SEMINAR ON COMPANY LAW THE CHAMBER OF TAX CONSULTANTS JOINTLY WITH TRIMBAK STUDY CIRCLE OF NASHIK SCHEDULE II, CASH FLOW & EXEMPTIONS TO PRIVATE LIMITED & OTHER COMPANIES 1 Abhay Mehta Partner Mehta Chokshi & Shah 25 th July, 2015
DEPRECIATION (SCHEDULE II) 2
WHAT IS DEPRECIATION? Depreciation is a systematic allocation of the Depreciable Amount of an asset over its Useful Life. Depreciation includes amortization. Depreciable Amount : It is the cost of an asset or other amount substituted for cost less its residual value. Useful Life : It is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units. 3
JOURNEY FOR DETERMINING USEFUL LIVES Initially, Schedule II prescribed two different treatments for different class of companies: Prescribed class of companies whose Financial Statements comply with the Accounting Standards prescribed for such class of companies. Useful life and residual value shall not be different from that as indicated in Part C, unless the justification for the same is disclosed. Other Companies Useful life of an asset and the residual value shall be lower and higher respectively than that prescribed in Part C. 4
NOTIFICATION DATED 31 ST MARCH, 2014 The useful life of an asset shall not be longer than the useful life specified in Part C and the residual value shall not be more than 5% of the Original Cost. Provided that where a company uses a useful life or residual value of an asset which is different from the above limits, justification for the difference shall be disclosed in its Financial Statements. 5
NOTIFICATION DATED 29 TH AUGUST, 2014 The useful life of an asset shall not ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than 5% of the Original Cost of the asset. Provided that where a company adopts a useful life different from what is specified in Part C or uses a residual value different from the limit specified above, the Financial Statements shall disclose such difference and provide justification in this behalf which shall be duly supported by technical advice. 6
FINAL ANALYSIS The final notification provided flexibility of determining the useful life and residual value of the asset, with the condition that where the useful life and residual value differs from that stated in Schedule II, reasons justifying such adoption should be provided. A level playing field has been provided to the Indian Companies vis-àvis the International practices in this regard. 7
INTANGIBLE ASSETS Intangible assets : Amortization shall be as per the provisions of the Accounting Standard 26. Exception to the above Rule: The Accounting Standards shall not apply in case of intangible assets created under Build, Operate & Transfer, Build, Own, Operate & Transfer or any other form of public private partnership route in case of road projects. 8
Amortization is calculated as follows: Amortization Rate = Amortization Amount X 100 Cost of Intangible Assets Amortization Amount = Cost of Intangible Asset X Actual Revenue for the year Projected Revenue from Intangible Asset (till the end of the concession period) 9
ILLUSTRATION Here we understand the concept with the help of an illustration on Toll Road. Following are the assumptions to the Illustration : Cost of Creation of Toll Road = Rs. 800 Crore Total period of Agreement = 17 years Time for creation of Toll Road = 2 years Balance years for amortization of Toll Road = 15 years Total Revenue to be generated Out of Toll Road = Rs. 1000 Crore The year wise generation of revenue shall be as follows : 10
Year No. Revenue (In Crores) 1 6 2 11 3 22 4 28 5 37 6 46 7 54 8 62 9 73 10 85 11 91 12 104 13 113 14 128 15 140 Total 1000 11
Year Revenue (In Crores) Computation Charged to P & L Amortization Rate 1 6 6/1000*800 4.8 4.8/800*100 0.6 % 2 11 11/1000*800 8.8 8.8/800*100 1.1 % 3 22 22/1000*800 17.6 17.6/800*100 2.2 % 4 28 28/1000*800 22.4 22.4/800*100 2.8 % 5 37 37/1000*800 29.6 29.6/800*100 3.7 % 6 46 46/1000*800 36.8 36.8/800*100 4.6 % 7 54 54/1000*800 43.2 43.2/800*100 5.4 % 8 62 62/1000*800 49.6 49.6/800*100 6.2 % 9 73 73/1000*800 58.4 58.4/800*100 7.3 % 10 85 85/1000*800 68 68/800*100 8.5 % 11 91 91/1000*800 72.8 72.8/800*100 9.1 % 12 104 104/1000*800 83.2 83.2/800*100 10.4 % 13 113 113/1000*800 90.4 90.4/800*100 11.3 % 14 128 128/1000*800 102.4 102.4/800*100 12.8 % 15 140 140/1000*800 112 112/800*100 14 % 12 Total 1000 800
EXTRA SHIFT DEPRECIATION No separate rates are prescribed for extra shift depreciation. Useful Lives of assets working on shift basis have been specified in the Schedule based on Single Shift Working. In case the assets are used for any time during the year for Double Shift, the depreciation will increase by 50% for that period. In case of Triple Shift, the depreciation shall be calculated on the basis of 100% for that period. 13
DEFINITION OF THE TERM SHIFT The term Shift is not defined in the Companies Act, 1956 as well as Companies Act, 2013. As per Section 2(r) of the Factories Act, 1948, the definition of the term shift is as follows: Where work of the same kind is carried out by two or more sets of workers working during different periods of the day, each of such sets is called group or relay and each of such period is called Shift. 14
Formula for arriving at Extra Shift Depreciation (EAC Opinion 31.13) = Depreciation for S.S Working + (Depreciation for D.S. /T.S. Working Depreciation for S.S. Working) X No. of Days Worked in D.S. / T.S. Normal Working Days during the year 15
ILLUSTRATION Assumptions to the Illustration Cost of Plant and Machinery = Rs. 30 Crore Residual Value = Rs. 1.5 Crore Depreciable Amount = Rs. 28.5 Crore Useful Life as per Schedule II = 15 years Normal Working Days = 300 Days Working Days for Double Shift = 60 Days Therefore, Depreciation amount as per SLM Basis = Rs. 30 Crore Rs. 1.5 Crore 15 years = Rs. 1.9 Crore = Depreciation for Single Shift Working 16
Now, Depreciation amount for Double Shift Working = [ Rs. 1.9 Crore (i.e. for Single Shift Working) + 50% (Rs. 1.9 Crore) Rs. 1.9 Crore ] X 60 Days /300 Days = Rs. 0.19 Crore Therefore, Total Depreciation to be charged to Plant and Machinery = Rs. 1.9 Crore + Rs. 0.19 Crore = Rs. 2.09 Crore 17
COMPONENTIZATION OF ASSETS Useful life specified in Part C is for whole of the asset. Where cost of a part of the asset is significant to the total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of the significant part should be determined separately. Notification dated 29 th August, 2014, has made the applicability of component accounting voluntary for Financial Year 2014-15 and mandatory from Financial Year 2015-16 onwards. Guidance for Component Accounting is available in the IndAS 16 Property, Plant and Equipment. 18
ILLUSTRATION We shall now understand how is Depreciation to be calculated for components of an asset and difference in provisions for calculation of the same as per Companies Act, 1956 and 2013. The following are the assumptions for calculating Depreciation of a Blast Furnace held by a Steel Company ABC Ltd. : The company assumes the furnace to have a useful life of 30 years based on past experience. Components Useful Life Cost (Rs. in Crores) Structure 30 75 Internal lining of refractory 5 20 Heating Components 7 14 Motors and other operating parts for controlling them 10 35 Total 144 19
DEPRECIATION AS PER COMPANIES ACT, 1956 Component Accounting was not mandatory as per Companies Act, 1956. Therefore, Depreciation of the furnace (SLM Basis) = Rs. 144 Crores/30 years = Rs. 4.8 Crore per annum Here, the Replacement Cost of various components will be charged to the Statement of Profit and Loss. 20
DEPRECIATION AS PER COMPANIES ACT, 2013 Component wise depreciation per annum shall be as follows : Furnace Depreciable Amount (Rs. In Crores) (A) Useful Life (B) Depreciation Amount (Rs. In Crores) (A/B) Structure 75 30 2.5 Internal lining of refractory 20 5 4 Heating Components 14 7 2 Motors and other operating parts for controlling them 35 10 3.5 Total 12 When at the end of respective useful lives the components are replaced, the replacement cost should be capitalized because by that time, they are fully depreciated and the carrying value at the end of their respective useful lives is NIL 21
CONTINUOUS PROCESS PLANTS It is a plant which is required and designed to operate 24 hours a day. Blast Furnace is required and designed to operate 24 hours a day. It may be shut down due to planned maintenance, lack of demand, etc. It would still be considered a Continuous Process Plant. Continuous Process Plant for which no special rates have been prescribed can be depreciated over a 25 year period. The period of 25 years was earlier stated as 8 years in Schedule II which was later rectified through a Notification. 22
ASSETS COSTING LESS THAN RS. 5,000 Companies Act, 1956 provided for depreciating assets costing less than Rs. 5,000/- at 100%. No such specific provision is stated in the Companies Act, 2013. 23
PART B OF SCHEDULE II The useful life or residual value of any specific asset, as notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the depreciation to be provided for such asset irrespective of the requirements of this Schedule. 24
TRANSITIONAL PROVISION From the date this Schedule comes into effect, the treatment for the carrying amount of the asset as on that date shall be as follows: In case there is remaining useful life of the asset : The same shall be depreciated over the remaining useful life as per this Schedule ; In case the remaining useful life is nil : Retain the residual value, and balance carrying amount should be adjusted against the opening balance of retained earnings. 25
ILLUSTRATION Name of the Asset Date put to use Cost Deprec iation WDV as on 31.03.20 14 Salvag e Value No of years the asset is used Bala nce Usefu l Life Carrying amount adjusted Against Reserves Depreciati on for C. Y. on Residual Carrying amount Plant & Machinery 01.04.1996 5,00,000 4,51,440 48,560 25,000 18-23,560 - Plant & Machinery 01.04.2001 10,00,000 6,52,080 3,47,920 50,000 13 2-1,48,960 Furniture 01.04.2008 15,00,000 4,06,125 10,93,875 75,000 6 4-2,54,719 Computers 01.04.2011 10,00,000 4,61,985 5,38,015 50,000 3-4,88,015 - Server 01.04.2011 10,00,000 4,61,985 5,38,015 50,000 3 3-1,62,672 26
TO CALCULATE RATE OF DEPRECIATION UNDER WDV METHOD: R= (1 - nth root of s/c ) x 100 Where, R = Rate of Depreciation (in %), n = Useful life of the asset (in years) s = Scrap value at the end of useful life of the asset c = Cost of the asset 27
CASH FLOW STATEMENTS 28
WHAT ARE FINANCIAL STATEMENTS? The definition of Financial Statements as per Section 2(40) of the Companies Act, 2013 is as follows: Financial Statement in relation to a company, includes : A balance sheet as at the end of the financial year; A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; Cash flow statement for the financial year; A statement of changes in equity, if applicable; and Any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv). The Cash Flow Statement is not a part of Financial Statements for the following : One Person Company Small Company Dormant Company 29
SMALL COMPANY Small Company is defined as per Section 2(85) of the Companies Act, 2013 as follows: Small Company means a company, other than a public company whose (i) Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; OR (ii) Turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees. The above shall not apply to (A) A holding company or a subsidiary company (B) A company registered under section 8; or (C) A company or body corporate governed by any special Act. 30
The Cash Flow Statements are to be prepared in accordance with Accounting Standard 3 Cash Flow Statements as issued by the Institute of Chartered Accountants of India. A Cash Flow Statement as understood by Accounting Standard 3 is as follows: A cash flow statement, when used in conjunction with the other financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. 31
SCOPE To present the cash flows of the business & includes Generation of cash & Its utilization PRESENTATION Presentation has to be classified in the following activities: Operating Activities Financing Activities Investing Activities 32
DEFINITIONS Cash Cash on hand & Demand deposits with banks Cash equivalents Short term, highly liquid investments Readily convertible into cash Subject to insignificant risk of change in value 33
OPERATING ACTIVITIES Includes mainly revenue generating activities. Normally results from transactions & other events that affects the profitability Except those which have to be classified as investing or financing activity Illustratively : Profit on sale of Fixed Assets (Investing Activity); Interest on loan (Financing Activity) For Banks/Financial Institutions - Advances & Loans given shall be considered as Operating Activities. 34
FINANCING ACTIVITIES Inflows/Outflows in composition of owners equity. Borrowings/Repayments of the same. Bank Overdrafts are treated as Financing Activity. However, IndAS -7 allows to include it as part of Cash & Cash Equivalents, if it forms an integral part of an entity s cash management. Separate disclosure enables stakeholders (shareholders/banks/fis) to predict future cash flows and assess quality of cash flows. 35
INVESTING ACTIVITIES Acquisition and disposal of assets which are intended for long term & investments which are also intended for disposal not before at least 12 months are considered as part of Investing Activities. Cash flow represent outflows made for resources intended to generate future income and cash flows. If a contract is accounted as a hedge, then cash flow of that contract is classified in the same manner as the hedged item. 36
REPORTING OF CASH FLOWS OPERATING ACTIVITIES Direct Method & Indirect Method Direct Method Gross Cash Receipts & Payments of Major Components disclosed. Indirect Method Its starting point is Net profit or loss for the period, which is adjusted for : Non-Cash Components of Income/Expense Deferrals and Accruals of Past/Future Items that are categorized under Investing/ Financing Activities 37
Enterprises mainly follow Indirect Method, though Direct Method is considered more appropriate. SEBI requires use of only Indirect Method for Listed Enterprises IndAS -7 also permits Indirect as well as Direct Method, however, it encourages entities to report cash flows from Operating Activities using the Direct Method INVESTING & FINANCING ACTIVITIES Major classes of gross cash receipts and payments arising from investing and financing activities should be reported separately, except for certain cash flows which can be reported on net basis. 38
COMPONENTS OF CASH & CASH EQUIVALENTS An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the equivalent items reported in the balance sheet. 39
RECENT AMENDMENTS TO COMPANIES ACT, 2013 40
COVERAGE Companies (Amendment) Act, 2015 Relaxations to Private Companies vide Notification dated 5 th June, 2015 Relaxations to Section 8 Companies vide Notification dated 5 th June, 2015 Relaxations to Government Companies vide Notification dated 5 th June, 2015 41
COMPANIES (AMENDMENT) ACT, 2015 42
REPORTING OF FRAUDS 43
SEC. 134(3) Earlier Provision Not Earlier in the Act. Provision After Amendment After Clause c following clause (ca) is inserted: Details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government Section 134(3) of the Act deals with the report of the Board of Directors to be submitted along with the financial statements in the general meeting of a company. It also includes documents like: Extract of the Annual Report Number of Board Meetings Director s Responsibility Statement A statement on declaration given by independent directors Etc. Clause (ca) of section 134(3) requires the Directors to submit details in respect of frauds reported by Auditors under section 143(12). 44
SEC. 143(12) Earlier Provision The Act requires that if the auditor of a company has reason to believe that an offence of fraud has been committed against the company, by its employees, he must report the matter to the central government within a time period and in a manner prescribed. Provision After Amendment Notwithstanding anything contained in this section, if any auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the central government within such time and in such manner as may be prescribed: Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and 45
Earlier Provision Provision After Amendment in such manner as may be prescribed : Provided further that the companies whose auditors have reported frauds under subsection 12 to the Audit Committee or the Board but not reported to the Central Government, shall disclose details about such frauds in the Board Report in such manner as may be prescribed. If auditor of the Company during the course of his audit, believes that fraud is committed by the employee or officer of the Company of such amounts higher than the specified limit prescribed by the authority then in such case he shall report the same to the Central Government. However, if the amount involved in the fraud is lesser than the specified limit prescribed by the authority then in such case Auditor shall report the same to Audit Committee of the Company or Board of Directors of the Company if such Company does not have any Audit Committee. In case where auditor has reported fraud to the audit committee or Board of Directors of the Company but he has not reported the same to the Central Government then Board of Directors of the Company shall report the same in the Board s Report. 46
LOANS TO PERSONS IN WHICH DIRECTORS ARE INTERESTED 47
SEC. 185 Earlier Provision Provision After Amendment After clause (b) Sub Section (1) of Section 185 following clause and proviso added: Not Earlier in the Act. Bare Act Language of Section 185(1)(b) : A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loan an interest is charged at a rate not less than the bank rate declared by the RBI (c) Any loan made by a Holding Company to its Wholly owned Subsidiary Company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly owned subsidiary Company, (d) Any guarantee given or security provided by a Holding Company in respect of Loan made by any Bank or financial institution to its subsidiary Company, Provided that the loan made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activity. 48
Section 185 of the Companies Act, 2013 deals with provisions relating to loans, guarantees and securities provided by a company to its directors or any other person in whom directors are interested. It prohibits grant of loan, giving of any guarantees or providing of any security in connection with loans to any of its Directors or any person in whom directors are interested. There are exceptions to this which were through proviso (a) and (b). Now additional exemptions are included through proviso (c) and (d) Exemptions have been provided for loans to persons in which Directors are interested viz - -loan made by Holding Company to its wholly owned subsidiary Company or any guarantee or security provided by Holding Company in respect of its wholly owned subsidiary or -any guarantee or security provided by Holding Company in respect of loan given by bank or financial institution to its subsidiary Company. ** Above exemptions are applicable only when loan amount is utilized by the subsidiary Company towards its principal business activities. The above exemption was earlier made available in the rules. The same has now been incorporated in Section 185 of the Act. 49
RELATED PARTY TRANSACTIONS 50
SEC. 188(1) Earlier Provision Provision After Amendment Earlier Special Resolution was required.(as per the Companies Act, 2013 r.w.rule 15(3)(i), the companies with a paid up capital of Rs 10 crore or more were required to get shareholders nod through a special resolution in case of related party transactions) For the word Special Resolution the word Resolution is substituted under the Act. Now Ordinary resolution will suffice. Not Earlier in the Act. Not required to follow provision of Section 188. After the third proviso of Section 188(1) the following proviso inserted: Provided also that that the requirement of passing the resolution under the first proviso shall not be applicable for transactions entered between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and have been placed before the shareholders for their approval. 51
Related Party Transactions beyond threshold limits shall require approval of Members vide Ordinary Resolution as against Special Resolution which was mandatory prior to this amendment. Transactions which have taken place between holding and wholly owned subsidiary Company, whose accounts are consolidated with holding Company and placed in AGM for approval does not require approval of Shareholders. 52
SEC. 177 (4) Earlier Provision Provision After Amendment Audit Committee has to act in accordance with the terms of reference specified in writing by the Board which included approval or any subsequent modification of transactions of the company with related parties. A proviso has been inserted after clause (iv) sub-section (4) of section 177, whereby the Audit Committee has been authorised to grant omnibus approval for RPT subject to conditions to be prescribed in the rules. 53
DIVIDEND DECLARATION & TRANSFER OF SHARES TO IEPF 54
SEC. 123 (1) DECLARATION OF DIVIDEND Earlier Provision Provision After Amendment New Proviso inserted For declaration of dividend an additional proviso is added whereby Company shall not declare any dividend unless its previous years losses and depreciation not provided in earlier years are set off against the profits of the Company for the current year. This condition was there in Rule 3 (5) of Companies (Declaration and Payment of Dividend) Rules, 2014, but was vaguely drafted and lower of the carried over losses or depreciation not provided for was to be set off against profits of the Company for the current year before any declaration of dividend. 55
SEC. 124 (6) UNCLAIMED DIVIDEND Earlier Provision Provision After Amendment All the shares in respect of which unpaid or unclaimed dividend has been transferred to IEPF, such shares shall also be transferred to IEPF All the shares in respect of which dividend has not been paid or claimed for 7 consecutive years or more shall be transferred to IEPF. The earlier condition was very stringent on the shareholders, which has been eased. It means that in case any dividend is paid or claimed for any year during the said period of 7 consecutive years, the shares shall not be transferred to IEPF. 56
RELAXATIONS TO PRIVATE COMPANIES 57
Sr. No. Section reference of 2013 Act 1. Section 2(76)(viii), 2nd proviso to section 188(1) 2. Section 43 and Section 47 Subject Definition of related party and related party transaction Kinds of Capital and Voting Rights Exemption / privileges for private companies A holding, subsidiary, associate company or fellow subsidiary of a private company, shall not be treated as related party for the purpose of section 188. Member of a private company can vote on a resolution for contract or arrangement to be entered into by the company with related party even if such member is a related party. Provisions of the 2013 Act relating to kinds of share capital and voting rights will not be applicable to a private company where such provisions are contained in the Memorandum of Association (MOA) and Articles of Association (AOA) of such a company. 58
3. Section 62(1)(a)(i) and Section 62(2) 4. Section 62(1)(b) Further issue of share capital (pertaining to rights issue) Further issue of shares pertaining to Employees Stock Options (ESOP) 5. Section 67 Restrictions on purchase by company or giving of loans by it for purchase of its shares With the consent of 90% of the members of a private company, rights issue can be kept open for a period lesser than 15 days and notice of the rights offer can be dispatched for a period lesser than 3 days before opening of the issue. A private company may approve issuance of shares for ESOP by an ordinary resolution instead of special resolution. The restrictions will not be applicable to a private company if following conditions are fulfilled: 1. No other body corporate has invested any money in its share capital; 2. Borrowing from banks, Financial Institutions (FI s) or any body corporate is less than twice its paid up capital or ` 500 million, whichever is lower; and 3. It has not defaulted in repayment of such borrowings at the time of purchase of own shares. 59
6. Section 73(2)(a) to (e) 7. Section 101 to 107 and Section 109 Prohibition on acceptance of deposits from public Certain procedures relating to general meeting Private company permitted to accept deposits from its members upto 100% of aggregate of its paid-up share capital and free reserves without obtaining deposit insurance, credit rating, depositing 15% of the deposit maturing in separate bank account etc. However, such private company will have to file details of money so raised with the Registrar of Companies (ROC). Provisions relating to: notice of meeting explanatory statement quorum for the meeting chairman of the meeting proxies restrictions on voting rights voting by show of hands demand of poll shall be governed as per the provisions of the AOA of the private company, wherein lenient provisions can be incorporated. In absence of provisions in the AOA, the provisions of 2013 Act will apply. 60
8. Section 117(3)(g) 9. Section 141(3)(g) Resolutions and Resolutions passed by the Board of agreements to be Directors of a private company on filed with ROC exercise of specified powers by means of a resolution in a Board meeting are not to be filed with ROC. Eligibility, Audit of private companies having paid Qualifications and up share capital of less than ` 1 billion disqualifications will not be counted in determining of auditors ceiling of 20 companies for appointment as auditor. The limit will also exclude OPCs, Dormant Companies and Small Companies. 10. Section 160 Right of persons other than retiring directors to stand for directorship Provisions pertaining to submission of candidature of directorship along with deposit of ` 1,00,000 shall not apply. 11. Section 162 Appointment of directors to be 2 or more directors can be appointed by way of single resolution at a general voted individually meeting. 61
15. Section 196(4) and (5) Appointment of managing director, whole- time director or manager Shareholders, Central Government approval and filing of return with ROC not required for appointment of managing director, whole-time director or manager of a private company. 62
RELAXATIONS TO SECTION 8 COMPANIES 63
Sr. No. Section reference of 2013 Act 1. Section 2(68) Subject Exemption / privileges for Section 8 companies Definition of The requirement of having minimum private companies paid up capital for a section 8 company formed as a private company shall not apply. 2. Section 2(71) 3. Section 96(2) Definition of public companies Annual General Meeting The requirement of having minimum paid up capital for a section 8 company formed as a public company shall not apply. Time, date and place of each annual general meeting shall be decided before hand by the BODs having regard to the directions, if any, given by the company in its General Meeting. 4. Section 101(1) Notice of meeting A General Meeting of members can be called by giving not less than clear 14 days notice (as against 21 days). 64
5. Section 118 6. Section 136(1) 7. Section 149(1) and 1st proviso of section 149(1) Minutes Right of member to copies of audited financial statement Company to have Board of Directors Provisions relating to minutes of proceedings of General Meeting, Board Meeting and other meeting and resolutions passed by postal ballot shall not apply to a section 8 company except that minutes may be recorded within 30 days A copy of Financial Statements, Auditor s Report and every other document required under law to be annexed or attached to the Financial Statements, which are to be laid before a company in its General Meeting shall be sent to members, trustee of debenture holder and to all other person not less than 14 days (as against 21 days) before the date of the meeting. The requirement of having minimum number of directors and the ceiling on maximum number of directors shall not apply. 65
8. Section 149(4) to (11), Section 149(12) (i), Section 150, Proviso to Section 152(5) Company to have Board of Directors The requirement of appointment of independent directors shall not apply. 9. Section 160 Right of persons other than retiring directors to stand for directorship Provisions pertaining to submission of candidature of directorship along with deposit of `1,00,000 shall not apply to section 8 companies whose AOA provide for election of directors by ballot. 10. Section 165(1) Number of directorships Restriction for holding office as a director, including any alternate directorship, in not more than 20 companies shall not include directorship in section 8 company. 66
11. Section 173(1) Meetings of Board The requirement of holding the 1st meeting of the Board of Directors within 30 days of the date of its incorporation and thereafter holding minimum 4 meetings every year within time gap of not more than 120 days between two consecutive meetings shall not apply. Section 8 company need to hold at least 1 board meeting within every 6 calendar months. 12. Section 174(1) Quorum for meetings of Board Quorum for board meeting shall be either 8 members or 25% of its total strength whichever is less, subject to minimum of 2 (as against 1/3rd of the total strength or 2 whichever is higher). 13. Section 177(2) Audit Committee Audit committee can be formed without independent directors. 14. Section 178 Nomination and Remuneration Committee and Stakeholders Relationship Committee Provisions related to Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not apply. 67
15. Section 179 Powers of Board Board of Directors may exercise following powers by circulation instead of at a board meeting: i. borrow monies; ii. invest the funds of the company; and iii. grant loans or give guarantee or provide security in respect of loans. 16. Section 184(2) 17. Section 189 Disclosure of Requirement of disclosure of interest by interest by director the director and prohibition in participating in Board meeting in which contract or arrangement is discussed wherein he is interested will be applicable only if the transaction is with the related party if the terms and conditions of the contract or arrangement exceeds ` 1,00,000. Register of The requirement of entering into the contracts or particulars of contracts or arrangements arrangements in in the register shall apply only if the which directors are interested transaction is with the related party if the terms and conditions of the contract or arrangement exceeds ` 1,00,000. 68
CONCLUSION The draft notification once implemented is likely to minimize procedural compliances for section 8 companies. It will provide enhanced operational freedom to such companies. This is a step in Government's efforts to ease of doing business in India. The draft notification will be effective on publication of the notification in the Official Gazette after the statutory Parliamentary approval process. 69
RELAXATIONS TO GOVERNMENT COMPANIES 70
Sr. No. Section reference of 2013 Act Subject Exemption / privileges for Government companies 1. Section 4(1)(a) Memorandum Name of the Company shall end with Limited only, even if it is a private company. 2. Section 56(1) Transfer and Transmission of securities Transfer of bonds issued by Government companies can be done without the instrument of transfer subject to conditions. Requirement of instrument of transfer shall not apply to securities held by nominees of the government. 71
3. Section 89 Declaration in respect of beneficial interest in any share Requirement of making declaration of holding beneficial interest and filing the same with Registrar of Companies (ROC) shall not apply. 4. Section 96(2) Annual General Meeting (AGM) The AGM shall be held at the registered office of the company or such other place as may be approved by CG. 5. 2nd proviso to section 123(1) Declaration of dividend 6. Section 123(4) Declaration of dividend In case of inadequacy or absence of profit, the conditions for declaration of dividend out of reserves prescribed in the rules shall not apply if the entire paid up share capital is held by CG, or SG or Governments or by the CG and one or more SG. Requirement of depositing the amount of dividend, including interim dividend, in separate bank account with scheduled bank within 5 days from the date of declaration shall not be required if the entire paid up share capital is held by CG, or SG or Governments or by the CG and one or more SG. 72
7. Section 129 Financial statement Accounting Standard 17 on Segment Reporting shall not apply in case of Government companies engaged in defence production. 8. Section 134(3)(e) Financial statement, Board s report Requirement of including the company s policy on Directors appointment and remuneration, stating criteria for determining qualifications, positive attributes, independence of a director, policy for remuneration of directors / key managerial personnel (KMP) / other employees in Director s report shall not apply. 9. Section 134(3)(p) Financial statement, Board s report Statement in Director s report regarding annual evaluation of Directors which are evaluated by Ministry or Department of CG who is administratively in charge of the company, or, as the case may be, SG, as per its own evaluation methodology, shall not apply. 73
10. Section 149(1)(b) and 1st proviso to section 149(1) Company to have Board of Directors A Government company may appoint more than 15 Directors by way of board resolution without passing special resolution of shareholders. 11. Section 149(6)(a) The opinion of Ministry or Department of the CG which is administratively-in-charge of the Company, or, the SG shall be considered (and not that of the Board of Directors) to determine integrity and relevant expertise and experience for appointing Independent Director. 12. Section 149(6)(c) Disqualification from being appointed as Independent Director, if the individual has or had pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during 2 immediately preceding financial years or during the current financial year shall not apply. 74
13. Section 152(6) and (7) Appointment of Directors The provisions relating to retirement of directors by rotation shall not apply if: (a) entire paid up share capital is held by CG, or by SG or Governments or by the CG and one or more SGs; (b) wholly owned subsidiary of the Company referred above 14. Section 160 Right of persons The provisions relating to submission of other than retiring candidature of directorship along with directors to stand deposit of ` 1,00,000 shall not apply if: for directorship (a) entire paid up share capital is held by the CGG, or by SG or Governments or by the CG and one or more SGs; (b) wholly owned subsidiary of the 15. Section 162 Appointment of directors to be voted individually Company referred above The provisions relating to appointment of 2 or more directors by way of single resolution shall not be apply if: (a) entire paid up share capital is held by the CG, or by SG or Governments or by CG and one or more SGs; (b) wholly owned subsidiary of the Company referred above. 75
16. Section 163 Option to adopt principle of proportional representation for appointment of directors 17. Section 164(2) Disqualifications for appointment of Director 18. Section 170 and 171 Register of directors and KMP and their shareholding and Members right to inspect said Register The provisions relating to appointment of minimum two third of total number of Directors on principle of proportional representation based on Articles of the Company shall not apply if: (a) entire paid up share capital is held by CG, or by SG or Governments or by CG and one or more SGs; (b) wholly owned subsidiary of the Company referred above. The provisions relating to disqualification for appointment of Director on account of failure of Company to file financial statement or Annual Return for 3 continuous financial years or to repay deposit or interest thereon or redeem debentures on due date or pay interest thereon or pay dividend for 1 year or more, shall not apply. The provision of maintaining the register of directors and KMP and their shareholding shall not apply if the entire share capital is held by CG, or by SG or Governments or by CG or by one or more SGs. Consequently, members right to inspect the registers shall also not apply. 76
19. Section 177(4)(i) Audit Committee Audit Committee shall only recommend the remuneration of auditors and will not be required to recommend the appointment of auditor and terms thereof. 20. Section 178(2), (3) and (4) Nomination and Remuneration Committee and Stakeholders Relationship Committee The Nomination and Remuneration Committee shall only be required to identify and recommend appointment and removal of senior management and other employees and frame policy for their remuneration. 21. Section 185 Loan to directors, etc. Prohibition on providing loan to directors and other person in whom director is interested shall not apply if the Company obtains approval of Ministry or Department of CG which is administratively-in-charge of the company or SG before making any loan or giving any guarantee or providing any security. 77
22. Section 186 Loan and investment by company The provisions relating to giving any loan, guarantee or providing any security in connection with the loan or acquire securities of any body corporate by company shall not apply to: a) Government company engaged in defence production; b) Unlisted Government company, if it obtains approval of Ministry or Department of CG which is administratively-in-charge of the company or SG before making any loan or giving any guarantee or providing any security or making any investment. 78
23. 1st and 2nd proviso to Section 188(1) Related party transactions Related party transactions which requires approval by way of a resolution and nonvoting by the concerned related parties shall not apply to: a) Entering into contracts or arrangements with other Government company b) Unlisted Government company entering into contracts or arrangements other than those referred in (a) above, obtains approval of the Ministry or Department of CG which is administratively-in-charge of the company or SG before entering into such contract or arrangement. 79
24. Section 196(2), (4) and (5) Appointment of managing director (MD), whole-time director (WTD) or manager Government Company permitted to appoint or re-appoint any person as MD, WTD or manager for a term exceeding 5 years. Shareholders, CG s approval and filing of return with ROC not required for appointment of MD, WTD or manager of a government company. 25. Section 197 Overall maximum Ceiling on payment of managerial Managerial remuneration, remuneration to nonexecutive directors, approval of CG etc. remuneration and managerial shall not apply. remuneration in case of absence or inadequacy of profits 26. Section 203(1), (2), (3) and (4) Appointment of KMP Appointment of KMP by prescribed class of companies shall not apply for appointment of MD or Chief Executive Officer or manager and in their absence, a WTD. 80
27. Section 439(2) Offences to be non-cognizable ROC and shareholders no longer have any authority to file complaint against the Company or its officer in any court for cognizance of any offence under 2013 Act. Court can take such cognizance only on receiving complaint from person authorized by CG. 81
CONCLUSION The draft notification once implemented is likely to minimize compliances for Government companies. The draft notification will be effective on publication of the notification in the Official Gazette after the statutory Parliamentary approval process. 82
THANK YOU 83