control and share ownership to decide control. But it is not clear whether a company being controlled by another by virtue of shareholder agreement, voter agreement or other means (but with less than 50% total share capital) will always become a Subsidiary. Page 11

12 Consolidated financial statements (CFS) Preparation of CFS mandatory for all companies having subsidiaries Currently, unlisted companies are not required to prepare CFS All requirements pertaining to preparation, adoption and audit will also apply to CFS For preparation of CFS, subsidiary includes associate and joint ventures Companies without any subsidiary but having associates and/or joint ventures will need to prepare CFS unless clarified otherwise Companies (Accounts) Rules, 2014 Rule 6 provides for manner of consolidation. Page 12

13 Consolidated financial statements (CFS) Statutory format for preparing standalone financial statements mandated for CFS as well Following additional disclosure required in CFS: Amount and percentage of net assets and profit/ loss of each subsidiary/ associate and JV vis-à-vis consolidated net assets and profit Indicating Indian and foreign subsidiary, associate and JV separately Statement containing prescribed salient features of financials statements of subsidiaries, associates and Joint Ventures to be attached Page 13

14 National Financial Reporting Authority (NFRA) yet to be notified Central Government to setup a central regulatory authority for various accounting and auditing matters under the Act Chairperson/ full-time members to be independent of audit/consultancy firms during appointment and upto 2 years thereafter To be headed by an eminent expert appointed by Central Government Role/ responsibilities: Make recommendations to the Central Government on formulation of accounting and auditing standards and policies Monitor and enforce compliance with accounting and auditing standards Oversee the service quality of professions associated with ensuring compliance with such standards and suggest measures for improvement Provide consultation to the Central Government on ordering additional matters to be included in the Auditor s Report Page 14

15 Re-opening of accounts - yet to be notified Under Order of Court/Tribunal Re-opening of accounts may be ordered by Court/Tribunal only on application by the Central Government, Income-Tax Authorities, SEBI, Other Regulatory Body or Authority and where : Accounts were prepared in a fraudulent manner Company s affairs were mismanaged casting a doubt on reliability of financial statements Representations of the aforesaid body/authority concerned need to be considered before passing such order Voluntary Revision Voluntary revision of financial statements/ board report permitted for any of the 3 preceding financial years Detailed reasons required to be disclosed in the board report Company needs to obtain specific approval from Tribunal for restatement Representations of the Central Government and Income-Tax Authorities need to be considered by Tribunal before passing such order Central Government to make rules including those relating to auditor s functions for revisions Page 15

16 Utilization of securities premium Purpose Companies Act, 1956 Companies Act 2013 Specified Others class Issue of bonus shares Writing off equity share issue expenses Writing off debenture issue expenses X Writing off preliminary expenses X Providing for premium payable on redemption of preference shares / debentures X The above restrictions for prescribed class of companies will bring their accounting treatment in line with AS. Page 16

17 Dividend declaration Transfer to Reserve Rules relaxed Currently, dividends can be declared only after certain specified percentage of profits are transferred to Reserves New Act allows companies to decide the percentage to be transferred The Companies (Declaration and Payment of Dividend) Rules, 2014 are notified for declaring dividends out of reserves Restrictions imposed on Interim Dividend Interim dividend can be declared : From Surplus in the Profit & Loss Account as well as Profits for the current financial year In case of YTD loss at quarter end, rate of dividend cannot exceed last 3 years average dividend No dividend can be declared on failure to comply with provisions relating to acceptance and repayment of deposits under the new Act Page 17

18 Bonus issue Bonus Shares can be issued only from free reserves, securities premium and capital redemption reserve Bonus Shares cannot be issued by capitalizing revaluation reserve Currently allowed for unlisted companies based on the Supreme Court judgment Pre-conditions introduced for bonus issue: Articles of Association authorise bonus issue Authorisation through General Meeting No default in payment of interest or principal on fixed deposits or debt securities issued No default in payment of statutory dues of employees Any partly paid shares outstanding on the date of allotment are made fully paid-up Any additional conditions prescribed Page 18

19 Key changes relating to audit

20 Qualification and remuneration Who can be appointed Only Chartered Accountant is eligible for appointment as auditor A firm with majority of partners practising in India may be appointed as auditor The existing law requires all partners to be practicing in India Where limited liability partnership is appointed, only partners who are chartered accountants authorized to act and sign as auditors Auditor remuneration To be fixed in general meeting or in a manner determined therein In addition to audit fee, it will also include : out of pocket expenses cost of facilities extended to him Page 20

21 Independence issues Auditors independence requirements significantly widened May result in ineligibility in a large number of cases A person is not eligible for appointment as auditor if the person or, his relative or partner : Holds any security or interest in the company, its subsidiary, holding, associate or fellow subsidiary Relative may hold security/interest not exceeding face value of shares of Rs. 1 lac (corrective action with in sixty days) Is indebted to the company or its subsidiary, holding, associate or fellow subsidiary in excess of Rs. 5 lacs. Has given guarantee or provided any security in connection with the indebtedness of any third person to the company or its subsidiary, holding, associate or fellow subsidiary in excess of Rs. 1 lac. Relative is defined to include spouse, member of HUF or as per Rule 4 of Companies (Specification of definition details) Rules, 2014 Very restrictive since does not exclude financially independent relatives Page 21

22 Independence issues Persons not eligible for appointment as auditor also include : Person or firm having business relationship of prescribed nature with the company or its subsidiary, holding, associate, fellow subsidiary or subsidiary of associate company whether directly or indirectly Could lead to practical difficulties unless arm s length business relationship is permitted Person whose relative is a Director or employed as Key Managerial Personnel in the company Apparently, this restriction will not apply to an audit firm Person who is in full-time employment elsewhere Relative to include Father, Mother, Son, Son s wife, Daughter, Daughter s Husband, Brother and Sister. Page 22

23 Independence issues Persons not eligible for appointment as auditor also include : Person or partner of a firm holding appointment as auditor of more than 20 companies at the date of appointment or re-appointment Restriction applies to private companies as well More clarity required : If a partner is holding appointment as auditor in his individual capacity of more than 20 companies whether the restriction will apply to his audit firm? Person convicted by a court of an offence involving fraud and 10 years have not elapsed from the date of conviction Ineligibility applies even if court order is subjected to appeal in a higher court Person whose subsidiary or associate or any other form of entity is engaged on the date of appointment in providing services that an auditor is prohibited to render Page 23

24 Independence issues Auditor not to render certain services Auditor cannot render following services to the auditee company, either directly or indirectly: Accounting/ Book keeping; Internal Audit; Investment Banking Services; Design & Implementation of Financial Information System; Outsourced Financial Services; Actuarial Services; Investment Advisory Services; Management Services; Any other prescribed services Many of these terms are not well-defined and may include services which auditors could provide without compromising their independence Restrictions apply to auditee s holding and subsidiary companies as well directly or indirectly is defined to include : Firm or any of its partners, parent, subsidiary, associate or any other entity in which the firm/its partner(s) has significant influence or control or whose name/trade mark/brand is used by the firm/its partner(s) Transitional provision Compliance to be ensured before closure of first financial year after commencement of the new law Page 24

25 Removal/ resignation of auditors Auditor appointed may be removed from his office before expiry of his term: By a special resolution of the company, and After obtaining prior approval of the Central Government An auditor who has resigned from the company: To file a statement indicating reasons and other facts with regard to his resignation within 30 days Page 25

26 Removal/ resignation of auditors Central Government may direct change of auditors, if it believes that : Auditor has acted in a fraudulent manner, or Abetted or colluded in any fraud by/in relation to the company, or its directors or officers Central Government may pass the order suo-moto, or on application of any person concerned Auditor against whom an order is passed by Tribunal Cannot be appointed auditor of any company for 5 years from order date May be imprisoned for upto 10 years and fined upto 3 times the amount involved It is clarified that where the auditor is a firm, liability will be of the firm as well as that of every erring partner. However in case of a criminal liability it shall devolved only on concerned partner who acted fraudulently or abetted or colluded in any fraud. Page 26

27 Tenure and rotation of auditors 5 years tenure introduced instead of current requirement of annual appointment at every AGM Audit Committee recommendations to be considered for all auditor appointments Listed companies/ prescribed class of companies cannot appoint An individual as auditor for more than 1 term of 5 consecutive years An audit firm as auditor for more than 2 terms of 5 consecutive years Ratification of appointment by members required at every AGM After completion of the above term : Cooling-off period of 5 years Newly appointed audit firm and the retiring firm cannot have any common partner Existing companies to comply with the above requirement within 3 years of commencement of the new law Page 27

28 Tenure and rotation of auditors other aspects Where no auditor is appointed or re-appointed at any AGM, the existing auditor will continue to be the auditor Currently, non-appointment of auditor at AGM results in vacancy which the Central Government is required to fill Members of the company are empowered to require Auditing firm to rotate the auditing partner and his team at such intervals as resolved by them, OR Joint audit Companies (Audit and Auditors) Rules, 2014 has prescribed the manner and conditions of rotation including class of companies. Page 28

29 Additional reporting responsibilities The audit report will state : Details of information and explanations necessary for the audit which he has not been able to obtain and their effect on financial statements Apparently, every such information/explanation need not be reported where its necessity for the audit is satisfied through alternative evidence or audit procedures Any observations or comments on financial transactions or matters which have any adverse effect on the functioning of the company Matters adversely affecting the company s functioning have not been restricted to only those impacting financial statements Any qualification, reservation or adverse remark relating to maintenance of accounts and on matters connected therewith Scope of reporting on matters connected with maintenance of accounts is too broad and has not been defined Page 29

30 Additional reporting responsibilities The audit report to also include : Whether the company has adequate internal financial controls systems in place and the operating effectiveness of such controls Currently, reporting over internal control is limited to purchase of inventory and fixed assets and sale of goods and services New law requires reporting over the entire financial controls system Reporting on operating effectiveness of controls required irrespective of their impact on financial statements or the presence of mitigating factors Any other matter as prescribed Reporting of frauds by the Auditors CARO may be replaced by a new Order Auditor to report to Central Government immediately If during the course of audit has any reason to believe that fraud is committed against the company No exemption with regard to materiality of amount involved Penal consequences of upto Rs. 25 lacs on failure to report Page 30

31 Additional reporting responsibilities The audit report shall also include views and comments on the following : Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement ; Whether the company has made provision, as required under ay law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivatives contracts; Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company. Page 31

32 Additional responsibilities for CFS CFS Audit Report to include: All newly introduced reporting requirements, as well as All matters currently reported upon u/s 227(3) of Companies Act Records of subsidiaries Auditor of holding company to have access to records of all of its subsidiaries to the extent required for consolidation No clarification for subsidiaries where the auditor is different and his work is relied upon No clarification for overseas subsidiaries not bound by Indian laws The above may indirectly result in greater obligation on the parent company s auditor Page 32

33 Other duties Attendance at AGM made mandatory for the auditor Absence permitted only if exempted by the company Attendance permitted through authorized representative qualified to be an auditor Right of being heard on matters concerning him as auditor Page 33

34 Additional liabilities and action against the Additional liabilities and action against the auditor

35 On contravention of law Auditor may be subjected to all of the following liabilities on contravention of any related provision of the new law: Fine upto Rs. 5 lacs In case of willful default with an intention to deceive the company or its shareholders, creditors, tax authorities : Imprisonment upto 1 year and fine upto Rs. 25 lacs Refund of remuneration received Payment of damages to the company, statutory body/authorities or any other person for loss arising from incorrect or misleading statement in audit report Where abetment or collusion in any fraud is proved, liability shall be of the audit firm, as well as every erring partner Page 35

36 Under class action suit Members or depositors may seek damages or suitable action from or against the auditor in connection with any of the following : Any improper or misleading statement in audit report Any fraudulent act or conduct Any unlawful or wrongful act or conduct No distinction has been made between willful or grossly negligent acts and errors caused unintentionally Tribunal s order would be binding on the company, all its members, depositors, auditor or any other person associated with the company Where the auditor is a firm, liability shall be that of the audit firm, as well as every erring partner Page 36

37 Prosecution by NFRA NFRA may investigate, on its own or on reference by Central Government, matters of professional or other misconduct by any member/firm of Chartered Accountants ICAI cannot initiate or continue proceedings in such cases If proven guilty, NFRA order may impose : In case of individual : Minimum penalty of Rs. 1 lac extending upto 5 times the fee received In case of firm : Minimum penalty of Rs. 10 lacs extending upto 10 times the fee received On individual or firm : Restriction on practice for upto 10 years Appellate Authority to be setup by Central Government for hearing appeals arising out of orders of NFRA Page 37

38 Limited Liability Partnership (LLP) The Chartered Accountants Act has been amended to allow audit firms to function as LLPs Liability of a partner in an LLP is generally limited to agreed contribution and only to his own wrongful acts or omissions Under the new law, the audit firm is often held responsible jointly and severally with the erring partners Based on such liability provisions, benefits of the LLP form of partnership may not be available to audit professionals Page 38

39 Enhanced corporate governance measures

40 Corporate Social Responsibility (CSR) Overview and key changes Basic provisions Constitution of CSR committee mandatory for company having Net worth of Rs. 500 crore or more; or Turnover of Rs. 1,000 crore or more; or Net profit of Rs. 5 crore or more 2% CSR spending would be computed as 2% of the average net profits during every block of 3 years. For the purpose of first CSR reporting the Net Profit shall mean average of the annual net profit of the preceding 3 financial years ending on or before 31 March Preference to local area and area around for spending CSR amount. Board report and the company s website to disclose CSR policy Schedule VII of the 2013 Act sets out the CSR Activities If a company fails to spend amount on CSR activities, the board will explain reasons for the same in its report Page 40

41 Corporate Social Responsibility (CSR) Overview and key changes CSR Committee CSR Committee will consist of For Listed Public Company and unlisted public company (Paid up capital of Rs 100 Crores or Turnover of Rs 300 Crores or Outstanding loans / borrowings of Rs 200 Crores) - 3 or more directors with at least one independent director For unlisted public company (other than above) and private companies 3 or more directors except 2 directors for private company having 2 directors only For foreign company at least 2 persons consisting of person authorised to accept notices on behalf of foreign company in India and another one nominated by foreign company. Role of CSR Committee: To formulate and recommend CSR policy, including activities to be undertaken To recommend amount to be spent To monitor CSR policy and activities Page 41

42 Corporate Social Responsibility (CSR) Overview and key changes CSR Rules, 2014 CSR Rules, 2014 to be applicable from financial year The rules clarify the following: Net profit shall mean net profit before tax and shall not include profits of branches outside India and dividend received from other companies in India incurring CSR costs Reporting will be done on an annual basis commencing from FY Amount spent in normal course of business not to be considered for CSR activities CSR activities done through trusts, societies or other organizations should have an established track record of 3 years Activities exclusively for the benefit of employees and their family members shall not be considered as CSR activities. Only such CSR activities as are undertaken within India to be considered. Companies may collaborate or pool resources with other companies to undertake CSR activities. Contribution / Donation to political party not to qualify as CSR Clarification Circular No. 21/2014 dated 18 th June, Page 42

43 Corporate Social Responsibility (CSR) Key impact No penal provision provided in the 2013 Act for failure to spend on CSR activities. Threshold of net profit of Rs.5 crore is on lower side vis-à-vis other thresholds May require more profit making companies to contribution towards CSR. Average net profit is determined as per section 198, and hence amount spend may be higher / lower than 2% of its average profits. Creation of provision for unspent amount may depend upon legal / other implication that will follow if company fails to spend amount. Per proposed changes in direct tax code (DTC), expenditure on CSR cannot be allowed as business expenditure Page 43

44 Enhanced role of Audit Committee and Board Audit Committee entrusted with additional responsibilities: Review and monitoring of auditor independence, performance and effectiveness of the audit process Approval or any subsequent modification of related party transactions Scrutiny of inter-corporate loans and investments Valuation of undertaking or assets of the company, if required Evaluation of internal financial controls and risk management systems Monitoring the end use of funds raised through public offers and related matters Stakeholders Relationship Committee (SRC) Companies having more than 1000 security holders of any type (including deposit-holders) to setup SRC to resolve their grievances Page 44

45 Additional Disclosures In the Board Report, on : Development and implementation of risk management policy Particulars of all contracts or arrangements with related parties (as defined) with justification for entering into such contract/arrangement For listed and prescribed companies, formal evaluation by the Board of its own performance and that of its committees and individual directors In the Director s Responsibility Statement of Board Report, on: Proper systems were devised by directors to ensure compliance with all applicable laws and were adequate and operating effectively For listed companies, declaration that Internal Financial Controls were laid down by the directors and are adequate and operating effectively In Company Website and Board Report, on CSR policy and initiatives Page 45

46 Internal Audit Overview and key changes Internal audit mandatory for below class of companies every listed company; OR every unlisted public company havinga. paid up share capital of fifty crore rupees or more during the preceding financial year; or b. turnover of two hundred crore rupees or more during the preceding financial year; or c. outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or d. outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and every private company havinga. turnover of two hundred crore rupees or more during the preceding financial year; or b. outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year: Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section. Page 46

47 Serious Fraud Investigation Office (SFIO) Central Government (CG) to establish SFIO to investigate frauds relating to a company as assigned to it by CG order No government investigating agency can investigate or proceed with cases assigned to SFIO SFIO empowered to arrest offenders in certain cases who may be released on bail only upon fulfillment of specified conditions SFIO to submit its investigation report to CG SFIO to initiate prosecution against the company, its employees or any other person connected with the company s affairs, directly or indirectly, as directed by CG SFIO report for framing charges would be treated as a police report under Code of Criminal Procedure, 1973 Page 47

48 Related party transactions

49 Relative Overview and key changes Definition: With reference to any person means anyone who is related to another if They are member of HUF They are Husband and wife Related in such manner as may be prescribed Companies Act also has similar definition but list of relatives have been prescribed Key impact Prescribed list of relation will have significant impact on aspects such as appointment, qualification and disqualification of auditors and independent directors A person may not be able to control/ influence other person if the other person is not financially dependent on him/her A person may be able to influence other persons who are financially dependent on him or her, even if they are not covered in specific list or relations Relatives While prescribing covered relationship, the Central Government may consider the fact that a person may not be able to control/ influence other person if the other person is not financially dependent on him / her Hence, instead of listing specific relationship, the Government may explain that clause (iii) in definition of the term relative will mean financially dependent person Page 49

50 Relative Father Mother Brother Sister Spouse Daughter's husband Daughter Son Son s wife This color indicates inclusion of Step relationship. i.e., Step-Father/ Step-mother etc. Page 50

51 Definition of related party Companies Act 2013 All persons covered under the definition of related party, namely; i. A director, KMP or their relative ii. A firm, in which a director, manager or his relative is a partner iii. A private company in which a director/ manager is a member/ director iv. A public company in which a director / manager is a director or and holds along with his relatives, more than 2% of its paid-up share capital v. A 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, except if advice is given in the professional capacity vi. Any person on whose advice/ directions/ instructions a director or manager is accustomed to act, except advice given in professional capacity vii. Any company which is: i. A holding, subsidiary or an associate company of such company; or ii. A subsidiary of a holding company to which it is also a subsidiary; viii. Such other person as may be prescribed Overview and key changes Related party is not defined under Companies Act. AS 18 however defines related party and states list of relations to which AS 18 applies Page 51

52 Related Party Transactions Companies Act 1956 Companies Act 2013 Central government approval required for entering into specified contracts, where paidup capital of the company is not less than Rs.1 Crore No such provision Following transactions are covered: Sale, purchase or supply of any goods, material or services Underwriting the subscription of any shares or debentures Restriction applies for only transaction involving pvt. Cos. Similar exemption in Companies Act No specific disclosure required in the board report. Special resolution at general meeting required incase paid-up capital is not less than or transaction does not exceed prescribed amount. No member of the company who is related party can vote on special resolution. Central government may prescribe additional conditions Following additional transactions covered: Buying or selling property of any kind Leasing of property Appointment of 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 derivative on securities of the Company. Restriction applies for only transaction with all related parties Restrictions don t apply to transactions in ordinary course of business except if not at arm s length Disclose in board report along with justification. Page 52

53 Related Party Transactions Following Companies / transactions shall be required to comply with section 188 (1): Company having paid up share capital of Rs 10 Crores or more; OR Any transaction by any company, which meets below criteria: Sale, purchase or supply of goods or materials directly or through appointing agents exceeding 25% of annual turnover; Selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding ten percent. of net worth; Leasing of property of any kind exceeding ten percent. of the net worth or exceeding ten percent. of turnover; Availing or rendering of any services directly or through appointment of agents exceeding ten percent. of the net worth; Appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees; Remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding one percent. of the net worth Page 53

54 Loans - Investments & Deposits

55 Loans to directors and subsidiaries Overview and key changes 2013 Act prohibits advancing loan to and providing guarantee/ security for loan to any director or person in whom director is interested. Person in whom director is interested includes: Director itself or director of holding company or its relative; Any private company in which any director is a director or a member; Any body corporate, the board, 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; 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 No possibility of seeking the Central Government approval to provide prohibited loans/guarantees/ security Restriction on loan does not apply to: Making of loan to managing/ whole-time director as part of service condition extended by a company to all its employees or pursuant to any scheme approved through special resolution A company, which in ordinary course of its business provides loans/guarantees/ securities and interest charged is not less than the bank rate declared by RBI Page 55

56 Loans to directors and subsidiaries Overview and key changes Rules specify the following: Any loan made, guarantee given or security provided by a holding company to its WOS company is exempted from the requirements under this section Any guarantee given or security provided by a holding company for loan made by any bank or financial institution to its subsidiary company is exempted from the requirements of this section Such loans should be utilised by a subsidiary company for its principle business activities Key impact There seems to be prohibition on giving loans to a subsidiary that is not a WOS Concern: Rules may be overriding the Act in giving exemptions! Page 56

57 Loans and investments by a company Overview and key changes A company cannot make investment through more than 2 layers of investment companies. However, the requirement does not effect: Acquisition of company incorporated outside India if such company has investment subsidiaries beyond two layers as per law of that country Subsidiary company having investment subsidiary for meeting law requirement. Investment Company means a company whose principal business is the acquisition of shares, debentures or other securities. Key impact Prohibition on more than two layers of investment may require many groups to reconsider their investment structures Page 57

58 Loans and investments by a company Overview and key changes Prohibits a company from giving loans, providing guarantees/security to other body corporate or acquiring securities of other body corporate exceeding higher of : 60% of paid up capital, free reserves and securities premium. or 100% of free reserves and securities premium 2013 Act extends restriction for provision of loan to/ guarantee/ security on behalf of any person or entity also 2013 Act allows provision of loan/ guarantee/ security or acquiring securities exceeding the limit by prior approval through special resolution Rate of interest cannot be lower than prevailing yield on one year, three year, five year or ten year Government security closest to tenor of loan Full disclosure required in the financial statements of the loans given, investments made or guarantee given/ security provided along with purpose Page 58

59 Loans and investments by a company Overview and key changes 2013 Act did not contain any exemption for loan made/ guarantee given/ security provided by a holding company to its WOS companies Rules provide that if a loan or guarantee is given or a security has been provided by a company to its WOS company or JV company, or acquisition is made by a holding company of the securities of WOS company, requirement concerning special resolution does not apply Company to disclose details of such loans or guarantee or security or acquisition in the financial statements Rules provide that: If aggregate of loans and investment made, guarantee and security so far provided, along-with investment, loan, guarantee or security proposed to be made, exceed the limits prescribed, then no investment or loan will be made or guarantee will be given or security will be provided unless previously authorized by special resolution passed at the general meeting. An explanation to the rule clarifies that it will be sufficient compliance if such special resolution is passed within one year from the date of notification of this section. Page 59

60 Loans and investments by a company Key impact Loans made to/guarantee/security on behalf of any person or entity will be included in maximum limit May have impact of company immediately breaching the limit Position regarding loans/ investments A parent company can give loan/ provide security or guarantee to its WOS company or acquire securities of WOS Special resolution requirement for exceeding 60%/ 100% limit will not apply A parent company can provide security or guarantee to its subsidiary company which is not WOS. However, it cannot give loan to such subsidiary company. These will be included in the 60% or 100% limit. Loan given, security/ guarantee provided to the JV company - Special resolution requirement for exceeding 60%/ 100% limit will not apply There is no relaxation/ exemption on the requirement concerning charging of interest on loans Company needs to charge interest at the specified rate on all its loans, including loans to WOS, other subsidiaries and joint ventures Page 60

61 Loans and investments by a company Key impact Whether omnibus resolutions is possible - One rule states that special resolution will specify the total amount up to which the board can give loan/ guarantee, provide security or acquire investments Whether investment in mutual funds will be included in the 60%/100% limit! Requirement to charge interest at government security rate may apply even to foreign currency loan Not comparable with interest rates prevalent in foreign currency Whether a company can give loan to its fellow subsidiary! Whether a company can take loan from its foreign parent! Whether a company also need to pass resolution for existing loans/ investments! Disclosure of transactions in the financial statements will also be subject to audit Page 61

62 Acceptance of Deposits Overview and Key changes No company permitted to accept deposits except Banking Company, NBFC and such other company as specified in Rules Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include: Money received by a Company from any other company Share application money provided the allotment is made within 60 days of date of receipt Money received from the promoters by way of unsecured loan as per stipulation of lending financial institution or a bank. Advance in connection with consideration for property Advance received under long tern projects for supply of capital goods Any advances received towards supply of goods or services provided such advance is appropriated towards such goods or services within 365 days from date of receipt of such advance Security deposit for performance of goods or provision of services Public company having net worth > 100 Crores or turnover > 500 crores only would be allowed to raise funds through public deposits Page 62

63 Acceptance of Deposits Overview and key changes Overview and Key changes: Any deposit remaining unpaid on the commencement of Act or interest due thereon: File within 3 months with Registrar of Companies a statement of all such deposits accepted by the Company and sum remaining unpaid on such amount with interest thereon Repay within 1 year from such commencement or from the date on which such payments are due, whichever is earlier Companies cannot accept deposits repayable on demand. Minimum period of deposit shall be of 6 months and maximum period of deposit shall be of 36 months. For meeting short-term requirements of funds, companies may accept deposits upto 10% of the aggregate paid-up share capital and free reserves and period for such short-term deposit minimum period of 3 months and maximum period of 6 months. Key impact: Loans from non-corporate shareholders to be considered as public deposit? Consideration of period for outstanding share application money or advance against goods or services to be done from date of receipt or April 1, 2014? Transitional provisions require repayment of outstanding deposits within a period on one year Will result in significant cash outflow Page 63

64 Mergers and amalgamations

65 Cross Border Mergers Page 65

66 Demergers Page 66

67 Buyback Page 67

68 Exemption from court process Page 68

69 Merger of listed company with unlisted company Page 69

70 Key changes to process of compromise/arrangement Page 70

71 Protection to shareholders Page 71

72 Multi layered structure restrictions Page 72

73 Acquisition of minority shareholding Page 73

74 Sale of undertaking Page 74

75 Holding Subsidiary relationship Page 75

76 Voting rights for Preference Shares Page 76

77 Preferential Allotment Page 77

78 Foreign company registration in India Overview and key changes Foreign company defined to mean company/body corporate incorporated outside India having, inter alia, Place of business through agent or electronic mode and Conducting business activity in India in any other manner Electronic mode defined in Rules very widely to include any electronic based activity ( , cloud computing, mobile etc.) whether or not server installed in India Foreign company having place of business in India triggers registration and India centric financials Likely retroactive applicability of provisions to existing companies Page 78

79 Foreign company definition Rule 2(h) of the Companies (Specification of definitions details) Rules, 2014 defines electronic mode for the purposes of s. 2(42) of the Cos Act 2013 to mean carrying out electronically based, whether main server is installed in India or not, including, but not limited to- (i) business to business and business to consumer transactions, data interchange and other digital supply transactions; (ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India; (iii) financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management; (iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and (v) all related data communication services Explore : E-learning, online travel, hotel booking, e-purchase, IBFD database access, etc Page 79

80 Tax Impact from Companies Act, 2013 Corporate Social Responsibility Tax deductible u/s. 37(1) or u/s. 35AC or u/s. 80(G)? Loans to Foreign Subsidiaries Whether interest to be charged at LIBOR linked rate or at Government yield rate as per Section 186? Related Party Transactions Whether Arms Length Price for Tax purpose would also be an arms length for section 188? Depreciation Component Accounting Non Withdrawal of Incremental depreciation from revaluation reserve for book profit. Change in the Voting power for preference shares The impact on sec. 79 or 40A(2)(b)? Foreign Company Definition of Electronic Mode Page 80

81 Thank You