Companies Act, 2013 and its implications on Private Sector.

COMPANIES ACT, 2013 AND ITS IMPLICATIONS ON CORPORATE WORLD-

The long-awaited Companies Bill 2013 got its assent in the Lok Sabha on 18 December 2012 and in the Rajya Sabha on 8 August 2013. After having obtained the assent of the President of India on 29 August 2013, it has now become the much awaited Companies Act, 2013 (2013 Act).

I am pleased to highlight on some of the key changes and challenges the new Companies Act, 2013 has for the Corporates to face on (more specifically on the Private Companies). This article would give an insight on the significant changes proposed by the 2013 Act as compared to the 1956 Act and my initial analysis thereon. It is pertinent to note that for the complete understanding of the implications of various sections of the 2013 Act, the related Rules will need to be read with.

The 2013 Act introduces significant changes in the provisions related to governance,e-management, compliance and enforcement, disclosure norms, auditors and mergers and acquisitions. Also, new concepts such as one-person company, small companies, dormant company, class action suits, registered valuers and corporate social responsibility have been included.

I hope this publication clearly explains the significant changes and their potential implications.

Section 2(30) – Debenture

Includes- any other instruments evidencing a debt whether constituting charge on the assets of the Company or not.

Section 2(40) – Financial Statement

• Cash flow statement, statement of changes in equity is also considered as financial statement.
• The annual report shall necessarily contain cash flow statement.

Section 2(41) – Financial Year

• Uniform financial year for all companies- 1st April to 31st march.
• With permission of NCLT, different financial year can be had for companies which are holding or subsidiary of the company incorporated outside India.

Section 2(55) – Member

Definition of member now includes every person holding shares of the company as against Section 41 which only provided for persons holding equity shares of the company.

So now Preference holder’s names would also appear in the Register of members.

Section 2(68) – Private Company

• Maximum number of members for a Private Company has been enhanced from 50 to 200.
• Sub clause (iii)- prohibition on the Company to invite the public for subscription of its shares in or debentures of the Company has been widened by replacing words “shares and debentures” with the term “securities”.

Section 2(6) and 2(87)- Associate Company and Subsidiary Company

• Subsidiary Company - Where Holding Company owns/Controls >50% TOTAL share capital or exercise *control of Board.

• Associate Company- Where Holding Company owns/Controls >20% TOTAL share capital or exercise *control of Board

*Section 2(27) defines control to mean the right to appoint majority of directors or to control the management or policy decisions by virtue of their shareholding or management rights or shareholders agreement or voting agreements.

• The definition of a subsidiary is based on ownership of the total share capital which includes preference share capital. This will have a significant impact on several companies which have issued preference shares. In other words, an entity may hold substantial part of equity, and still not be a holding company. However, accounting consolidation is still based on equity shares/voting rights.
• An ‘associate’ as a company in which that other company has a ‘significant influence’, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

‘Significant influence’ means control of at least twenty percent of total share capital, or of business decisions under an agreement.

• Vide Circular No. 20/2013 dated December 27, 2013- Clarification with regard to holding of shares or exercising power in a fiduciary capacity - Holding and Subsidiary relationship under Section 2(87) of the Companies Act, 2013.

“…………………….it is hereby clarified that the shares held by a company or power exercisable by it in another company in a 'fiduciary capacity' shall not be counted for the purpose of determining the holding-subsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013.

• By further notification, it is intended to introduce layers of subsidiaries a holding company can have.
• Only for the purpose of the definition of “Subsidiary” -Sec. 2 (87) and “*Associate”- Sec 2(6):-
• Total share capital includes paid up equity share capital and convertible preference share capital.

Section 5- Articles

Articles may contain provisions for entrenchment that specified provisions of articles may be altered only if conditions/procedure more restrictive than those applicable in case of special resolutions is complied with. Notice of entrenchment provision is to be given to the ROC and must be agreed by all members of the Company.

Section 12- Registered office of company

12(3)(c)-CIN also to be included in the letterheads/business correspondence letters of the Company effective 1^st April, 2014.

Section 13- Alteration of Memorandum of Association

Now, in addition to alteration in articles, any alteration in the Memorandum would also require sanction by way of special resolution.

By reason of which, now any increase in authorized capital of the Company would also call for a special resolution and filing of form 23 with Registrar of Companies (ROC).

Section 14- Alteration of Articles of Association

The Act requires filing with the registrar every alteration of articles within a period of fifteen days instead of one month as per the existing law.

Section 42- offer or invitation for subscription of securities on private placement

• Private Company may make private placement through issue of Private Placement offer letter.
• Offer or invitation to subscribe can be made to such number not exceeding 50 excluding QIB’s and employees who are offered securities in pursuance of ESOP’s and to not more than 200 persons in aggregate in a financial year.
• All Private Placement offers can be made only to such persons whose names are recorded by the Company prior to the Invitation to subscribe and such persons to receive offer by name and a complete record of this to be kept by the Company.
• Complete information to be filed with ROC within 30 days of circulation of Private Placement offer letter.
  • No further issue of securities unless previous securities offered are allotted or offer withdrawn or abandoned
  • Allotment to be made within 60 days (else it would termed as Deposit- Section 73)
  • Monies raised by the issue will need to be parked in a separate bank account and cannot be used until allotted
• All monies payable towards subscription of these securities shall be paid through cheque or Demand draft or other banking channels but not by cash.
• Special resolution- needs to be passed per private placement transaction. Explanatory statement to include the basis/justification for the price at which offer or invitation is being made.- Noteworthy is-in case of issue of NCD’s it shall be sufficient if company passes a previous special resolution only once is a year for all issues during the year.

(Where the offer is to the persons who are the existing shareholders of the Company and in the proportion of their holding in the Company i.e. in case of rights issue- provisions of Sec. 62 relating to further issue of capital would apply and where the offer is not in proportion of their holding or is to the third party- provisions of this section would get attracted).

Section 43- Kinds of share capital

Public Companies issuing shares with DVR’s had to comply with the rules-which under the act were not applicable to Private Companies. Further notification on rules would suggest the compliances for Private Companies in issue of shares with DVR’s.

Section 46- Certificate of Shares

No duplicate share certificate can be issued except with the prior approval of the Board. All entries in the Renewed and Duplicate Share Certificates to be authenticated by the Company Secretary.

Section 47- Voting Rights

Distinction between cumulative & non-cumulative preference shares done away with, where dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class shall have a right to vote on all resolutions placed before the Company. (this would apply where it is declared and not paid ????)

Section 48- Variation of shareholders’ rights

Under the 2013 Act, variation of the rights of a class of shareholder’s would also require the 3/4^th approval of the other class whose rights are impacted by such variation, in addition to the approval by way of Special resolution of the class whose rights are put for variation. Eg. Any increase in dividend payment to Preference holders would require approval of Equity holders as well as this variation would impact rights of equity holders too. Similarly on conversion of Preference shares approval of equity holders would be required.

Section 54- Issue of Sweat Equity

1. Special Resolution
2. 1 Year from the commencement of business.

Section 55- Issue and Redemption of preference shares

Fresh preference shares can be issued to redeem existing preference shares, which are due for redemption, and/or to pay dividend on preference shares subject to- approval of 3/4^th of preferenceholders, NCLT approval and cash redemption of dissenting holders.

Section 56- Transfer and Transmission of securities

Transfer Deed is valid for 60 days from the date of execution.

Certificates to be issued within

a) 2 months of allotment

b) 1 month from date of receipt by Company of transfer

c) 6 Months from allotment of debentures

Section 60- Publication of authorized, subscribed and paid up capital of the Company

Any notice, publication, advertisement, business letter, bill head, letter contains Authorized capital of the Company; it should as well mandatorily mention the subscribed and paid up capital of company as well.

Section 62- Further issue of capital -(enforced-except Sub Section (4)-(6))

• Pre-emptive rights to the existing shareholders of the Company, to employees under ESOP’s-

(The offer to existing holders and to the employees under ESOP’s would require Board Resolution)

• To any persons other than those mentioned above would require approval of 3/4^th of the shareholders obtained to make such allotment of shares and the price for said issue is determined by the “registered valuer”.
• Rules framed hereunder mandates passing of special resolution prior to issue of debentures or loans containing option for conversion to equity.
• Rights issue/Private placement can’t be kept open for more than 60 days else it would tantamount to deposits.

Section 63- Issue of Bonus Shares

Specific provision now introduced which requires compliance with certain prescribed conditions for issue of bonus shares:

• Authority by Articles
• Board and shareholders’ approval
• No default in payment of interest/principle of FD
• No default in payment of statutory dues
• No partly paid up shares
• No issue of bonus in lieu of dividend

Section 64-Notice to Registrar for alteration of share capital read with Section 55- Issue and Redemption of Preference shares

Notice to be filed with ROC within 30 days from redemption of redeemable preference shares.

Section 68- Power of Company to purchase its own securities- (Buy Back)

• In addition to other conditions, minimum gap of one year between two buy backs specifically included in the Act.
• No buy back permitted if the Company is in default.

Section 73-Prohinition on Acceptance of Deposits by Companies from Public

Act prohibits acceptance of deposits by companies other than (i) banking/ Non-banking finance companies (ii) class of companies which the Government will notify in consultation with RBI; (iii) deposits raised by companies from its shareholders.

• Act mandates passing of resolution by shareholders approving acceptance of deposits from members by companies- rules for acceptance will be prescribed separately.
• Mandates repayment of deposits including interest due thereon to be repaid within 1 year from the commencement of this act or date when repayment is due, whichever is earlier.
• Requires to maintain 15% of deposits maturing during financial year and next financial year- in “Deposit Repayment Reserve Account”
• Act talks about securing the deposits generally-but if the deposits are not secured-they will be terms as “unsecured deposits” and fact that deposits are unsecured will need to be specified in offering document and advertisements.
• Circular inviting deposits shall include the financial statement, credit rating etc, which needs to be filed with ROC within 30 days before the date of issue of circular.
• Provision of deposit insurance.
• Raising of Deposit limits 10% of paid up capital and free reserves where repayable not earlier than 3 months and limits to 25% of paid up capital and free reserves when repayable beyond 3 6 months but not later than 36 months.

As per the Rules, following receipt of monies (including the exhaustive list enlisted in the rules-“The Companies (Acceptance of Deposit) Rules, 2014) shall be exempt from the definition of deposits:

a) Amount received by a company from another company- (ICD- would attract Sec 186)

b) Amount received pursuant to an offer made towards subscription of securities- provided shares are allotted within 60 days from the date of receipt of application money or advance for such securities.- (thus, it mandates allotment within 60 days to not fall within the definition of deposits)

c) Amount received from the Director of the Company-provided a declaration is given by the Director to the effect that the money lent is not from borrowed funds.

d) Amount raised by issue of bonds/debentures secured by first charge on assets excluding intangible assets or debentures compulsorily convertible into shares of the Company within 5 years.

e) Any advance received in course of business as an advance for supply of provision of services will have to be appropriated against same within a period of 365 days from date of acceptance.

f) Security deposit for performance of the contract for supply of goods or provision of services.

Section 77-Registration of charges (Charge defined in Section 2(16)

• Pledge of movable property/shares also to be registered with ROC.
• On an application made by the Company- Registrar may allow registration within a period of 300 (30+270) days of such creation.
• Satisfaction has to be mandatorily be filed within the period of 30 day from the date of payment/satisfaction.
• Entries in the Register of charges shall be authenticated by the Director or CS of the Company or person authorized by the Board.

Section 82-Satisfaction of charges (Charge defined in Section 2(16)

• Registration within a period of 30 days of satisfaction.

Section 88- Register of Members

Register of Members shall be in form MGT.1 which shall include in addition to the existing details, data on UIN/CIN details of the member. The entries in the Register needs to be authenticated by the Company Secretary or the person authorized by the Board Resolution (in case of Dematerialized shares) and date of BR to be contained therein.

Section 92-Annual Return

• Annual Return to contain details as on close of the FY (currently it is as on the date of AGM).
• Annual Return to contain additional information relating to remuneration of directors and KMP, details of meetings of members, BOD and its various committee, etc.
• To be certified by PCS-where paid up capital is more than 10 Crs or turnover more than 50 Crs.

Section 96-Annual General Meetings, Section 101- Notice of Meetings and Section 102- Explanatory Statement to be annexed to the notice, Section 104- Chairman of the meeting

• Conducting Annual General Meetings permitted between 9 am and 6 pm on all days except National Holidays.
• 21 clear days’ notice, 95% member’s consent- for shorter notice. Notice also to the Directors and Auditors.
• Notice of general meetings and voting by shareholders on resolution permitted by electronic means
• Notice relating to special business to be conducted at shareholder’s meeting calls for additional disclosures- nature of interest in business items of key managerial personnel etc.
• Act prohibits the chairman of the board from being appointed as the Managing Directors or CEO of the company unless the articles of association provides otherwise or in situation where company has multiple business and each such business is headed by an independent CEO.
• The chairman of the company may be appointed as a member of the nomination and remuneration committee but shall not chair such committees.

Other requirements:

• Act does away with the requirement of holding a statutory meeting for public companies
• Act permits keeping of registers and copies of annual returns at any place in India where more than 1/10th of the members reside, by passing a special resolution
• Quorum requirements for listed companies changed to (i) 5 members present if shareholders are < 1,000 (ii) shareholders >1,000 < 5,000- quorum of 15 members (iii) shareholders >5,000- quorum of 30 members.
• Newspaper advertisement for notice of AGM has been done away with.
• Listed companies are required to file change in promoter shareholding & top 10 shareholders within 15 days of change with ROC.
• Shareholder holding at least 10% of total voting power or shares of Rs. 5 lakhs (as against Rs. 50,000/- now) in value-can demand a poll at a general meeting
• Passing of certain resolution by postal ballot for all companies (not only listed companies) made mandatory. The Central Government may, by notification, declare transactions to be transacted only by means of *postal ballot.
• ·-Section 110 (exemption to companies having 50 or less than 50 members)

2(65) “postal ballot” means voting by post or through any electronic communication;

Section 102- Explanatory Statement

Apart from the existing requirements of disclosing full particulars and reasons for proposing a resolution and place and date for inspection of relevant documents, section 102 now requires disclosure of not only the names of the interested parties but also the nature and extent of interest of directors, managers, key managerial personnel (KPM) and relatives of directors, manager and KMP in the explanatory statement to be annexed for every special business in the notice calling general meetings.

The proviso to sub-section (2) requires mention of the extent of the interest of every promoter, director, manager or KMP in any other company to be affected by the proposed resolution if they hold 2 (two) percent in that other company. The 1956 Act required such a disclosure if director, manager or secretary holds 20 (twenty) percent or more in such other companies.

The provision uses the term ‘paid up capital’, which includes equity as well as preference share capital of a company.

Section 117- Resolutions and Agreements to be filed

Apart from Special resolutions required u/s 180(1)(a),(b),(c) and (d), resolutions passed by the Board u/s 179(3) would further require filing of said resolutions with ROC:

1. To make calls
2. Buy back
3. Issue of securities
4. To borrow monies
5. To invest funds
6. To grant loans, provide security/give guarantee
7. To approve FS and Boards report
8. Diversify business
9. M&A, reconstruction
10. Takeover
11. Any other matter as may be prescribed- as per rules:- (Rules for Section 179)
    1. To make political contributions
    2. To appoint or remove KMP
    3. To take note of apt/removal of one level below KMP
    4. To appoint internal and secretarial auditor
    5. To take note of disclosure of directors interest and shareholding.
    6. To buy/sell investments held by Company comprising 5% or more of the paid up share capital and free reserves of investee company
    7. To invite/accept/renew deposits
    8. Review/change terms of public deposit
    9. Approve quarterly, half yearly and annual financial statements

Section 118- Minutes of Meeting

Secretarial Standards mandatorily to be complied with for minutes of board meeting and general meeting.

Section 123- Declaration of Dividend

• Requirement of transfer of certain percentage of the profits to reserves prior to declaration of dividends done away with. *Free reserves definition no longer includes share premium account.
• Declaration of interim dividend permissible in a loss situation subject to conditions.
• No dividend to be declared in case of defaults in repayment/redemption of deposits/preference shares.

Section 129- Financial Statements

• Consolidation of financial statements of subsidiaries becomes mandatory for all companies.
• For the purpose of this section only, subsidiary shall include associate company and JV.
• Financial statements to be signed by Chairman (if authorized by Board) or two directors (one of which to be MD/CEO), CFO and Company Secretary.

Section 134-Financial Statements and Boards Report

• Financial statement to be signed by chairperson, if BR authorizes him, by 2 Directors (including MD) and CEO, CFO and CS.
• Director’s Report to include amongst others, extract of the Annual Return, development and implementation of a risk management policy and CSR, related party contracts, certain loan / guarantees/investments and in case of listed and prescribed public companies – annual evaluation of the performance of the BOD. – To be signed by Chairman or 2 Directors.
• The Directors' Responsibility Statement to include the statement that the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such system were adequate and operating effectively.

Section 135-Corporate Social Responsibility

• CSR provisions of Act apply to Companies with net-worth of Rs. 500 Cr. or *net profit of Rs. 5 Cr. or turnover of Rs. 1,000 Cr. *net profit as per financial statements of the Company.
• Companies fulfilling above thresholds to form CSR committee of Board. CSR committee to have at least 3 directors of which at least 1 to be an *independent director-*not required for private companies.2 Directors for CSR committee in case of Private Companies, where there are only two directors on the Board.
• Company only when it ceases to be a company covered under this section for a period of 3 consecutive years shall not be required to form CSR committee.
• CSR committee’s mandate would be to:

– Formulate & recommend CSR policy for the company

– Freeze indicative list of activities to be undertaken by company

– Decide amount of expenditure involved in implementing CSR activities

– Monitor CSR policy

• Companies mandated to disclose CSR policy on company’s website.
• The Act specifically provides that companies shall give preference to the local areas around it where it operates for spending amounts earmarked for the CSR activities.
• Board of company has a principal responsibility to implement CSR Policy.
• Boards report to include annual report on CSR.
• Computation of average net profits as per the explanation to the section is as per the provisions of section 198 of the act, while the rules as well provides for definition of net profit,in which case the act to override articles in personal opinion.

Section 136: Right of member to copies of audited financial statements

Circulation of financial statements (consolidated), auditors report to be sent to the members and other persons entitled-21 days before the date of AGM.

Every company having subsidiary shall place the audited accounts in respect of each of its subsidiary on its website.

Section 138: Internal Audit

Private Companies having turnover of Rs. 200 Crs or more during the preceding financial year or where the outstanding borrowings exceed Rs. 1000 Crs during the preceding financial year shall be required to appoint an internal auditor within 6 months, who shall either be a chartered accountant or a cost accountant or such other professional as may be decided by the Board to conduct internal audit.

Section 139: Appointment of Auditors

• Currently appointment is done every year, under the new act, appointment is done once for five years-ratification (supposedly meant to convey “reappointment”) to be done for every year.
• Written consent and certificate prescribing appointment, if made, shall be in accordance with the conditions prescribed with certificate u/s 141 also to be obtained from the auditor.
• Intimation to the auditor of his appointment within 15 days of his appointment.
• Form to be filed with ROCnotifying such appointment within 15 days of his appointment.
• As and from and pursuant to the notification released by MCA, no audit firm to be re-appointed for more than 2 terms of five consecutive years and shall not be eligible for re-appointment for (5) years from completion of term.
• Unqualified Audit Report need not be read out at the meeting.

Section 140- Removal, resignation of auditor and giving of special notice enforced-except second proviso to sub section (4) and sub section (5)

• For not reappointing the retiring auditor unless the auditor has completed term of 5 years or 10 years, as the case may be, the law now requires special resolution with a special notice, rather than ordinary resolution.
• For removal of auditor also, special resolution is sought now, in addition to CG approval.

Section 146- Auditors to attend general meeting

Notice of general meeting to be issued to the Auditors.

Section 148- Central Government to specify audit of items of cost in respect of certain companies

• Under the Act, no approval of Central Government is required for the appointment of Cost Auditor to conduct the Cost Audit.
• The Central Government may by order direct maintenance of cost records for certain class of companies engaged in production of prescribed goods and providing prescribed services and may also specify audit of items of cost in respect of certain class of companies engaged in the production of such goods or providing such services as may be prescribed.
• Now the Cost Accountant in practice shall submit the copy of his audit report to the Board of Directors who shall forward the same to Central Government, instead of directly forwarding the Report by Auditor to the Central Government.

Section 149- Board of Directors

• Minimum Directors- For public company- 03 and For private company- 02 Maximum Directors- 15 Directors can be further increased by passing a special resolution- CG approval done away with.
• At least one director must be a resident in India – a person who has stayed in India for 182 days in the previous calendar year.
• And for some classes-There must be woman director.
• Listed Companies- mandatorily to have at least 1/3^rd independent directors. His term not to exceed two consecutive terms of 5 years each.
• Duties of Directors very descriptively included.
• Number of directorships including alternate directorships not to exceed 20. Of these 20 directorships, not more than 10 can be public companies. Earlier there were no restrictions as regards directorships in private companies and alternate directorships. (Section 165).
• Appointment of alternate director permitted to original director who is out of India for at least 3 months (as against original director remaining outside the state).

Section 164-Disqualifications for appointment of Director

Additional grounds for disqualification of director

• A person who has been convicted of offence dealing with related party transactions at any time during the preceding 5 years.
• Directorship in private companies too under ambit of disqualification on ground of non-filing of financial statements or annual return for any continuous 3 years or failure to repay deposits accepted by it or redeem debentures on due date or pay interest due thereon or pay any dividend declared and such failure continues for 1 year or more.

Section 167-Vacation of Directors office

Even if a Director seeks leave of absence, the office of Director shall fall vacant if he fails to attend all the board meetings held during the tenure of 12 months, fails to disclose interest.

Section 168- Resignation of Director

• A director may resign by notice.
• The board shall take notice of the same. In other words, it is not mandatory for the resignation to be accepted.
• It is also explicitly provided that the resignation shall take effect from the date of receipt of the notice by the Company.
• An additional obligation on the Directors to send notice of his resignation to the Registrar with detailed reasons for such resignation.
• Copy of Resignation letter and reasons for resignation to be filed with Registrar within 30 days of resignation. Board Report to mention the resignation of Director and also to be published on website.

Section 170- Register of directors and key managerial personnel and their shareholding

• Register of Directors, KMP and register of their shareholding have been merged into one register.
• Now return for appointment or changes therein shall also be filed for appointment of Key managerial personnel along with directors.
• The particulars of directors and key managerial personnel to be entered in the register shall be in the format as given in the rules.
• The particulars shall include the details of securities held by each of them in the company or its holding, subsidiary or associate companies.

Section 173-174 -Board Meeting

Minimum nos. of board meetings continues to be 4- gap between two meetings not to exceed 120 days. Board meetings though electronic means permitted.

1. Convening Board meeting permissible with at least 7 days’ notice. Shorter notice permissible if at least 1 independent director, if any, is present at such meeting.
2. Issuance of securities, providing guarantees, financial statements approval, directors’ report approval, diversification of business decisions etc.- to be only transacted at a duly convened board meeting and not by circulation of resolution.

Section 177 and Section 178 – Audit Committee and Nomination and Remuneration Committee and Stakeholders Grievance Committee

Establishment of Vigil Mechanism: - Every Listed Company and Companies which has deposits from Public and Companies which have borrowed monies from Banks/FI’s in excess of fifty crores rupees would require establishing vigil mechanism for their directors and employees to report their genuine concerns/grievances.

- To be published on website

- To be mentioned in the Board’s Report.

Audit committee

• Mandatory for listed companies and other prescribed classes of companies.
• Composition–Minimum 3 directors with majority comprising of IDs.
• Chairperson and majority of directors shall be persons with ability to read and understand the financial statement.
• Transitional period for compliance– 1 year from the commencement of Act.

Nomination and Remuneration committee

• Mandatory in case of listed companies and other prescribed classes of companies.
• Composition– 3 or more NED of which at least ½ shall be IDs. The Chairperson of the company can be a member of the committee but cannot be a chairperson of the committee.

Stakeholders Relationship Committee

• SRC mandatory where total number of shareholders, deposit holders, debenture holders and other security holder exceeds 1,000 at any time during a FY.
• Composition–Chairperson shall be NED and such other number of directors as determined by the BOD.

Section 179 –Powers of Board

Resolutions passed by the Board under this section also to be filed with Registrar u/s 117.

1. To make calls on shares.
2. Borrow monies- to be filed- (in addition to special resolution filed u/s 180(1)(c)-where borrowings exceed aggregate paid-up capital and free reserves- explanatory statement -102).
3. Authority to buy back
4. Invest funds of the Companies- to be read with Sec. 186- (will be filed in addition to Special resolution where investments exceed 60% of paid-up capital, free reserves and securities premium account or 100% of free reserves and securities premium account).
5. Grant of loans/guarantees/securities –to be read with Sec. 186
6. To approve financial statements and Boards Report
7. To approve takeover/merger/amalgamation
8. To make political contributions
9. To appoint/remove KMP
10. To buy/sell investments held by the company constituting 5% or more of paid up capital and free reserves of Investee Company
11. To take note of disclosure of directors interest and shareholding (no changes in shareholding to be filed with ROC, however these are to be taken for noting in the Board Meeting as per Section 184).
12. To invite/accept or renew public deposits
13. To approve quarterly, half yearly and annual financial statement or results.

(Except where specifically provided in the Act, resolutions other than specified above can be passed by circulation).

Section 180 – Restrictions on powers of Board

• Applicability of Old Sec. 293 is now extended to private companies as well.
• The requirement is now of Special Resolution at a Shareholders meeting.

(Sale/lease of whole of undertaking, to invest, to borrow exceeding net worth, to remit any debt due from Director)

Section 181 and Section 182 – Contribution for charitable purposes and Political contributions

• Contribution to charitable purposes-beyond 5% of average net profit for 3 years then prior general meeting approval required.
• Company three years in existence and amount not to exceed 7^1/2 % of average net profits for 3 years.

Section 184 – Disclosure of interest by director & Section 2(49)- Interested Director

• Now, in case of private companies as well, Directors cannot vote nor be a part of discussion in the meeting where they are concerned/interested* in the contract or arrangement taken up at the meeting.
• Directors to disclose interest in the Board Meeting first held in the Financial year and whenever there is any change in the shareholding should also be noted in the Board Meeting.
• Interested?
  • by being a Director, shareholder (holding 2% or more of the shareholding) or is a promoter, manager, CEO of the Body Corporate with which the contract/arrangement is entered into. (term director is not included).
  • By being a partner, owner or member of the firm with which the contract/arrangement is entered into.

Section 185- Loan to Directors

PROHIBITED TRANSACTIONS

IN CASE OF LOAN (INCLUDING BOOK DEBTS):-

1. No Company advances any loan to its director.
2. No Company advances any loan to director of the lending company, or of a company which is its holding company or any partner or relative of any such director.
3. No Company advance any loan to any firm in which any such director or relative is a partner;
4. No Company advance any loan to any private company of which any such director is a director or member; (term “relative” is not included here)
5. No Company advances any loan to 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
6. No Company advance any loan to 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.

GUARANTEE AND SECURITY

No company gives any guarantee or provides any security in connection with aforesaid loan.

ALLOWABLE TRANSCATIONS UNDER THIS SECTION

1- Loan given to Managing Director or Whole Time Director as part of the conditions of services or pursuant to the scheme approved by the members by Special Resolution.

2- A company make loan or give guarantee or provide security in ordinary course of its business for due repayment of loan. In this regard interest is charged at a rate not less than the bank rate declared by RBI.

Observations:

• Existing loan on 12th September is not affected by above provisions. However, it should not be renewed & should be repaid on due date.

In case of working loans or other loans which are repayable on demand and are subject to renewal, if is renewed after 12^th September and company continues its corporate guarantee, section 185 will be applicable.

• As per rules notified any loan made by holding to wholly owned subsidiary or guarantee/security provided by holding in respect of loan of subsidiary (not wholly owned) is exempted from the requirements of the section provided the loan is used by the subsidiary for its principal business activity.

Section 186-Loans and Investments by the Company

• Investments with not more than 2 layers.
• Loans and guarantees/securities to be limited to 60% of net worth or 100% of free reserves and securities premium*, unless sanctioned by a special resolution. *additionally introduced.
• Rates of interest on loans linked with yields on G-secs of 1, 3, 5 or 10 years, closest to the terms of the loan.
• As per rules, loan or guarantee given or security provided by a company to its wholly owned subsidiary or JV Company or any acquisition by holding company of securities of wholly owned subsidiary company is exempted from the requirements of this section provided the Company discloses the same in the details of aforesaid in the Balance Sheet.
• Sufficient compliance- if special resolution passed within 1 year from the date of notification of this section.
• Calls for disclosure in financial statements and prior approval of PFI’s from where any term loan is subsisting.

Section 188-Related Party Transactions

List of Transactions has been expanded to include:-

• Leasing of property of any kind
• Selling, buying or disposing of property of any kind- immovable property is now included
• Availing or rendering of services
• Appointment of agent
• Related party’s appointment to office place of profit in the company, subsidiary company or associate company.- Ensure no relative of director is earning remuneration from any related company as same would amount to Office or place of profit.

Related party? - Section 2(76)

“Related party”, with reference to a company, means—

• a director or his relative;
• a key managerial personnel or his relative;
• a firm, in which a director, manager or his relative is a partner;
• a private company in which a director or manager is a member or director;
• a public company in which a director or manager is a director or holds along with his relatives, more than two per cent. of its paid-up share capital;
• any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
• any person on whose advice, directions or instructions a director or manager is accustomed to act:Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
• any company which is—a holding, subsidiary or an associate company of such company; or a subsidiary of a holding company to which it is also a subsidiary;
• such other person as may be prescribed;

1. All related party transaction would now require Board approval.
2. Govt. approval is done away with- Special Resolution required for companies having paid up share capital of 10 crs. or more or

• • Where sale/purchase or supply of goods/materials exceeds 25% of annual turnover- (as mentioned in (a) to (e) )
  • Where sale/purchase or disposing off property exceeds 10% of net worth (as mentioned in clause (b) and (e).
  • Leasing of property exceeds 10% of turnover –(as contained in clause (c))
  • Availing or rendering of services exceeding 10% of net worth- (as contained in clause d and e)
  • No interested shareholder to vote in such meeting. Creates a peculiar situation in case of contracts between holding-subsidiary-associate companies.
  • Only arm’s length transaction* exempted
  • Board report to include such transaction and justification for entering into such related party transactions.
  • KMP includes CEO, MD, CS, CFO, WTD and such other officer as may be prescribed.
  • * the term property is contained in Section 232 in explanation section which includes assets, rights and interests of every description and liabilities includes debts and obligations of every description.

Section 192- Restriction on Non-cash transactions

A company will require prior approval in general meeting for entering into an arrangement by which:

• a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
• the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected.

Section 194- Prohibition on Forward dealings in securities

• This prohibits forward contracts and option contracts in shares or debentures of the company, holding/subsidiary companies, or associate companies

Section 203- Appointment of key managerial personnel.

• Every company belonging to prescribed class or classes of companies (Rs. 5 cr or more of paid up capital) is compulsorily required to appoint MD or CEO or manager and CS and CFO.
• An individual shall not be appointed or reappointed as the chairperson of the company as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act.
• Under the new law, in case some companies are engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business, they may have chairperson of the company as well as the managing director or CEO at the same time. This is subject to notification of such class of companies by the Central Government.
• Whole time KMP shall not hold office in more than one company at the same time. He may do so with the permission of Board.
• An obligation to fill the vacancy has been made time bound under the Act. Within six months of his vacancy, the resulting vacancy is required to be filled.
• ·

Section 204- Secretarial Audit for bigger companies

• All listed and other prescribed companies are required to annex with its Board’s report, a Secretarial audit report given by a company secretary in practice.
• The Board is required to give explanation on any qualifications/ the remarks made by company secretary in practice his report.

Section 205- Functions of Company Secretary (CS)

Report to be given by the CS to the Board that Company is in compliance with all laws applicable to the Company.

Miscellaneous

ü Memorandum of association can have only main and objects necessary to achieve main objects- “other objects” category done away with in the new Act.

ü Under the Companies Act of 1956, it is required that the Certificate of commencement be obtained only by public companies, while in the new Act it is required that all the companies obtain the commencement Certificate from the Registrar. Any company after its incorporation can commence any business or exercise any borrowing powers only after filing two documents with the concerned ROC i.e. 1. Director’s declaration as regards paid-up capital and 2. Verification of ROC, before commencement of business or exercising borrowing power.

ü New act prohibits companies from changing objects in memorandum of association if monies raised under public offering remain unutilized without passing a special resolution of shareholders and providing exit to dissenting shareholders

ü Appointment of debenture trustees will be mandatory only if debentures are issued to more than 500 allottees.

ü The word fraud is repeated 136 times in the Act. Fraud is defined as any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

ü Change in registered office outside the local limits of any city, town or village may be made with the authority of special resolution by the company.

ü Every company making public offer and other prescribed class of public companies will have to issue securities only in dematerialized form by complying with the provisions of the Depositories Act, 1996 and the regulations made thereunder. Other companies may convert their securities in dematerialized form or issue its securities in physical form.

ü Company can’t issue shares at discount except sweat equity-complete prohibition.

ü A public company having prescribed net worth or turnover may accept deposits from persons other than its members subject to the prescribed compliance requirements and legal framework provided in the clause. Such company will also have to obtain credit rating from recognized agency and will also have to create a charge on its assets.

ü Central Government may prescribe the class or classes of companies and manner in which a member may exercise his right to vote by the electronic means.

ü

Section 234- Cross Border Mergers

The Act now provides for merger of an Indian Company into a foreign company incorporated in jurisdictions yet to be notified

Prior approval of RBI would be mandatory.

Section 253-Sick Company

-Inability to pay 50% of outstanding secured debt – would determine sickness of the Company

Prohibition of Insider Trading

New clause has been introduced with respect to prohibition of insider trading of securities. The definition of price sensitive information has also been included.

Directors and the key managerial personnel of a company are prohibited from forward dealings in securities of the company.

Serious Fraud Investigation Office

Statutory status to SFIO has been proposed. Investigation report of SFIO filed with the Court for framing of charges shall be treated as a report filed by a Police Officer.

SFIO shall have power to arrest in respect of certain offences of the Act which attract the punishment for fraud. Those offences shall be cognizable and the person accused of any such offence shall be released on bail subject to certain conditions provided in the relevant clause of the Act.

Class Action Suits

• Specified No. of Members, Depositors or any Class of them may file an application before the Tribunal.
• Where the Members or Depositors seek any Damages or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.
• The order passed by the Tribunal shall be binding on the company and all its Members, Depositors and Auditors

OPC and Small Company

• Act recognizes two new classes of companies viz. One Person Company (OPC) & small company
• OPC has a mixed feature of sole proprietary status with limited liability.
• Small companies defined to have a maximum paid-up capital of Rs. 5 Cr. or turnover of not more than 2 Cr. or such higher amount which shall not exceed Rs. 20 Cr.
• Both OPC & small companies are subject to least statutory compliances under new law.

Section 58(2)- Refusal of registration and appeal against refusal

• Shareholders’/Joint Venture agreement provisions between two parties/shareholders can be contractually enforced-i.e. share transfer restrictions etc. permissible for unlisted public companies even without incorporating such restrictions in articles of association.

Section 41- Global Depository Receipts

Pursuant to a special resolution, a company may issue GDR’s in any foreign country, in such manner and subject to such conditions as may be prescribed. However FCCB’s are not yet provided for.

Section 2(60), 39 and 53- Officer in default:

The definition has been widened and includes merchant bankers as well.

Section 236- Squeeze Out:

Where the acquirer acquires 90% or more of equity of a company, he may notify the company of its intention to buy the remaining equity shares. The minority holders shall have the right but not the obligation to sell the shares held by them.

Sec 442 – Mediation and Conciliation:

Act provides for power, in case of any pendency of proceedings before the NCLT or the CG or NCLAT, to refer a matter to the mediation and conciliation panel.

A new quasi-judicial body comes up – NFRA

• To oversee compliance of accounting and auditing standards
• To oversee quality of service of professionals associated with preparation of financial statements
• The powers of NFRA shall exclude the powers of the ICAI to investigate into the same misconduct.

Section 230- Compromise or Arrangement

• Approval of compromise or arrangement will require approval of 3/4^th in value of members or creditors (as against dual test of majority plus 3/4^th in value).
• Any shareholder with 10% voting right or creditor with 5% in value of outstanding debt can object to scheme of compromise or arrangement.
• Merger of an Indian company into foreign company and vice versa permitted (only merger of foreign company into Indian company permitted under existing law).
• Merger of a listed company into an unlisted company permissible if dissenting shareholders of listed company provided with exit by promoters/persons in control .
• Merger of holding and subsidiary companies permissible without NCLT nod.
• Minority squeeze-out i.e. purchase of minority shareholding of up to 10% by majority shareholders made easier under the Act.
• Valuation of shares mandated by Act to be done by “Registered Valuers”.